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The Cost of Employee Turnover: Why Employee Retention Should be a Top Priority for Your Organization

December 22, 2023

The importance of retaining top talent cannot be overstated in today’s economic climate. Employee retention is a key factor in driving organizational success - especially during an economic downturn.

Why does employee turnover matter? Having a high turnover rate can incur costly expenses associated with recruiting and training a new hire. With 3.6 million employees quitting their job within the United States each month, talent recruitment, onboarding, and training costs can quickly add up.

Employee retention and turnover go hand in hand, and understanding their financial implications can be the key to a company's success.

In this blog post, we explore how employee turnover can negatively impact a company, the connection between motivation and turnover, and the benefits of retaining employees.

What is Employee Retention and Turnover?

Employee retention refers to a company's ability to keep its employees from leaving. It's a measure of how well an organization can maintain a stable workforce over time. 

On the other hand, employee turnover is the rate at which employees leave a company, either voluntarily or involuntarily, and are replaced by new hires. High turnover can be a sign that there are underlying issues within an organization that need to be addressed.

A few of the top reasons that contribute to high turnover include:

  • Lack of work-life balance
  • Lack of recognition
  • Burnout
  • Toxic Culture
  • Low Compensation
  • No growth opportunities or career development opportunities
  • Lack of action from feedback
  • Poor Management

How to Calculate Employee Retention and Turnover

Knowing your retention and turnover rates is key to understanding the health of your organization and accurately forecasting talent management costs. Here’s how you can calculate both rates.

Employee Turnover Rate Formula:

Turnover Rate = (Average Number of Employees/Number of Departures) × 100

Employee Retention Rate Formula:

Retention Rate = (Number of Employees at Start of Period/Number of Employees at End of Period - Number of Departures) × 100

What is a Healthy Turnover Rate?

Healthy turnover rates vary by industry, region, and company size. That being said, a general rule of thumb is a turnover rate of 10% or less is considered healthy. This means if a company has 200 employees, losing 20 or fewer in a year is acceptable. 

Of course, it is important to note that industries with traditionally high turnover rates, like retail, might have different benchmarks. For a better benchmark, compare your turnover rate to the industry average.

Here are the latest turnover rates for each industry:

  • Mining and logging: 36.2
  • Construction: 56.9 
  • Manufacturing: 39.9
  • Trade, transportation, and utilities: 54.5
  • Information: 38.9
  • Financial Activities: 28.5
  • Professional and business services: 64.2
  • Education and health services: 37.3
  • Leisure and hospitality: 84.9
  • Oher services: 47.2
  • Government: 18.1

The Cost of Employee Turnover

Employee turnover costs can be significant for organizations. The amount of resources and time it takes to identify, interview, hire, and then train a replacement quickly add up. In fact, Gallup found that the cost of replacing an employee can range from one-half to two times the employee’s annual salary.

You may be wondering why the costs are so significant. Here's a few reasons why:

  • Team Impact: When an employee leaves, often other team members take on their leftover responsibilities until they hire a replacement. This causes the team to be less productive as they take on double the amount of their normal work.

  • Talent Recruitment Costs: Recruiting a replacement can be costly. The average cost per hire is $4,633. For an executive level position, it can be up to seven times that amount.

  • Onboarding and Training: It typically takes a new hire six months to a year to get acclimated to their position. During this time, a new hire isn't as productive, leading to diminished results among other factors.

  • Disruption: Anytime an employee leaves, they leave behind unfinished projects and tasks as well as take valuable knowledge. This can cause projects to get pushed out or deadlines to not be met.

It's important to note that 30-40% of the costs are hard costs, while the rest are soft costs that result in the transition. High turnover is a costly hidden expense that many organizations underestimate, emphasizing the need to mitigate turnover rates and associated costs.

Graphic that says "What is the cost of turnover in your organization? Calculate Your Costs."


Why is Turnover a Motivation Problem?

Turnover often stems from a lack of motivation among employees. When employees don't feel valued, recognized, or challenged in their roles, they are more likely to seek opportunities elsewhere. This not only leads to increased recruitment and training costs but also results in a loss of institutional knowledge and expertise.

In fact, data shows this is a problem many organizations are facing. Disengaged and burnt out employees are 2.6 times more likely to leave their current employer according to a recent study by Gallup. This highlights the importance of having a strong employee engagement strategy tailored to your organization.

Most Effective Methods for Managing Employee Turnover and Retention

Managing employee turnover and retention effectively requires a multi-faceted approach. And unfortunately, there is not a one size fits all approach to retain employees. However, there are several notable strategies you can use to cultivate motivation and reduce turnover, including:

  1. Open Communication: Foster an environment where employees feel comfortable sharing their concerns and feedback. Use a real-time anonymous feedback tool like Employee Voice to keep a pulse on the health of your organizations. 
  2. Professional Development: Offer opportunities for continuous growth and advancement within an organization.
  3. Recognition and Rewards: Recognize and reward employees for their contributions. Offer a points-based recognition platform like Connects Plus to encourage a culture of appreciation.
  4. Work-Life Balance: Ensure employees have a healthy balance between their professional and personal lives. Provide a flexible work model to support employee’s work-life balance.
  5. Competitive Compensation: Offer competitive salaries and benefits to attract and retain top talent.
  6. Robust Onboarding: With 38% of employees quitting in their first year of employment, onboarding is an important factor in reducing turnover. Create a comprehensive onboarding program that sets the right tone for employees, starting on day one.

While there are numerous tactics and strategies you can implement to reduce turnover, it’s important to remember that your strategies should be tailored to your organization’s needs.

If you aren't sure what's causing your organization's high turnover rate, consider implementing an employee feedback survey, such as an anonymous 24/7 pulse survey, to get insight into what issues employees may be experiencing. You can then use these key insights to adjust your employee retention strategies and help solve for the identified issues.

The Benefits of Retaining Employees

Employee retention is not just a “feel-good” concept; it’s a strategic move that can significantly impact a company’s bottom line. When employees feel valued and appreciated, not only are they more likely to stay, but they are also more likely to work harder.

Here are the top ways organizations benefit from retaining their employees:

  1. Cost Savings: One of the most immediate and apparent benefits of retaining employees is the reduction in turnover costs. The process of recruiting, interviewing, hiring, and onboarding new employees can be quite expensive.
  2. Increased Productivity: It's no surprise that employee turnover can cause significant disruption within an organization. When employees stay at an organization for an extended period, they become experts with the organization’s processes and in their respective fields. This expertise can translate to quicker task completion, fewer errors, and an overall boost in productivity.
  3. Higher Employee Morale: Organizations with high retention rates often have a healthy, thriving workplace culture. When employees feel a sense of security and satisfaction from their role, employee morale soars.
  4. Institutional Knowledge: Long-term employees often accumulate a wealth of knowledge. They understand the company’s history, values, processes, and the intricacies of their roles. This knowledge is valuable as it can help streamline operations and avoid costly mistakes.
  5. Improved Customer Satisfaction: Customer satisfaction is closely linked to employee retention. When customer-facing employees stay at a company, they build stronger relationships with clients. These relationships are built on trust, reliability, and a deep understanding of customers’ needs.

By retaining valued employees, organizations can reduce unnecessary costs and drive better business outcomes.

If your organization is struggling with higher employee turnover rates, consider conducting a culture-focused employee survey or an anonymous pulse survey to get insight into what's causing employees to leave. Once you have enough feedback, you can then create a data-driven employee retention plan to combat the underlying issues.

Learn more about how you can implement a robust employee retention strategy to increase motivation and reduce turnover.

Conclusion

Employee retention and turnover are critical metrics for any organization. While turnover is sometimes inevitable, understanding its root causes, especially the role of motivation, can help companies address the issue proactively. By investing in robust employee retention strategies, businesses can create a positive work environment that encourages loyalty and reduces turnover.

Graphic that says learn how boosting retention can set your organization up for success and improve the bottom line.