Employee retention: The real cost of losing an employee

Attracting and retaining talented people is vital for an organization's success. Organizations need to invest in recruitment and retention strategies to thrive in today's economy. But, finding and keeping the best employees is especially challenging for small businesses and nonprofit organizations that must compete with larger businesses and budgets for top talent.

In this article, we'll cover the effects of employee turnover and strategies you can use to prevent it. We'll also look at employee turnover costs.

Takeaways from this blog post:

• High employee turnover can lower morale and make employees feel disconnected.
• A high rate of turnover can also impact productivity since your remaining employees may become overwhelmed with additional work.
• The financial impact of recruiting and training new employees to replace those who have left can be significant, with turnover costing thousands of dollars per employee.

What is employee turnover?

Employee turnover occurs when an employee leaves your organization. This can be for any reason, including quitting for better job opportunities, retirement, or termination. An employee turnover rate measures the number of employees who leave your organization in a specific time period.

There are two types of employee turnover: voluntary turnover and involuntary turnover. Voluntary turnover is when an employee chooses to leave the organization, while involuntary turnover is when you terminate an employee.

Why does employee turnover matter?

According to the Bureau of Labor Statistics¹, the number of U.S. employees voluntarily leaving their jobs has increased since 2021 in a trend known as the Great Resignation. This is especially evident in the professional and business services, manufacturing, and retail industries.

While the trend has slowed in recent months, many workers continue to leave their jobs voluntarily. According to the Bureau of Labor Statistics, 3.5 million people quit their jobs in February 2024.

Frequent voluntary quit rates like these have a negative impact on your organization in more ways than one.

Chris Estrada is the CEO of Nationwide United Auto Transport. With more than 20 years of management experience, he's confronted the challenge of losing key employees.

"When an essential team member departs, it's not just the intimate knowledge of our workflow we lose," Estrada said. "We also face a decrease in productivity and employee morale until a fitting replacement is found."

Employee turnover decreases productivity

Losing employees can decrease productivity simply because you have fewer team members to get work done. As the remaining employees get overwhelmed with more work to help make up the difference, their stress levels rise, making them far less likely to perform at their best.

"Recruiting the right talent may take anywhere from one to four months, depending on the role's complexity," Estrada said. "The delay, coupled with the costs, can put an enormous strain on remaining team members, as they may need to shoulder additional responsibilities."

Overworking your remaining employees can also lead to further turnover.

This kind of hit on your employees' productivity is also a hit to your organization financially. A HubSpot report³ found that lost productivity costs U.S. businesses a shocking $1.8 trillion every year.

Employee turnover lowers morale

One of the first impacts of employee turnover you'll notice is a decrease in employee morale. As more employees leave, the ones remaining may have lost a valuable work friend, which matters more than you might think.

"Preserving the company's culture during this transition is crucial -- it's one of our key focus areas when someone leaves, with a direct impact on hiring and retention strategy," Estrada said.

According to a study by Office Vibe², 70% of employees say having a friend at work is the most crucial element to a happy work life. Moreover, 50% of employees with a best friend at work reported feeling a stronger connection to their organization.

So if one employee leaves, it can severely affect the culture and commitment your remaining employees have to the organization and their role.

Additionally, employees will ask questions about why their coworkers are leaving. They may also reflect on the reasons why, which can further damage morale and your culture.

The costs of turnover are high

Perhaps the biggest concern employee turnover presents is the financial costs of recruiting and training new employees to replace the ones you've lost. While employee turnover costs vary, there's no question it's something employers need to manage.

The average cost of turnover per employee can be thousands of dollars. Some studies⁴ predict that every time a business replaces a salaried employee, it costs six to nine months of their average salary. For an employee making $60,000 a year, that's $30,000 to $45,000 in recruiting and training expenses. However, replacement costs vary by wage and role of the employee.

For example, some report the average costs to replace an employee are:

• One to two times⁵ an employee's yearly salary
• $1,500 for an hourly worker
• 100% to 150% of an employee's annual salary for technical positions
• Up to 213% of an employee's annual salary for C-suite positions⁶

What is the true cost of losing an employee?

In an article⁵ on employee retention, Josh Bersin of Deloitte breaks down key factors that contribute to the true cost of losing an employee.

These factors include:

• Recruitment costs: This includes the direct costs of hiring a new employee, like advertising, interviewing, screening, and hiring.
• Onboarding costs: The cost of the onboarding process, including training replacements and management time.
• Lost productivity: It may take a new employee one to two years to reach the productivity of an existing person, resulting in indirect costs to your organization.
• Lost engagement and impact on employee morale: Other employees who see high turnover tend to disengage and lose productivity, affecting team morale.
• Customer service and errors: New employees take longer to complete their work and are often less adept at solving problems.
• Training costs: Over two to three years, a business likely invests 10% to 20% of an employee's salary or more in training.
• Lost institutional knowledge: When highly-skilled or longtime employees leave, your organization loses some institutional knowledge, which is the combined skill set and experience of your business.
• Cultural impact: Whenever someone leaves, others take time to ask why. Additionally, there may be a customer impact on your business if your turnover affects your staffing amounts.

One of the reasons the real cost of employee turnover is such a mystery is that most organizations don't have systems in place to track exit costs, including recruiting, interviewing, hiring, orientation and training, lost productivity, potential customer dissatisfaction, reduced or lost business, administrative costs, and lost expertise. Calculating this amongst all employees for a total annual cost takes collaboration among departments (HR, finance, operations, etc.), tools to measure these costs, and reporting mechanisms.

Why do employees quit?

There are many reasons why an employee might leave their current role.

Some of the top reasons for employee turnover are:

• Lack of growth or career development opportunities
• Lack of employee engagement
• Poor company culture
• Poor employee benefits and annual compensation
• Disagreements with coworkers or management
• No clear business goals or direction
• Employees feel like their employers don’t consider their honest feedback or thoughts

In 2022, Employ⁷ surveyed more than 1,200 HR decision-makers and recruiters. According to survey results, the top three motivators causing employees to seek new employment are needs for an increased salary, remote work options, and opportunities for career growth.

Employee retention strategies

So, what can you do about employee retention and reducing turnover costs? We've compiled some employee retention tips in the following sections.

Offer a quality health benefit

Offering health benefits is a great way to boost employee retention. Health benefits are frequently cited as one of the most desired employee benefits.

According to our 2022 Employee Benefits Survey Report, 87% of employees surveyed said they value health benefits like health insurance. Additionally, 72% of employees value dental insurance, and 63% value mental health benefits.

However, not all health benefits are created equal.

Traditional group health insurance is a common option for many organizations, but rising healthcare costs are making it unaffordable for many small to midsize organizations. Additionally, these plans force employees into networks that may not work for their individual needs.

A health reimbursement arrangement (HRA) is a popular option among organizations for its flexibility and lower costs. An HRA allows you to reimburse your employees tax-free for their qualifying medical expenses, such as individual health insurance premiums and out-of-pocket medical expenses.

HRAs are more cost-effective and flexible than traditional health plans because employers can offer a monthly allowance that fits their budget. If your employees don’t use their total allowance at the end of the year, you can keep the remaining funds, contributing to even greater savings.

With an HRA, your organization can say “goodbye” to tough minimum participation requirements and annual rate hikes that come with group plans.

Three of the most popular types of HRAs are:

• The qualified small employer HRA (QSEHRA)
• The individual coverage HRA (ICHRA)
• The group coverage HRA (GCHRA), also known as an integrated HRA

You can also offer your employees a taxable health stipend. This works similarly to an HRA but with fewer regulations and restrictions on which expenses you can reimburse. While an HRA is often a better option, a stipend is excellent for organizations that want to offer a benefit to international employees, 1099 contractors, and those with advance premium tax credits (APTC).

Offer an array of perks and benefits

In addition to health benefits, be sure to offer your employees various benefits and perks to ensure their unique needs are being met. Providing benefits improves employee satisfaction, which reduces employee turnover rates.

According to our 2022 Employee Benefits Survey Report, some of the most-valued benefits include:

• Paid time off (PTO)
• Retirement benefits
• Flexible schedules
• Paid family leave
• Professional development
• Life insurance

You can also offer employee stipends to your employees to help them pay for a wide array of expenses important to them. These taxable benefits allow you to easily reimburse employees for expenses such as health, wellness, remote work, transportation, and education costs.

With WorkPerks from PeopleKeep, you can manage your employee stipend benefits and create custom categories for any stipend you want to offer. You also have the option to offer one allowance to your employees to use on any expense of their choice.

Wellness stipends are a great place to start. Building a holistic employee wellness program helps boost employee engagement and productivity while addressing the health needs that traditional benefits don't cover. With a wellness stipend, you can reimburse your employees for gym memberships, fitness classes, wearables and devices, home exercise equipment, and more.

Benchmark your employee retention rates

Another way to reduce the costs of employee turnover is to benchmark your employee retention rate. By understanding how many of your employees are staying at your organization over a specific period, you'll be able to better work on methods to retain those likely to leave.

Use proven retention strategies, not guesswork

There are many proven ways to improve retention and reduce turnover.

Here are a few ideas:

• Hire the right employees the first time
  • First, identify your ideal employee and how you can convince them to apply. Then, update your hiring process and job description to reflect this.
• Identify the perks and benefits your employees want
• Set clear goals and expectations for your employees
• Optimize your employee onboarding program for long-term success
• Offer a clear career path with room for advancement
  • If your current employees feel stagnant in their roles, they'll look for new job opportunities elsewhere.
• Create and maintain a positive company culture
• Recognize employees for their work
  • This can be as simple as regularly thanking your staff or investing in employee recognition programs and activities.
• Keep open lines of communication with your employees
  • Provide regular feedback to your employees and welcome it from them in return.

Don't assume that every employee experience is positive

A mistake some organizations make is assuming their current workers are happy. By fostering a high-feedback environment, you'll be able to see how employees feel about your organization. This will allow you to take action to improve areas that are lacking.

It's also a good idea to conduct stay interviews with your employees to ensure their needs and goals are being met before they decide to leave your organization.

Conduct employee exit interviews

While you don't want to see your key employees leave, you can learn a lot through employee departures. Be sure to conduct an exit interview. This will help you identify the reason your employees leave for other opportunities.

Conclusion

When an employee leaves your company, it can be a big blow to your organization's morale and productivity. However, a high annual turnover rate can also cost you valuable time and money. That's why implementing strong retention strategies from the beginning is so crucial, including offering quality benefits to take care of your employees.

This blog article was originally published on June 2, 2020. It was last updated on April 16, 2024.

1. https://www.bls.gov/news.release/pdf/jolts.pdf
2. https://blog.hubspot.com/marketing/workplace-friendships
3. https://blog.hubspot.com/marketing/productivity-prohibitors
4. https://mnwi.usi.com/Resources/Resource-Library/Resource-Library-Article/ArtMID/666/ArticleID/782/Cost-of-employee-turnover#:~:text=The%20Society%20for%20Human%20Resource,in%20recruiting%20and%20training%20costs
5. https://www.linkedin.com/pulse/20130816200159-131079-employee-retention-now-a-big-issue-why-the-tide-has-turned/
6. https://www.applauz.me/resources/costs-of-employee-turnover
7. https://www.jobvite.com/lp/employ-quarterly-insights-report-q4-2022