Hidden business costs can compromise the financial success of any mid-sized company. Manufacturing inefficiencies, retail shrinkage, service delivery cost over-runs, expensive overhead such as posh office spaces or first-class flights for business executives. They all add up and pull down profits. But few costs have as great an impact on an organization’s long-term success as high employee turnover.
While some attrition is expected—and at times even welcomed, such as when new ideas and approaches are needed to help drive improvements across your company—poor employee retention poses a myriad number of challenges for business leaders. According to a recent study by Standard Life, a whopping 82 percent of employers surveyed couldn’t definitively quantify the income statement implications of significant staff turnover. That’s a major analytical gap.
Maybe they don’t want to know the answer. That’s because, among HR professionals and accountants, the widely accepted cost to replace an employee is equivalent to approximately 40 percent of a staffer’s annual salary.
A staggering expense
Consider that figure for a moment: Every downsized or terminated staff member is costing your company nearly half of their total compensation. That’s a staggering payout that delivers absolutely no net benefit to your organization. In fact, every departure can be seen as having a significant negative impact on everything from employee morale (even if the exiting employee was disliked, their colleagues will inevitably have to pick up the slack until a replacement arrives) to customer service. One of the most common irritants between clients and their suppliers is when employee turnover creates disruptions resulting in lackluster customer service. At time same time, relationships and institutional knowledge are lost whenever a client-facing employee quits or is terminated, creating further tensions between client and suppliers.
Depending on the departed employee’s seniority and position, that could compromise key sales opportunities, lessen innovation or even cost your business a key client. In worst-case scenarios, that individual may be such a key cog in the company that their absence threatens the survival of the business itself.
The challenges with high employee turnover don’t end there. Filling an empty position takes time and resources. Unless filled internally, the job usually needs to be advertised. Your HR team and hiring managers will need to dedicate extended periods of time to selecting, interviewing and ultimately hiring new employees. That’s time they could be spending on revenue-generating tasks—or, at the very least, more meaningful work. If you utilize the services of a recruitment firm, they will usually command a fee of up to 30 percent of the new hire’s first-year salary (usually a lower percentage for higher-earning executive-level employees) if the individual remains in their position for an agreed-upon period (usually at least six months).
The hidden costs of high turnover
Training is another time-consuming expense. It becomes a particularly daunting challenge if the departed employee had been with your organization for years and had specific skills that aren’t easily transferred. In many cases, organizations won’t even fully understand every aspect of these employees’ jobs (mind-boggling, I know, but this is a very common problem) including the full extent of their day-to-day duties.
More difficult for your CFO (or Chartered Professional Accountant) to quantify is the opportunity costs that emerge with employee turnover. What new business could those staffers have helped you secure? How much greater would your productivity and overall output of product or services been if they were still on your team? What game-changing idea, new efficiencies or innovations might they have brought to the table? You’ll never know.
Now, the points mentioned above all assume that the turnover doesn’t result in legal challenges. In that case, all budgetary bets are off. Employees are increasingly grieving layoffs or terminations in court, arguing constructive or wrongful dismissal, for example. Others might claim they were harassed on the job and file a human rights complaint. HR law issues open a Pandora’s box of problems that are always best avoided.
Employee retention requires strategy
A CEO’s best defense is to retain (good) employees for as long as possible. Doing so requires fostering organization-wide engagement, providing competitive compensation and career development opportunities and building and maintaining a strong workplace culture. And those are only a handful of tactics that top employers (e.g., those that are in demand and manage to attract, engage and retain top talent) use to buttress their balance sheets and mitigate avoidable HR-related financial risks.
It’s important to remember that minimizing employee turnover is not only a strategic priority but an ongoing process. It’s also an oft-overlooked aspect of achieving financial success.