The True Cost of Replacing an Employee
America is in the midst of the “Great Resignation.” Workers are leaving their jobs in record numbers, with the figure approaching 3.9 million in July, U.S. News & World Report reported. This is leaving businesses scrambling to replace employees — oftentimes at a major cost to them.
“The real cost of turnover is often estimated to be 33% to two times the employee’s annual salary, depending on the complexity of the position,” said Edie Goldberg, president at E. L. Goldberg & Associates, which helps businesses design HR systems to improve results. “A 100-person organization that provides an average salary of $50,000 and has 30% turnover could have turnover and replacement costs of $495,000 to $3 million per year. Approximately 67% of the cost is soft costs — lost productivity, lost knowledge, errors, etc. — while 33% of this is in hard costs related to recruiting, background checks and temporary workers needed in the interim.”
Before allowing an employee to resign without any effort to get them to reconsider, employers should be aware of all of the possible costs of replacing an employee.
“The talent market has undergone whiplash-like change in the last 18 months, with companies shedding their workforce last spring and then spinning into a hiring frenzy this summer. It’s no surprise that many employees are looking for new opportunities or at least reevaluating their career priorities,” said Jen L’Estrange, founder and managing director of Red Clover, which provides human resources and change management consulting. “While I don’t believe in negotiating ‘special deals’ to keep people, I also believe that we need to understand the total cost of ownership in employee disengagement and attrition.”
Here’s a look at all the costs employers take on when they have to replace an employee.
Hiring an Interim Replacement
“Business continuity comes at a premium,” L’Estrange said. “If you’ve just lost someone in a critical business operations role, then the first priority is finding cover. For management roles, interim can be a solution, but it comes at a price — typically 20-25% more than the fully loaded cost of the person who just left.”
Recruitment for a Full-Time Replacement
“Recruiting costs more than you think,” L’Estrange said. “The easy number is the agency fee. If you’re using one, costs are approximately 20% of the first year’s compensation — most commonly just the base salary, but this can also include annual bonuses.”
Then there’s the cost of lost productivity.
“Don’t forget to add the internal costs of interviewing,” L’Estrange said. “You should include an hourly ‘burn rate’ for the time spent by hiring managers and HR interviewing candidates.”
Onboarding costs time and money.
“Your hiring manager, team and HR will spend additional time onboarding the successful candidate,” L’Estrange said. “A good onboarding process runs for 90 days and will involve 40+ hours of internal work to get it done from start to finish. Plus, in the current job market, we’re seeing salary costs for replacement employees are averaging 15% more than the incumbent, and that has a knock-on effect on total labor costs.”
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When employers are rushing to fill a position, they may end up hiring someone who isn’t a good fit.
“Mis-hires are debilitating and crazy expensive,” L’Estrange said. “Hiring the wrong person costs more than not hiring at all. In fact, it’s about twice as much between the time involved in going back to market and managing the onboarding process again. There’s also the straight-up salary costs with little to no business contribution to show for it. As much as hiring managers complain about HR insisting on a rigorous interview process, slapdash selection is literally the worst.”
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A Dip in Employee Engagement
When someone leaves a company, it can affect their co-workers in a negative way, leading employee engagement to take a dip.
“As leaders, we feel attrition from the perspective of business continuity, cost management and profit margins. But our people experience attrition as a loss,” L’Estrange said. “They’re losing their friends and colleagues, people that they know well, like and respect. So, it’s only natural that the colleagues that stay behind start to question their loyalty to the company. Engagement drops, and so does productivity.”
Damage to the Employer Brand
When companies experience a significant increase from their usual turnover percentage, this can begin to reflect poorly on the brand.
“As that number increases, the perception of the employer brand begins to drop, and then more people leave, and it drops again, and things may start to spiral,” L’Estrange said. “Luckily, this doesn’t happen often or overnight, but it’s both disruptive and costly when it does.”
Damage to Customer and Vendor Relationships
“As the organization shifts focus from external to internal to recruit a replacement, especially if the resignation was done on short notice, both customers and vendors suffer,” L’Estrange said. “We can’t be all things to all people at the same time, and every hour that we spend trying to find that perfect candidate is an hour that we’re not managing our key partner and customer relationships. While hard to measure directly, we feel it when contract renewals come up or when we start to see an uptick in customer attrition and brand switching.”
Loss of Organizational Knowledge
When an employee leaves, they tend to take much of their organizational knowledge with them.
“Two weeks’ notice is not a lot — not for a basic handover and certainly not enough for a proper transition with documentation,” L’Estrange said. “Expect some things to fall through the cracks. A lot of it can be retrieved or recreated, but if you’ve lost a critical resource and that loss is forcing you back to market, then you can be sure that some organizational and institutional knowledge will be lost forever.”
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