Article Originally Published: July 2019
EDIT [12/17/2021]: Before you continue and read the article below, consider that in November 2021 we saw the highest record of resignations in the US than ever before. 4.5 Million Americans chose to leave their jobs, however unemployement still remains at abour 4% nationwide. How is this possible? Where are these people going? And how can businesses build cultures that help keep the best possible talent they can?
There isn’t a one-size fits all approach, but hopefully you can find some value in the information below.
EDIT [Jan 1, 2022]: while some employement and salary numbers may be different today than they were 3 years ago, the impact of knowing how much your attrition/turnover is costing you is still the same. If you are intersted in getting help calculating the true impact of turnover in your organization, get in touch with Daniel Card – hello@letsthink3d.com
Article: “The Hidden Costs of Attrition” – Article Originally Published: July 2019
What does it take to be a successful organization in today’s business environment? Any number of factors can play a role in either aiding or hindering the pursuit of that goal, regardless of the industry or size of a company.
We all know the major hurdles in today’s business environment: the speed and capability of new technology continues to impact organizations and force them to adapt, or get left behind; the workforce dynamic is shifting with a new mixture of generational representation—and with it, a change in outlooks and expectations. All markets continue to become increasingly competitive over smaller and more niche shares, and it becomes more challenging than ever for organizations to achieve the level of success that they all desire. These are only a handful of examples among the plethora of challenges that all organizations face but cannot control.
However, there are two universal and critical factors for success that all organizations can control—the culture that they create and the employees that they choose to nurture it.
Employees are among the largest expense for any company. Businesses tend to focus on the basic payroll costs of labor—wages, benefits and payroll taxes; but what about the cost to replace that labor? Because natural attrition is inherent within any business, the cost is often overlooked without exploring the potential to really mitigate that cost.
Any successful business executes specific strategies that focus on continually improving a number of aspects within their organization: to grow the business, to increase market share or to develop the next best product. Your organization likely has a hiring strategy; why wouldn’t they have a retention strategy?
Addressing employee turnover is a major cost savings opportunity. Studies have shown that roughly one-fifth of workers voluntarily leave their job each year, and on average it takes one-fifth of the employee’s annual salary at minimum to replace them. It’s time to start doing the math.
Turnover Cost for Front Line and Mid-Level Roles
According to Zane Benefits, a Small Business Employee Benefits and HR Blog:
- 16% of annual salary for high-turnover, low paying jobs (earning under $30,000 a year)
- What’s the Math?: Cost to replace a $10/hour employee = $3,328.00
- 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year)
- What’s the Math?: Cost to replace a $40k/year employee = $8,000.00
Factors Included in Replacement Cost:
- Hiring Costs -> Advertising, interviewing, screening and hiring.
- On-boarding -> Cost of on-boarding a new person including training and management time.
- Training cost; over 2-3 years, a business likely invests 10-20% of an employee’s salary or more in training.
- Lost Productivity & Expertise
- From the New Hire -> It may take 1-2 years to reach the productivity of an existing employee.
- From the Leaving Employee -> Lower output from employee in their remaining time on the job.
- From Other Employees -> Turnover leads to disengagement, productivity loss, feeling like they need to “pick up the slack”.
- Customer Service, Efficiency & Errors
- New employees are less efficient and often less adept at solving problems.
- Leaving employees have increased likelihood of negative customer impact in their remaining time on the job.
- Workplace Culture Impact
- Negative impact a leaving employee can have on co-workers in their remaining time on the job.
- When someone leaves, others ask themselves “why?” or “can I do better elsewhere too?”
Does Your Company Consider All of the Costs of Attrition?
The true cost of employee turnover is often an unknown, as most companies don’t have systems in place to track all of the tangible and intangible costs: exit costs, recruiting, interviewing, hiring, orientation and training, lost productivity, potential customer dissatisfaction, reduced or lost business, administrative costs, lost expertise, etc. This takes collaboration among departments (HR, Finance, and Operations), ways to measure these costs, and reporting mechanisms. Nevertheless, both the issue and opportunity still exist.
Doing the Math
Let’s explore the cost of turnover with a basic example by putting the Zane Benefits figures above to work.
Attrition Rate = # of Employees no longer with the company / Average number of employees
An Example of Company X
- “Company X” employs 100 employees
- A front line employee of Company X makes $10/hour ($20,800 yearly)
- It costs 16% of their yearly salary to replace a front line employee, which is $3,328 per front line employee
Consider the cost of a yearly Attrition rate of 25%:
- 25 employees will leave their position yearly
- 25 employees x $3,328 = $83,200 yearly cost in Attrition
Consider the Potential Cost Savings in 5% Reduced Attrition:
- Reduce the attrition by only 5%, or 5 less employees leaving
- Only 20 employees x $3,328 = $66,560 yearly cost in Attrition
- Savings of reducing attrition to 20% = $16,640 ($83,200 – $66,560)
Additional potential benefits:
- What if productivity increased by 3% due to higher employee engagement?
- What if customer satisfaction improved by 4% stemming from employee buy-in to a company belief statement?
- The ability to build greater momentum in desired culture due to not having to retrain or to give a boiled-down version of past intentional actions to build engagement and culture.
Knowing is Not Enough Why do personal trainers exist? They work better than trying to lose weight alone.
- They’ve spend countless hours mastering the complexity of the human body, diet and exercise.
- They hold no bias with their clients other than seeking to help achieve their client’s goals.
- They hold clients accountable to stay on the path to the end result, even through difficulties.
- They are able to leverage best practices from experience in dealing with other similar clients or addressing similar issues and goals.
All of these same benefits apply to cultural and leadership consulting.
One thing that all truly successful people know is that it takes focus to reach the next level. Redesigning a thriving culture requires a huge amount of focus, which is why it is so often underdeveloped. At Think 3D, Culture and Leadership are our focus. You focus on your business, and we’ll focus on you.
We help transform organizational culture to develop an environment that both allows for employees to be enriched and the businesses and organizations that they drive to flourish.
We do this by creating customized strategies that maximize the potential of their teams, drive down attrition and drive up engagement, based off of the 3 Dimensions of a healthy culture: Professional, Personal and Potential.
Find out more at letsthink3d.com