Employee turnover is more costly than you think. Every businessman knows at some level that it’s easier for them if they can manage to keep their current employees than to need to find replacements. However, the cost of staff turnover is surprisingly high, and many small business owners don’t fully realize just how expensive it is to replace an employee.
When you’re negotiating with an employee, you need to keep this cost of employee turnover in mind so that you can accurately assess how much your employees are worth. The value of an employee goes beyond the value to the company to also include this high cost of finding a replacement.
Expenses to Consider
The factors that go into determining the cost of employee turnover are diverse and reach into many areas of your business that you might not immediately think about. Some expenses are obvious, while others are more indirect but real nonetheless. Here are a few examples:
The factors that go into determining the cost of employee turnover are diverse and reach into many areas of your business that you might not immediately think about. Some expenses are obvious, while others are more indirect but real nonetheless. Here are a few examples:
- Hiring a recruiter. If you decide to use an outside recruiter, you’ll need to factor in those costs, whether you use a search firm or an employment agency.
- Your own lost productivity. While you are searching for a new employee, you will have to set aside part of your own time to conduct the job search—time that you would otherwise have been able to dedicate to your business. The opportunity cost of the job search means you can’t use that time to work on marketing, sales, development, or any other priorities.
- Advertising fees. If you’re posting your job opening, whether in newspapers or online, it will cost you.
- Travel expenses. You may decide to bring in candidates from out of town, and pay their travel expenses; or you might decide to travel around and meet candidates, in which case you have to pay for your own travel. Candidates outside of your local area require travel.
- Training time. You have already invested time to train your current employee, and it will require additional time to train anyone new that you bring in as a replacement. Staff turnover means duplication of that training time, whether it’s another employee or you yourself that has to run the training.
- Intangibles. There are other intangible costs to staff turnover, items that won’t show up anywhere on your financial sheet, but have a real impact nonetheless. A high turnover rate leads to decreased employee morale, as the team is in a constant state of flux without any stability, as well as a loss of customer confidence.
The Total Cost
So how much do all these various factors cost you when you face employee turnover? Some of them are hard to quantify, and calculating opportunity cost is much more difficult than, for instance, determining the cost of job postings and hiring recruiters. There are many estimates people have come up with, formulas that they use to budget the cost of replacing employees in their own businesses. Aetna, for instance, estimates the cost at 93 percent of the annual salary of the position, factoring in all the elements of time, productivity, and other hiring costs. Others, however, estimate the cost of hiring a new employee to be as high as 200 percent of the position’s salary, depending on the field and kind of position.
So how much do all these various factors cost you when you face employee turnover? Some of them are hard to quantify, and calculating opportunity cost is much more difficult than, for instance, determining the cost of job postings and hiring recruiters. There are many estimates people have come up with, formulas that they use to budget the cost of replacing employees in their own businesses. Aetna, for instance, estimates the cost at 93 percent of the annual salary of the position, factoring in all the elements of time, productivity, and other hiring costs. Others, however, estimate the cost of hiring a new employee to be as high as 200 percent of the position’s salary, depending on the field and kind of position.
No matter which figure you find to be most accurate for your business, employee turnover is costly. The best thing you can do as a businessman is to find ways to keep good people, rather than constantly churning through replacement after replacement.
Published: March 22, 2013
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