The High Cost of Employee Turnover

One of the tasks of small business ownership that most owners dislike is searching for, interviewing and hiring employees. As our businesses grow, it's inevitable that we'll need help getting all the work done. We need employees, or our businesses hit a plateau or capacity that we can't grow beyond. But the hiring process is one that we don't have a lot of experience in, it takes away from our perception of all the other “important” work we need to do, and frankly we're just not that good at it. As a consequence we tend to hire the first seemingly qualified candidate that is pleasant enough to get along with.

You may have heard the old adage, “Hire slow, fire fast.” Unfortunately, most business owners hire fast and fire slow. In other words we don't use enough care in selecting employees and we often end up with performance that is less than anticipated or needed. But in the time it takes to confirm under performance (think 2-4 months) we develop a relationship with the person in the sense that we like them, or understand them, or sympathize with them. That relationship then makes it hard for us to let them go so we put up with a lower level of performance thinking that things will get better or we'll eventually train them to do the work to the standards needed. So we fire slow, but eventually terminate their employment and start another recruiting search all over again.

A lot has been written about the high cost of employee turnover, but it is not obvious because it is money not directly taken out of the business nor is it often an identifiable, single expense. But make no mistake, turnover is costly. Numerous sources state that turnover is at a minimum in the range of 30-50% of employee salary. So if you have a $50,000/year employee, losing and replacing that person will likely cost you AT LEAST $15,000-$25,000! What causes that high cost?

• Cost of the person who fills in for the vacant position.
• Cost of lost productivity to the business.
• Administrative cost of stopping payroll and benefits.
• Cost of reshuffling work or of delaying shipments or service.
• Cost of the training invested in the lost employee and the training for a replacement, including licenses or certifications.
• Severance costs or continuation of benefits.
• Cost of remaining employees' reduced productivity due to “water-cooler” talk about the former employee.
• Cost of lost knowledge, skills or contacts that the person leaving takes with them.
• Cost of unemployment insurance.
• Cost of lost customers that the employee takes with them or influences.
• Cost of advertising to find a replacement or cost of recruitment agency.
• Cost of vetting and interviewing replacements.
• Cost of drug screens, background checks or reference checks.
• Cost of pre-employment tests or assessments.
• Cost of onboarding, i.e. business cards, keys, telephone, email, etc.

If you are honest with yourself, turnover is likely much higher than the 30-50% typically quoted. Doesn't it make sense to put a little more upfront effort into the hiring process to improve your odds of retaining employees for a long time? The time spent interviewing, checking references, doing assessments, training and more also are costly, but you will actually reduce the time and money spent on these if you do them less frequently. Working on employee retention is financially rewarding!