Written by: Seth Richtsmeier
An organization is only as good as its employees. It may have state of the art buildings, equipment, vehicles, and a large budget, but if it has low quality employees it can be difficult to compete effectively. These days, innovation is the name of the game, particularly in technology-based businesses. Innovation depends entirely on people. Behemoths like Google, Facebook, Microsoft, and Apple are so successful not just because of technology, but also because of people.
When highly-talented employees have good training and they’re happy on the job, they’re productive. Plain and simple. When employees leave the company in a voluntary manner to do things like retire, move away, or raise children, this is known as employee attrition. These types of events can cost the company in many ways. Some costs of employee attrition can be measured using monetary terms, but there are other costs that are difficult to measure, and yet they’re just as important. It’s therefore wise for every company to implement and manage an effective employee retention strategy.
So, what’s the actual cost of employee attrition?
Cost of Employee Recruiting
Replacing employees is a large investment. A company must spend significant time and money to search for the best talent through advertising, recruitment agencies, screening, interviewing, and hiring. According to studies done by the Center for American Progress, the cost of employee attrition varies based on the role of the employee and their salary/wage level. In the study, the CAP found the following:
- For low-paying jobs (i.e. earning less than $30,000 per year), the average cost of replacement was found to be 16% of annual salary. For example, it would cost $3,328 to replace an employee earning $10/hour.
- For positions that earn between $30,000 and $50,000 per year, the cost of replacement was found to be 20% of annual salary.
- For executives earning high salaries, the cost of replacement was found to be 213% of annual salary. (Boushey & Glynn, 2012). For example, an executive who earns $100,000 would cost $213,000 to replace.
What are the most damaging consequences of employee attrition?
Lost Employee Productivity
When an employee leaves the company, it’s not always easy to immediately replace that person. In some cases, especially for low paying positions, a temporary employee can come in to help. Can a temp hit the road running? The answer is no temp is immediately productive. He or she must go through a learning curve, trying to understand what is required of them. Then, after some time the temp becomes productive while recruitment is underway. When the new employee finally arrives, they also must go through a learning curve, learning to understand the business, goals, and responsibilities. The new hire may need to go through company or team training before they can be productive. It can take anywhere from six months to two years before a new employee performs at peak levels. How much productivity is lost? It’s difficult to say since some companies do not keep enough records to track employee productivity.
Lost Employee Knowledge
Employees typically work in teams, and as a team there is shared knowledge regarding products, customers, processes, and strategy. Some knowledge is unique in nature, based on personal or team efforts such as research and development. When one or more members of a team leave the company by attrition or turnover, they take that knowledge with them, perhaps to use with another company. Even worse, that company could be a competitor. Can the value of lost knowledge be put in monetary terms? Again, this value depends on if a company is wise enough to measure such things. The truth is that it can takes six months to rebuild the knowledge base that’s been lost, while the knowledge that the company invested in is being used elsewhere or not at all.
Cost of Training and Recruiting
When an employee leaves, the manager is suddenly in double trouble. First, he or she must keep the ship afloat without the lost employee, either redistributing duties or finding a temporary replacement. Secondly, the manager must take on the burden of recruiting a new employee, taking precious time away from strategic matters and the daily work of managing his team. And as we just learned about employee retention and productivity, there is always a learning curve.
When the new employee arrives, the company relies on its best employees to handle training. Because an experienced employee is busy training the recruit, some of their work is likely to be delegated to another employee who, as expected, already has a full plate and may become overwhelmed with more work. Workload productivity goes down because part of people’s time is spent in training. Other team members may be overwhelmed or frustrated, and they may even make mistakes or cause clients to become frustrated with quality and deadlines. As a result, overall productivity is lowered while the new employee is “learning the ropes.” There is a monetary value to the cost of training the new employee to bring them up to speed, but unless the company is measuring factors like time and projects in conjunction with wages, it can be impossible to accurately determine lost dollars.
Some employees are loved, respected, and relied upon because they’re nice people or star performers. Their presence motivates others. Colleagues know they can depend on these star employees for success. If an individual of this caliber leaves the company, this can put a damper on staff morale.
- First, losing a co-worker to attrition or turnover can cause employees to feel bitter, sad, or distracted, depending on the reason for the departure.
- Secondly, someone will be assigned to take on the work of the departed employee, and they might be either incapable or uncomfortable with the change. Taking on more work is a challenge that could have an impact on quality or timeliness. As a result, morale and confidence drops as there’s a struggle with productivity.
- Thirdly, the remaining employees might start looking for jobs elsewhere. In the case of turnover, their former colleague might have been given a substantial increase in pay, and that might prompt other employees to reconsider their career options.
Essentially, the team to which the former employee belonged might be unstable or overworked for some time, and productivity could be reduced drastically.
Higher Replacement Salary
Some employees are not easy to replace and a company might not have someone internal to promote. Recruiting from outside the company might mean offering a salary that is between 10% and 20% higher than what was being paid to the former employee. If the skill is scarce or in demand, then the increase is even higher than 20%.
The Domino Effect
Sometimes the person who leaves the company to do things like retire, move away, or raise children. Other employees might like what they hear about the former colleague and start considering a voluntary move of their own. There’s even the possibility the former employee tries to persuade their former colleagues to follow suit, or pursue a better opportunity elsewhere. In a domino effect scenario with one employee leaving after another, this type of loss that can potentially bring a company to its knees.
In many businesses, relationship is everything. Many customers stay with a service provider because of their relationship with particular people, and they will not budge even when another provider with comparable services is knocking at their door. When that star contact person leaves the provider, and let’s say errors start popping up in invoices, the customer could very well be frustrated enough to move on to a new service provider.
It might not be easy to persuade a frustrated customer to give the company a second chance to prove itself. That might mean lost revenue. If the company loses a major customer because a star employee has left on their own terms, that may result in a huge drop in sales. In turn, the company could flip from profitable to operating at a loss, all because of a single employee. How much could employee attrition affect your business?
Has your organization implemented a strategy to combat employee attrition?
People are every company’s greatest revenue generators in terms of innovation, sales, customer relations, and many other important factors. Employee attrition is obviously a costly factor as it has an impact on productivity, revenue generation, and costs. The cost of employee attrition is directly related to the company’s ability to redistribute the work and hire replacements for lost employees, usually at greater costs. All companies spend money to attract the right people. What many companies don’t do is invest in employee retention strategies.
Want to know the truth behind what keeps employees engaged? Download the TINYpulse Employee Retention Report.
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