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High Employee Turnover Costs Hurt Profits

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Hands using a calculator - Employee Turnover Costs Hurt Profits
Margaret Sanchez
Margaret Sanchez
June 12, 2020

Do you know what your turnover rate is? According to a recent study done by the Work Institute, US companies lose at least 27% of their workforce yearly. The institute expects this high annual turnover rate to increase by eight percent every year.

Why should you care? Each turnover can cost your company between half and twice your outgoing employee’s annual salary. If your organization loses its best people and is unable to find suitable replacements, you may all be looking for work.

The good news is that it is possible to get a handle on the situation and do something about high turnover. You can retain up to half of the employees whom you would have lost by taking proactive measures.

Turnover Costs You Money Three Ways‍

Your employee turnover cost includes separation, recruitment and training, and incidental expenses.

Separation costs – Separation costs include severance pay, continued benefits expenses, unemployment insurance claims, and the like. You are also paying current employees to conduct exit interviews, remove outgoing people from the payroll and benefits system, and other tasks associated with processing terminations.

Manager training new employees

Recruitment and training costs – You pay employees to update job descriptions. You may hire recruiters, or you may post jobs and screen applicants in-house where one or more people interview candidates. You may pay for testing, background checks, and/or candidate travel expenses.

You may also pay relocation expenses. Payroll spends time entering new-hire information into the payroll and benefits system. You spend money on training. And, of course, newbies want to take up some of their managers’ time.

Incidental costs – Incidental costs include things like knowledge, productivity, and morale. When experienced people leave, they take job knowledge with them. If you don’t acquire experienced new-hires, turnover will increase, and you could eventually end up with an incompetent workforce. Losing your best people means that you lose your most effective problem solvers, constant innovators, and your reliable winners.

Employees absorb the departed person’s work, and they may then take up the slack for the new person. Short handedness and low morale can lead to decreased productivity at a time when you need to see increased productivity. Some of the work just won’t get done. The situation could lead to lost customers, a threatened brand, and possible litigation.

Because some incidental costs are not immediate or easily quantifiable, your company could grossly underestimate the incidental charges it is paying. Without having some idea of what the incidental cost is for each employee that you lose and replace, you don’t know what your company’s total cost of turnover is.

Why Do Employees Leave?

Hand giving a resignation letter while holding personal belongings

Managers don’t usually fully know why their employees leave, but most everyone assumes it has something to do with either unhappiness with the pay rate or with the job itself.

Low wages, coupled with little morale problems, make some types of jobs highly disposable to many people. Losing an employee most commonly occurs in retail, customer service, hospitality, service, construction, and trade and utility jobs.

Even companies in those industries can make changes that reduce turnover. If you frequently see your most valuable employees leave, you very likely have serious morale problems and/or other issues that you need to resolve.

How You Can Reduce Turnover‍

According to Gallup, voluntary departures of employees cost US businesses about $1 trillion annually. Astonishingly, up to 52% of these departures could have been prevented by taking proactive measures. Here’s what you can do:

  1. Calculate your employee turnover cost – Knowing at least the quantitative costs of voluntary turnover give you an idea of where your company stands where turnover is concerned. Operations and finance people need to own the numbers so that you’ll get full cooperation from them when you need it.
  2. Invest in employee growth - Train your managers to have frequent meetings with employees to discuss what frustrates them, what they dream of, what their aspirations are, and so on. Then allow employees who want to try a more prominent role to have a shot at it. Equip employees with the skills they’ll need to go where they want to go in their careers (at your company, hopefully).
  3. Let employees know that they make a difference – Employees need to know that they are part of something meaningful and more significant than what they see on a daily level.
  4. Build a culture that cares – Create a culture of caring for others’ best interests. It will take time, but you’ll be able to manage employees better if they trust that you respect and appreciate them. They will positively respond to your critical feedback and frank conversations with them. They will also be much happier in their jobs, morale will be high, and they’ll very likely stay.
  5. Once your company has created a healthy work environment, you need to hire quality people.
Man interviewing a new candidate

Hire The Right People‍

Hiring the right people prevents some voluntary departures—interview applicants who have a history of long-term employment at companies in your industry. Also, determine whether they would fit into the company culture and be accepted by coworkers.

Turnover includes involuntary departures too. Layoffs happen, but you can prevent having to fire people by hiring people who don’t have a history of getting fired. A track record of short-term employment could mean that the candidate is being fired a lot rather than leaving companies for various reasons. If you pursue these kinds of candidates at all, be sure to contact their past employers and their references.

Operating as a 24/7/365 business, Pallet Market Inc. is one of Southern California’s leading pallet manufacturers and distributors. Contact Pallet Market Inc. for a quote today.