Why Having a High Employee Turnover Rate Can Drain Your Bank Account

According to the Bureau of Labor Statistics September 2021 news release, national employment is on the rise. However, employee turnover rates are rising too, with talk of "The Great Resignation" dominating many conversations. While some turnover is normal in your organization, there's a real cost to having a high employee turnover rate.

Today, we're going to tell you about the direct and indirect costs associated with a high employee turnover rate,

How does a high employee turnover rate affect your business financials?

With so many job applicants to choose from, it seems to make good business sense to let unsatisfied employees quit rather than raise their salaries to be competitive.

However, CBS MoneyWatch warns that businesses that practice this technique are shooting themselves in the foot.

“Although employee replacement costs are a one-time expense and a salary increase is ongoing, it would take four years of a higher salary to equal the cost of replacing [an employee] one time.” -CBS MoneyWatch

The Center for American Progress also published an article detailing the financial consequences of a high employee turnover rate. A study compiled from 30 cases found it will cost businesses about one-fifth of a worker’s annual salary to replace them if they quit.

Calculating the Direct & Indirect Costs of High Employee Turnover

Typically when an employee leaves a company, their position must be filled in order for operations to continue running smoothly.

The company will experience both direct and indirect costs as a result.

While direct costs are often easier to measure, they are usually less expensive than indirect costs. Indirect costs are more difficult to ascertain. However, they can be detrimental because they may encourage other employees (as well as clients) to part ways with a company experiencing a high turnover rate.

Here are a few examples of both cost types:

Direct costs

• Separation costs (exit interviews, severance pay, and higher unemployment taxes)
• Labor costs increase to cover the employee’s duties (overtime for other staff or temporary hires)
• Replacement costs (open position advertising, search and agency fees, screenings, fingerprints, background checks, drug testing, physicals, hiring bonuses, applicant travel and relocation reimbursement, etc.)
• Training costs (orientation, classroom and on-the-job training, certifications, uniforms,
• handbooks, etc.)

(If your organization has a high employee turnover rate, it's time to focus on creating a winning company culture. We discuss how to do that in this post)

Indirect costs

• Loss of productivity the last days before the employee’s departure due to reduced morale (We talk about motivating your employees and boosting morale in this post)
• Loss of productivity as a result of being understaffed
• Reduction in the overall morale of all employees coping with the vacancy and extra responsibilities, which also leads to loss of productivity
• Reduced quality, errors, and waste as the new employee learns their job
• Unsatisfied clients

(Source: Center for American Progress)

At Two Roads, we offer sound financial advice to help you stay profitable. For more information about how our bookkeeping services can do just that, contact us at 865-212-0063.

Next, you'll want to visit this post for seven actionable tips to help you reduce your high employee turnover rate and retain your staff.

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This post was first published in 2015, but it was updated in 2021 just for you.