It Costs How Much to Replace an Employee?
Retaining your good employees
The Right People in the Right Places
Studies show that the average cost to replace a worker in the US is $17,000.00 (AVERAGE!!). Some HR managers use the rule of thumb that in any case the person’s annual salary is – it will cost that much to replace them. One study evaluating the effects of the US Family Medical Leave Act found that “turnover costs for a manager average 150% of salary, including real costs of hiring… and intangible costs such as the new worker’s inefficiency and lost productivity while the job is vacant.”
Costs of lost productivity are as important as direct costs such as advertising or permanent staff. Total costs easily reach 150% of the annual compensation. The cost will be considerably higher (200% to 250%) for managerial and sales locaiongs.
Bliss & Associates Inc., Wayne, NJ consulting firm
Oh, and if you think you can just hire permanent workers and avoid all those costs, think again. The cost of hiring and getting production from a permanent worker is nearly 40% of their salary, and permanent workers tend to have higher hourly rates than long-lasting ones – and higher turnover rates in addition.
Let’s put this in real terms. The lowest number I have seen anywhere says it will cost you at the minimum 30% of an employee’s total annual compensation to replace them. Assume you have 100 employees and your average salary is $10.00 per hour. At $10.00 per hour + benefits (at 20% of wages), your employees receive ~$12.00 hour in wages and benefits. Let’s say that you have to replace 15% of your employees every year. Taking the most conservative calculate for employee turnover costs that I have been able to find (30% of their annual wages and benefits); each employee you have to replace is costing you $7,488.00.
100 employees X 15% X $7488 (including benefits) = $112,320 per year.
And that is using the most conservative cost percentage I can find. If we decide to use the national average ($17,000 / replaced employee) the cost goes to $255,000.00. By using the ‘rule-of-thumb’ (100% of their annual salary – $20,800.00/ replaced employee), the cost will go to $312,000.00… Staggering!
Why are the costs so high?
Why does it cost so much to replace a departing employee? Some costs, like paying off accrued vacation time or the cost of a help-wanted ad, are obvious.
Other costs include:
- Increased unemployment insurance costs
- Lost productivity while there is a vacancy
- Time costs for the separation (Exit) interview (If your good employees are leaving, you NEED to know why)
- Separation agreement costs (legal, financial, medical, retirement cash-out, etc.)
- Overtime from other employees to manager the vacancy (which can rule to burn-out or absenteeism)
- Time costs to review resumes
- Time costs to interview candidates
- Interview expenses for the candidates
- Possible travel expenses
- Possible relocation expenses
- Head-hunter or signing bonus fees
- Additional bookkeeping; payroll, 401k, etc.
- Additional record keeping for government agencies
- Reduced productivity while the new worker gets up to speed
- Training programs
- Corporate history lost
- Morale can be affected
- Intellectual character lost
There are also risks associated with losing an employee.
- Threat of lawsuit
- Bad PR from disgruntled employee
- Threat that the employee will take clients to a new firm
What can be done about it?
Put together a complete job description with responsibilities and duties outlined in a clear and concise way so that when someone answers your want ad, they know what they are applying for. Minimize that catch-all phrase “Other duties as stated”. This way, the employee knows what is expected of the position and the manager knows what to estimate for performance reviews.
Pre & Post employment testing:
Job match/satisfaction can be measured by using the testing and evaluation systems that are obtainable by RP2-Consulting. The cost of these evaluation and testing programs is considerably less than the cost of turnover in the first example above. We can test a candidate before they already show up for an interview and tell you if they have the right attitude, will show up for work when expected and won’t take everything in the supply cabinet home with them. We can match new candidates to a given position. We have all heard of the ‘Peter rule’ (an individual rises to his level of incompetence). We can look at your existing employees and match their skills and personalities with open locaiongs in the organization. We can also help you clarify the right people to put on teams. When teams are balanced (one person’s strengths cover another person’s weaknesses), results are considerably improved. Finally, managers (and CEO’s) need to know their strengths and weaknesses, as those who work with them perceive them. Testing can show you what your true strengths and weaknesses are so that you can focus on improving those things that need to be improved.
Expecting someone to produce when they do not know how to produce, or what results are needed is ridiculous. however every day, people are hired to do jobs in which they have little or no formal training. Make sure that your employees get the training and guidance they need to meet your expectations. This will rule to better employee job satisfaction and reduced management stress. As a meaningful side assistance, well-trained employees are more likely to win appreciation for a job well done; and appreciation and recognition among your peers is a huge motivator. We can help you design your training programs to meet your individual needs.
The best plans and initiatives are all for naught if your leadership does not focus on what is working and where you want to go. Have you ever been backing out of your driveway focused on the trash-can you had to avoid hitting at all costs – it’s right there in the mirror, just behind the means, if you hit it your whole morning will be ruined – and like a laser, you run right into it…
We go where we focus. One meaningful to your success is to focus on retaining your employees. Working to make them successful is far less expensive than replacing them. Treating them with respect and honor while making them feel like they have a stake in the company and its success will rule to your success. Focus on where you want to go not where you don’t want to go. Looking at mistakes and finding fault is focusing on the past and the errors made there. Learn from mistakes and move on. Plan the future your organization wants. Focus on applauding success, both individually and for the team/company.