It Can Cost 400% of an Employees Annual Salary To Replace Them

I ran into one of my neighbors this weekend and asked him how his business was going. “Bob” runs a company of about 1,000 employees. He estimates that his average number of resignations has doubled in the last few months. He knows we are in the “Great Resignation.” Still, he thinks employees are just shifting around, always looking for something better. He believes that he will fill his open positions (primarily IT professionals) from workers resigning from other companies.

Bob knows from exit interviews that his knowledge workers are leaving because they are accepting higher salaries, and their new companies are permitting hybrid work. Bob does not want to give even his top performers raises, and he will continue to require that all employees work from the offices 100% of the time.

As a Partner at Soteria, a full-service HR company, I just had to share cost information about employee turnover. Here are a few stats.

Cost to Replace an Employee:

  • On the low-end, for the average salaried US worker, it costs $15,000
  • Entry-level employees: 30%-50% of their annual salary
  • Mid-level employees: 150% of their annual salary
  • High-level or highly specialized employees: 400% of their annual salary

My neighbor Bob stared at me blankly. These stats can help make the point that voluntary employee turnover is expensive. But it does not help an organization care about it. Your upper management is likely to question the validity of this information. I don’t blame them. When you look at these stats, it may seem unbelievable. Typical questions:

  • How did you calculate these costs?
  • Where did you get this data?
  • Are these numbers relevant to our industry?

Calculating Costs

For our clients, we look at 10 data variables to calculate the cost of employee turnover, but I’ll summarize expenses into five categories.

  1. Cost to Fill the Vacant Position – The total cost associated with all talent acquisition. This includes a portion of the HR and hiring manager’s salary, advertising costs, assessment testing, and background checks, and the cost of all time spent by employees involved in the interviewing process.
  2. Onboarding & Orientation Costs – The cost of time spent by a trainer and/or the hiring manager to onboard and get a new hire up to speed.
  3. Productivity Ramp-up Cost – The cost of a new employee ramping up and learning the ropes in a 60–90-day period where the new hire is doing more learning than producing. We use the new hire’s daily salary and benefits expense.
  4. Benchmark Employee Cost – The total departed employee’s compensation (salary and benefits). We break this data into daily and monthly rates to accurately prorate when the position remains open.
  5. Vacant Position Coverage Cost – The number of days the position remains empty multiplied by the daily rate provided in your benchmark employee costs. This is the cost to cover the position with other resources and includes the opportunity cost of offsetting other priorities.

Bottom Line

Employee turnover carries a high cost, and the higher the employee turnover rate, the higher the price. Keeping your current employees motivated and productive is cheaper than finding, hiring, and training new ones. Soteria works with companies to measure employee satisfaction and minimize turnover. We offer custom holistic solutions that encompass your complete HR needs. Maybe next time, I’ll chat with Bob about hybrid work solutions.


Sources:

  1. https://info.workinstitute.com/hubfs/2020%20Retention%20Report/Work%20Institutes%202020%20Retention%20Report.pdf
  2. https://blog.employerscouncil.org/2017/06/28/costs-of-turnover/
Samantha Harwood