How to calculate the real cost of employee turnover
Every time an employee leaves an organization a slew of resources are drained to find their replacement.
While companies aren’t necessarily shelling out thousands of dollars upfront to find a replacement, they are losing a significant amount with lost productivity. That includes everything from time spent interviewing candidates, onboarding them, and then training them for the next several weeks to months. Sure, it might be a part of that manager’s duties, but it’s hours of their days that they could otherwise use to focus on other needs that more positively impact the company’s bottom line.
Employers know that attrition is costly. But how much is it really?
The Center for Economic and Policy Research has its own turnover calculator for companies to see the costs for themselves. To replace an exempt worker (salary workers who don’t get paid extra for overtime) making $93,641 a year, will cost the average organization $23,712, according to this calculator.
Let’s break it down
That’s based on a number of variables, which depend on how much your company spends in hours and dollars on each part of the interview and onboarding process.
For the purpose of this estimate, we will use average numbers. Start with the interview process: advertising will be $1,000, agency fees $4,800 and travel for in-person interviews $1,000. That also includes 15 hours of time for screening, including reviewing resumes, 10 hours on selecting, including preliminary phone interviews, and 48 hours on hiring top candidates, including calling references. There might be an additional two hours on administrative tasks, like entering the new hire into the payroll system and signing them up for health insurance or other benefits. Once a candidate is selected, it might take over 30 hours of company time for training, and the new hire might not be fully proficient at their job for 90 days.
“Then a manager is following the new hire around to teach them the ropes,” said Eileen Appelbaum, co-director of the Center for Economic and Policy Research. “Let’s say it takes two weeks for the new employee to be completely up to speed. On average, that means for those two weeks, you’re paying them a full-time salary and you’re only getting half-time production from that person. And of course the manager training them isn’t as productive as he would have been if he wasn’t showing the new employee how to do the job.”
When all of that is added up, it leads to a significant amount of resources wasted that wouldn’t need to be otherwise tapped. And while in this case there is one person who might be doing the hiring, other bigger organizations might have an entire team dedicated to this.
“If you have normal turnover, you have some employee whose job it is to deal with that,” said Appelbaum. “People have groups within HR that do hiring. But, if you didn’t have such high turnover, you wouldn’t need a special group that does hiring. That’s included in turnover costs.”
With the boom in AI, it might help offset some of these costs and slim down the time spent in finding and onboarding the next person to fill the role. Naturally some companies are already doing this today, but then there are new costs with that, like the upfront charge for using an AI platform to help with this, or the time spent to learn how to use the platform. However, if it pans out, the cost of turnover might change over time thanks to new technology.
Hard costs vs soft costs
The Center for Economic and Policy Research’s calculator is just one way to figure out these costs. Research from the Society for Human Resource Management found that the average cost per hire was $4,700, according to data from 2022. But, many employers estimate the total cost to hire a new employee can be three to four times the position’s salary. That means if you’re hiring for a job that pays $60,000, you may spend $180,000 more to fill that role. Average replacement costs increase the more senior the position is. Of course, that’s not money necessarily coming out of a company’s pocket, but it is money that is lost. SHRM estimated that 30% to 40% are hard costs, and the other 60% are soft costs.
Alongside advertising, other hard costs include adding people into printers and scanners for in-office, modifying security systems like door swipe cards, and adding additional people to payroll systems, which sometimes charge by the number of people in your system for the whole year, not by the average number. There could also be overtime expenses to cover a reduced workforce or temporary employee pay. If the person left involuntarily, the employer also likely has to pay severance, which can be costly. With that comes an uptick in unemployment insurance because the more unemployment claimed, the more of a liability you are.
“If an employer terminates an employee and they do it poorly, there’s a lot of risk involved,” said Amanda Day, Remote’s senior director of people enablement. “That can be extremely costly because that person could potentially file a claim for unfair dismissal. If it’s someone of a protected class, it could become extremely expensive if they file a claim with the EEOC. It can take years working with legal to resolve it, so you’re paying legal fees and the person who left a sum of money.”
Additionally, when you hire someone new, the average salary for that position might be thousands of dollars more than what you were paying the person in the position before. If you pay out for a referral bonus, that’s another cost accrued.
But the soft costs are what really make turnover so expensive.
“These interviews aren’t five to 10 minutes, I’d say more like 30 minutes to an hour,” said Julie Schweber, senior HR knowledge advisor. “If we’re very interested in someone, directors and managers could be spending one to three hours on it. That manpower cost to do the interviewing is significant.”
And if it’s a newer manager who is hiring, they might also need training themselves on how to approach the interview process.
“Your hiring managers that are doing interviewing, anyone who is doing interviewing, should be trained,” said Schweber. “HR should be conducting training for anyone who hasn’t interviewed before. That could be a whole big expense if we’re asking questions that are not supposed to be asked.”
Other soft costs include the extra slack that team members need to pick up while that role is being filled, which sometimes can take months, stressed Day. It results in an additional loss in productivity and could even lead to other team members feeling demoralized and thinking about leaving too.
“I think you have to be even more intentional in your retention strategies because it is more normal now than previous generations to move to different companies and different jobs in a shorter period of time,” said Day.
Another formula for calculating turnover costs
Management consultancy company G&A Partners uses a different formula for calculating employee turnover cost:
- Overtime paid to retained employees because of the employee’s departure
- Costs to hire temporary workers, independent contractors, or consultants
- Direct costs for recruiting (agency fees, advertising costs, background check/drug screen vendor costs, etc.)
- The departed employee’s rate of pay (including fringe benefits and tax costs covered by the employer) for the period the position was vacant.
Calculate the first three bullets and add them together. Subtract the total of the last bullet (representing the money not spent on the employee) from the first number. This will reveal the hard costs resulting from a separation.
Soft dollar costs are more elusive. Determine the number of hours HR employees and managers spend reviewing resumes, setting and conducting interviews, and obtaining and reviewing background checks and drug screenings. Then multiply those hours by the participant’s rates of pay to give you a starting point. That’s G&A Partners’ calculation.
It can be difficult to nail down, but is an important reminder of how much retention really matters. The Center for Economic and Policy Research originally conducted its research around turnover rates to make a case for better policies to support workers, such as paid sick days, a fair salary, investments in workforce training and family leave.
“There are some management consultants who now take our calculator when they visit a client who doesn’t realize turnover is expensive or doesn’t want to make a change whether it be for paid family and medical leave or accommodating an employee who needs a temporary reduction in hours,” said Appelbaum.