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Employee retention: The real cost of losing an employee

HR • February 2, 2023 at 11:38 AM • Written by: Chase Charaba

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

This article will cover why employee turnover matters, how it can hurt your organization, and strategies you can use to prevent it. We’ll also look at the cost of employee turnover.

Takeaways from this blog post:

  • Employee turnover can have a negative impact on an organization's morale, as employees may lose valuable work friends and feel less connected to the organization.
  • Losing employees can lead to decreased productivity, as remaining employees may become overwhelmed with additional work.
  • The financial costs of recruiting and training new employees to replace those who have left can be significant, with turnover costing thousands of dollars per employee.

Looking to reduce employee turnover at your organization? Download our guide to learn how to keep your employees without breaking your budget

What is employee turnover?

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

Employee turnover can be split into two categories: voluntary 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 industries like professional and business services, manufacturing, and retail.

While the trend has slowed in recent months, many workers continue to leave their jobs voluntarily. According to the Bureau of Labor Statistics’ December 2023 news release, 3.6 million people quit their jobs in October 2023.

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

Employee turnover lowers morale

One of the first changes you'll notice after losing an employee 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.

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, the culture and commitment your remaining employees have to the organization and their role in it can be severely affected.

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

Employee turnover decreases productivity

Losing employees also leads to decreased 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.

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.

The cost of employee turnover is 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 the true cost of turnover varies, there's no question it's something employers need to manage.

The average cost of turnover per employee can cost thousands of dollars. Some studies4 predict that every time a business replaces a salaried employee, it costs 6 to 9 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 reports the average costs to replace an employee are:

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

What is the real 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: The direct costs of hiring a new employee, including 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, or 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 career development opportunities
  • Lack of employee engagement
  • Poor company culture
  • Lack of or poor employee benefits and annual compensation
  • Disagreements with co-workers or management
  • No clear business goals or direction
  • Employees feel like their honest feedback or thoughts aren't considered

A 2021 Pew Research survey7 asked workers why they quit their jobs. According to the survey, 63% of respondents said low pay and no opportunities for advancement were factors in their decision to leave. Additionally, 43% of respondents said the benefits their previous employer offered weren’t good enough.

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 an excellent option for many organizations, but rising healthcare costs are making it unaffordable for many small to midsize organizations. Additionally, employees are forced 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.

Three of the most popular types of HRAs are:

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 can be reimbursed. 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 employee benefits improves job satisfaction, which reduces turnover.

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

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 opportunities for growth
    • Employees look for development opportunities in any job. If they feel stagnant in their role, they’ll look for new opportunities that help them grow.
  • 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

Don't assume your employees are happy

A mistake some organizations make is assuming their employees 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 exit interviews

Finally, when employees do decide to leave, be sure to conduct an exit interview. This will help you identify the reason your employees are leaving for other opportunities.

Conclusion

When an employee leaves your organization, it can be a big blow to your organization's morale and productivity. But a high annual turnover rate can also eat into your overall budget. That's why implementing strong retention strategies from the beginning is so crucial, including offering quality benefits to take care of your employees.

Looking to build a flexible benefits package that helps keep your employees happy? Schedule a call with a personalized benefits advisor to see how we can help you offer flexible benefits on a budget.

This blog article was originally published on June 2, 2020. It was last updated on December 21, 2023.

  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.pewresearch.org/fact-tank/2022/03/09/majority-of-workers-who-quit-a-job-in-2021-cite-low-pay-no-opportunities-for-advancement-feeling-disrespected/

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Chase Charaba

Chase Charaba is the content marketing manager at PeopleKeep. He started with the company as a content marketing specialist in early 2022. Chase has written more than 350 blog posts for various companies and personal projects throughout his career. He’s worked for digital marketing agencies, in-house marketing teams, and as the editor for national award-winning high school and college newspapers. He’s also a YouTuber, landscape photographer, and small business owner.