The True Cost of Employee Turnover on Your Business

Whether you’re running a small, medium-sized, or large organization, a high employee turnover can adversely affect your business. As well as decreased productivity for the organization, current employees may suffer from low morale when they see team members leave or if they have to work more to pick up the slack.  

These workers can become increasingly dissatisfied if new hires aren’t brought in quickly to ease the pressure, which can lead to a cycle of high turnover.

The bottom line: You don’t want high employee turnover. Read on to learn the impacts of employee turnover on your business, understand how to measure employee turnover, and discover what you can do to prevent a mass exodus.

What is employee turnover?

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Employee turnover is the number of employees who exit an organization over a period of time—typically measured separately by the month and year, and often expressed as the turnover rate.

This rate helps you measure the efficiency of your human resources (HR) department, as well as your managers and organization, allowing you to compare your departments and company to industry averages and corporate plans.

An employee exit counts as turnover, whether it’s voluntarily or involuntarily. Voluntary turnover is when workers decide to quit on their own. Involuntary turnover is when an employee is asked to leave.

While turnover rates vary by industry and company size, a good rule of thumb is to work for a rate of 10% or less. Anything above that could mean that making some simple changes can lead to higher retention rates, increased efficiency, and lower costs.

The best way to find the real cause of employee turnover is to have an active and engaged HR department and management staff who enable employees to voice their concerns. Not every employee complaint can be addressed—but they can always be taken seriously. You might also use an employee engagement app, or contract a third-party HR expert, to work with your team and take anonymous polls and surveys to find root causes before they become major issues.

You should also conduct exit interviews and ask for an honest opinion on what the employee felt pushed them away. You can use this information to implement appropriate preventive measures.

What is the cost of employee turnover?

For you to understand the real cost of employee turnover, we have to divide it into direct and indirect costs.

Direct turnover costs are incurred when searching, hiring, onboarding, and training employees. Direct costs include any money spent, as well as the time it takes to interview, onboard, and train new hires.

Indirect turnover costs or hidden costs arise from reduced performance and productivity.

A high turnover means you’re losing institutional knowledge. Employees have valuable skills and experience learned on the job, and finding suitable replacements may be a challenge.

Plus, you still have to train and bring them up to speed, meaning you’ll lose productivity while helping new hires settle in.

The real cost of employee turnover can be as much as twice the amount of the departing employee’s salary.

The average monetary cost of employee turnover

The average monetary cost of employee turnover differs depending on the industry, the organization, and the employee’s position.

According to a report by SHRM, a good benchmark is to assume that it will cost between 6 and 9 months of an employee’s salary to replace them. This means that if a departing employee’s annual salary is $100,000, replacement costs and new hire training costs will likely sum up to between $50,000 to $75,000.

Other studies put this number even higher, especially for highly trained roles and leadership positions. When you factor in various indirect costs that arise due to reduced performance and lost productivity, additional costs could range between $30,000 and $120,000.

The cost of decreased productivity

A high turnover rate could leave you without enough personnel to cover all aspects of your business. As a result, you may need to search for and recruit new hires (but this takes time and resources, and can further reduce your productivity).

The remaining workers must also spend time training new employees, meaning their priorities are split or they may be temporarily taken away from their normal responsibilities that help earn a profit for the company. Projects might have to be paused. Customer satisfaction might go down as orders are missed or complaints are mishandled.

There’s also a lost opportunity cost: money that could have been earned had someone been in the role.

If a role is left vacant, the company may miss out on potential revenue that could have been generated if the position was filled. Additionally, if a new hire must be trained, other employees may need to divert their attention from their usual tasks, potentially delaying or reducing their productivity. This can also result in lost revenue, as time and resources are spent on training instead of revenue-generating activities.

The cost of lowered employee morale

Employee turnover affects your financial performance, as well as your workers’ morale. When employees feel like their coworkers are just rotating through, it creates an environment where workers feel expendable or like they can’t build a long-term career with the company.

This can affect your business by contributing to more turnover, less motivation, and lower productivity.

The remaining employees may have to take up extra responsibilities as more workers exit, which can be frustrating and lead to burnout. New employees may need to be offered more incentive to sign on—either with more pay or better benefits—leading to feelings of jealousy from a crew who feels betrayed for their loyalty.

In the end, even the most conscientious employee’s work may suffer, and even the most loyal might consider leaving.

How do you measure employee turnover?

Measure employee turnover by finding your employee turnover rate. To find your monthly turnover rate, simply divide the total number of employers who leave in a month by your average number of employees for that month, and multiply the total by 100.

Let’s say five employees left your company in March, while the average number of workers was 120. We calculate the employee turnover rate as follows.

5/120 * 100% = 4.167%

In the above example, the employee turnover rate for March was 4.167%.

You can adjust the time period when calculating employee turnover rate. For instance, instead of a month, you can look at quarters or years. In general, a turnover rate of 10% or less is ideal regardless of the period.

Learn more about calculating employee retention rate and turnover rate.

Key reasons employees quit

Lowering employee turnover, or maintaining a low turnover rate, should be among your top priorities. But you must first understand why employees leave to successfully retain workers for longer periods. Here are some top reasons you could be losing employees.

Opportunity to earn more elsewhere

Research by the Pew Research Center shows that low pay is among the biggest reasons employees left their jobs in 2021. Of the 63% of participants who agreed that poor compensation was a motivator for them quitting, 37% regarded it as a major reason, and 26% regarded it as a minor reason.

If your company isn’t staying competitive with pay based on market rates for the job at hand, employees will likely consider moving to other companies that offer higher pay for the same position.

Lack of growth opportunities

The Pew Research Center’s study found the lack of career development opportunities was also a significant reason many workers left their jobs. In fact, 33% of participants claimed that few or no opportunities for growth was the major reason they quit.

Employees want to feel they are learning or developing their skills to advance to higher positions or better opportunities. When this is nonexistent, employees often look for it elsewhere.

Not feeling valued

Employee recognition is an important part of the workplace. Workers prefer an environment where they are recognized and appreciated by their colleagues and the management team.

When employees feel they are not respected or valued in their workplace, their drive to do their best work often suffers. As a result, they start looking for another work environment where they feel valued. In Pew’s research, 35% of the participants claimed that feeling disrespected was a major reason they left their jobs.

Disliking the work environment

The kind of work environment you have, and your corporate culture, can affect your employee turnover. Most people would prefer to work where they feel inspired and comfortable. If employees have a negative experience, they’ll likely look for someplace else where they feel better.

One culprit for workers disliking the work environment is the presence of a toxic organizational culture. Signs of toxic work culture differ from one organization to another, but might include rampant dysfunctional conflicts, lack of trust, unhealthy work-life boundaries, low morale, and overall negativity.

A toxic work culture can contribute to stress and anxiety, making it challenging for employees to focus on their job. In the long run, employees can become fed up with these issues and, in turn, choose to exit.

Feeling uninspired

An inspired workforce is generally more motivated, self-driven, and capable of achieving more.

Failing to engage and inspire your team members leads to diminished productivity, poor employee engagement, and reduced commitment.

When employees don’t feel the inspiration, growth, or progression they desire, they often lose passion for their work and may search for regained passion elsewhere.

Some signs that employees lack inspiration include poor focus at work, absenteeism, reduced quality, missing deadlines, and appearing withdrawn. Business owners and team leaders who see any of these signs should find ways to engage and instill a sense of purpose in their employees.

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‍5 tips to reduce employee turnover cost

Now that we know some of the major reasons employees quit their jobs, here are five tips and retention strategies to help reduce employee turnover costs.

Regularly recognize employee performance

Your culture should also support a proper recognition and reward system. Recognizing your employees can go a long way in lowering your turnover rate and improving retention. Through recognition, employees feel valued and appreciated for their work. As a result, they can be motivated to put in more effort and stay with the company longer.

Employee recognition enables you to reinforce positive behaviors in the workplace. By recognizing employees, you show them you like what they are doing and appreciate their hard work, and create the strong culture that’s fundamental to long-term success.

You don’t have to wait for the big moments, like a 25-year anniversary, and award employees with hefty perks for them to feel recognized.

Small, frequent gestures, such as positive feedback, thank-you notes, and shoutouts, can go a long way in boosting employee morale. Rather than waiting months to recognize employees, being spontaneous with your feedback can also be effective.

And when those big moments do come around, such as winning a big account or completing a major project, increase the size of your recognition to be in-line with the size of the accomplishment.

Reassess your hiring process

Choosing the best employees for your organization is critical to its success. You want to bring in the right people so they feel they’re in the right place (and will stay longer).

Sometimes, a poor fit can cause employee turnover. For example, a new hire may not stay long if they don’t like your company culture. So, you need to thoroughly interview candidates to ensure they are suitable for open roles.

Don’t just focus on their skills, qualifications, and experiences when screening candidates. Instead, look at their behaviors, values, and other personal attributes and determine if they align with your organization's goals and ideals.

Don’t forget to describe your company’s culture, management, vision, mission, and other important aspects to help potential employees settle in.

Pay attention to competitors

As much as you improve your internal processes, you must also keep an eye on what your competitors are doing. If they have low turnover rates, see how compensation benchmarking can help you understand how these companies retain workers for longer periods.

How much are they paying their workers? What support systems do they offer their team members? What is their company culture? What kind of retention strategies do they have?

Benchmarking from your rivals can help your company know what employees may be looking for or how to stay relevant in the industry. You can use this information to make changes and help retain workers.

Offer opportunities for growth

Workers prefer an environment with access to growth opportunities. Employees who feel they are not growing with your company might be inclined to go elsewhere.

Avoid unwanted exits by offering clear paths for employee development. Start with providing continuous training programs to help improve employees’ skills and experiences and prepare them for future roles.

Go a step further and provide career development services, including counseling, job shadowing, and mentorship programs.

Also help employees learn by providing helpful feedback during performance reviews.

Delegating certain responsibilities can also empower employees and allow them to get real-world experience.

Develop your company culture

Your company culture and work environment must coincide with what the people working there want to be around. Employees who feel happy in their work environment want to keep working there.

Developing a strong culture starts with ensuring effective workplace communication, transparency, and accountability.

As an employer, you should listen to and consider employees’ concerns and opinions during decision-making so they feel like part of the team.

A strong company culture promotes inclusivity. Ensure all employees feel comfortable in the workplace to reach their potential.

You should also create a welcoming environment where employees know their rights and freedom are protected. This allows them to focus more on their work.

Don’t forget to allow your people, and yourself, to have a proper work-life balance. Your people need to go home and unwind, spend time with their families, or engage in their favorite hobbies. Letting them power down their work phones to have that time uninterrupted is important to their overall well-being, and their ability to be focused on their work.

The best employees for your business are on Upwork

An employee moving through the complete employee cycle—from recruitment and hiring to moving on to their next engagement—is normal and can be healthy. But high turnover rates can be problematic and a sign that something is wrong.

Lower turnover by reassessing your hiring policies, improving employee recognition programs, working on your company culture, and creating growth opportunities.

As you work through these processes and need to fill skills gaps, consider starting your search for top talent on Upwork. You can easily find professionals to fill vacant roles and help your company stay on course.