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The real cost of employee turnover

Mikaella McInerney
September 16, 2022

Employee turnover is an important metric for everyone in a company, but especially for the recruitment, talent acquisition, people, and HR teams. Bad hiring decisions lead to high employee turnover.

New to hiring? No problem!
This article is the hiring 101 that will help you to hit the ground running.

Nobody likes employee turnover, and high employee turnover is always a warning sign. When lots of your employees are leaving en masse it might be an indication that management is not clear, that the talent acquisition team is repeatedly hiring the wrong candidates, or that there is something at fault with your company culture. And what’s most significant, from the smallest amount of employee turnover to the highest, is this: employee turnover is expensive.

Employee turnover is part of life. SHRM estimates average annual employee turnover rates to be around 19%, but as an average, this takes into account companies with bad employee turnover, too. In general, experts advise that any employee turnover over 15% is too high. It’s a warning sign that all is not well—and it’s taking a significant (and avoidable) chunk out of your company’s budgets.

Employee turnover is an important metric for everyone in a company, but especially for the recruitment, talent acquisition, people, and HR teams. Bad hiring decisions lead to high employee turnover. That means employee turnover needs to be part of your analysis of any recruitment process at your company. Equally important is knowing how much employee turnover is costing you. In this article, we’ll teach you how to calculate turnover rate and its cost.

How do I calculate the cost of employee turnover?

Calculating the cost of employee turnover might seem an impossible task, with so many factors and variables. But actually it’s pretty simple!

First, you need your cost calculations. Most of these costs are, you guessed it, about the time and capacity of your salaried employees, in the recruitment team and the hiring manager or team members who will be onboarding and working with the new hire. So work out roughly what percentage of their time will be spent on these activities, and then take the same percentage of their salary to find the cost factor you’re looking for.

Then, use this formula for the exact cost of employee turnover:

Take your vacant position coverage cost
ADD
The cost to fill the vacant position
PLUS
Onboarding and orientation costs
PLUS
The productivity ramp-up cost
MULTIPLIED
By the number of employees lost in that position in a given year
MULTIPLIED
By twelve to give you your annual rate!

As you can imagine, this adds up. The SHRM reported that it usually costs a company six to nine months of an employee’s salary to replace them. So if your employee is making €60,000 a year, that comes out to €30,000-€45,000 in recruiting and training costs when they leave. No small figure!

How do I avoid the costs of employee turnover?

The expensive rate of employee turnover makes it all the more important that we act decisively to prevent unnecessary employee turnover. There are lots of things that can contribute to employee turnover, from company culture to management style. But one of the main contributors to employee turnover is in your hiring process. A large part of turnover can be connected to poor hiring practices.

Working out why an employee has left involves going back to the beginning and working out what went wrong—or right!—in their recruitment and onboarding. Why did you choose this candidate for the role in the first place and were there qualities you were concerned about that you skimmed over at the time? What was the initial job description like, and were there any changes between hiring and onboarding that might have made your chosen candidate unhappy in their role?

Reconsider every decision you made to see if there was any clue as to why your employee has left. Particularly if the employee is leaving within the first 18 months of their employment, there’s a good chance that you’ll be able to understand what went wrong by looking at their recruitment process.

Analyze your hiring process, reflect on its strengths and weaknesses and use HiPeople to make data-driven decisions to build a stronger recruitment strategy that decreases employee turnover over time.

Why should I calculate employee turnover rate and cost?

That high number might be frightening. But there are many reasons why analyzing the cost and rate of employee turnover will improve your recruitment process.

  • Benchmark employee cost: Knowing how much each employee costs you in their turnover is a great figure to have at your hands whether they leave or not! Employee cost benchmarks can help your budgets and overall company strategy, as well as your recruitment process.
  • Ramp up productivity during onboarding: If you work out which parts of the recruiting process cost more and when, you can create a more efficient, streamlined and productive onboarding process. Bring in your hiring manager and other crucial onboarding employees only when they’re needed, and have a specific onboarding strategy which increases retention and lowers costs.
  • Save time and money: In the end, calculating employee turnover rate and cost is about building a better recruitment process. That means one that is faster, more streamlined, and less expensive. As you already know, saving your company time and money is a no-brainer win!

Knowledge is power

Ultimately, knowing and calculating your employee turnover costs is all about giving you better insight and control into your recruitment process. It saves your company time and money and helps you hire the right people at the right time… and then keep them! And it all goes towards making your company a healthy, successful and pleasant place to work.

Need help in streamlining your recruitment process and making data-driven hiring decisions? Need more analysis as to why your employees are leaving and what kind of Quality-of-Hire you’re making? HiPeople have you covered.

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