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The Hidden Costs of Turnover

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The Hidden Costs of Turnover

It feels like no matter what you do, some new hires simply don’t work out. One-third of new hires quit their job after about six months. The reasons are myriad, but one thing is certain: business owners pay a hefty price to replace them.

Estimates of the cost of employee turnover vary dramatically. The Center for American Progress puts the cost to replace a midrange position at 20 percent of that person’s annual salary. Other estimates go as high as 150 percent of a midlevel employee’s annual salary.

“The cost of a bad hire is always extensive,” says Arte Nathan, founder of The Arte of Motivation. “Most companies don’t know the full cost of the turnover, so they don’t apply the resources upfront to avoid it. If you make a bad hire, there is a ripple effect among all who work for you, your product and your product quality.”

It’s not just new hires that create turnover. The loss of a longtime employee can be even more painful. And then there are millennials, who are more prone to job-hopping than previous generations. According to a September 2016 report from the US Department of Labor, the median tenure at a company for workers ages 25–34 is 2.8 years.

Some of the employee turnover costs are obvious and easily reflected on the balance sheet. These include everything that comes with hiring and training a replacement, including recruiting, interviewing, pre-employment skills testing or screening, administrative processing, orientation, and possibly hiring temporary workers or reimbursing travel costs.

But there are many other hidden, intangible costs that could be even more detrimental to a company. Here are three hidden costs of employee turnover:

Lowered Production and Quality

The tasks that were being done by the departing employee will need to be covered by someone else until a replacement is hired. In some cases, the person or persons being asked to do the extra work might not have the same set of skills or experience. And when employees are asked to do more, quality typically declines.

Even after a new hire is made, it will take that person a while to get up to speed. Josh Bersin of Bersin by Deloitte says it may take a new employee one to two years to reach the productivity of an existing employee.

There’s also the possibility that some work might just fall through the cracks. Production delays and lost sales can lead to unhappy customers. Clients notice when production declines, and some may abandon your business for a competitor.

“Dealing with trainees can be challenging,” says Toronto-based HR consultant Tom Armour. “If you have a lot of unwanted turnover, customers can get annoyed or begin to lose interest in your business.”

Loss of Morale

Overworked employees are unhappy employees. If staff members are asked to take on too many new responsibilities, they can become resentful. And if this feeling is not contained quickly, the turnover can create more turnover as discouraged employees look to move on.

Then there is the gossip.

When an employee departs, whether he or she was shown the door or left by choice, others take the time to ask why. It creates talk among the coworkers that is often not constructive for the business: “Will I be let go next?” “Is our employer heartless?” or, “If he found a better job, so can I.”

Loss of Institutional Knowledge

Long-term employees know the ins and outs of the company traditions, the quirks of the clients and bosses, and which approaches work best with each coworker. Practical knowledge of products, strategy, clients, processes, and customer needs disappears with the departing employee. And much of this tribal knowledge is never written down.

“These are the street smarts you need to have to get real work done in that particular organization,” says Rick Lash, senior client partner with Korn Ferry’s Hay Group. “It only comes with experience.”

Employers would be wise to invest the time and the money to attract and retain the right people. It’s better to give a high-performing employee a raise or to invest in more training and development than to watch your workers walk away. Human Resources Incorporated advises implementing a retention program and talking to your most valuable employees now to find out what keeps them with you, why they might leave, and what they need to be happier and more productive in their job. A little preventative action can mean saving big.