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Compensation Corner: The High Cost of Employee Turnover is Even Bigger Than You Think (Here’s What You Can Do About It)

High Cost of Employee Turnover | Total Reward Solutions


As one of our valued strategic partners, we want you to know about an important and surprising issue facing many corporate employers today: the high cost of employee turnover. According to a recent Forbes article, the cost of replacing skilled and specialized employees can, in many case, be well above the employee’s annual salary. Even the costs associated with replacing entry-level employees can cut deeply into your compensation and employee rewards budget. Let’s take a look at why employees might “jump ship” in the first place, how big an impact that can have on your organization, and what you can do to minimize the impact.

Why Employees Leave

In many cases, company management cannot control why employees choose to leave. Family and personal situations, spousal relocations, opportunities in a new field of interest, and many other reasons can prompt an employee to move on. (They might hit the lottery and buy a remote private island!)

But other reasons employees leave might very well be within the power of management to mitigate. These include situations where the employee does not feel engaged with the big-picture work the company is doing. Or if the employee doesn’t feel valued for his or her work contributions. Or if the employee can’t see a professional development career path within the organization. Or, certainly, if employees incorrectly perceive their salaries to be below market (as we addressed in a recent post).

Many of these situations can be addressed internally with better communication and transparency. But regardless of why an employee leaves, you should understand that the costs to your company can be huge.

The High Cost of Employee Turnover Hits Home

I won’t go deeply into the numbers (frankly, the math can get a little complicated and might vary from industry to industry and region to region); but know this: the high cost of employee turnover can be crippling. In fact, the cost to replace an employee could range from 30 percent to 400 percent of an employee’s annual salary, depending, of course, on many factors, including employee skill level and market availability of replacement workers. Even if your employee turnover costs are lower – helped by finely tuned recruiting and hiring processes, along with rapid and proven onboarding – your company takes a hit every time you have to replace an employee.

What You Can Do to Reduce the High Cost of Employee Turnover

Obviously, if you reduce your employee churn rate overall, you reduce the costs associated with replacement. So how can you be better positioned to hold on to valuable workers?

  • First, let them know they are valued. This can be as simple as telling employees you appreciate their efforts, individually and as a team.
  • Keep them engaged and connected to the big-picture importance of what they are doing for the organization.
  • If possible within your organization structure, provide paths for advancement. Don’t make promises you can’t keep, of course, but let the employee know there is room to grow inside the organization and that their loyalty could prove to be worthwhile.
  • Provide personal and professional development opportunities. While this could help prepare a worker for an opportunity outside your organization, it will keep them on your team during the development cycle. This will likely yield performance benefits for your company and position the employee for internal advancement opportunities.
  • Make sure they are being paid equitably relative to the market.
  • Make sure they are in the right position within their pay grade. If they are too low relative to other workers or to their own length of service or skill set, you might be able to bump them to a higher percentile.
  • When awarding merit increases or year-end bonuses, deliver these rewards in terms of dollars, not percentages. A stated $500 bonus is typically more appreciated than a 1% bonus, even if they are the same reward.

Knowledge is Power

Employees are pretty savvy at seeking information about where they stand in the marketplace and finding opportunities outside your organization. Are you as knowledgeable in that regard? Do you have enough market rate information to appreciate the likelihood that employees might leave? If not, it might be time for a Market Rate Analysis (typically a good idea at least every two years). Are you confident that your pay grades are appropriately aligned? If not, perhaps a Pay System Review is necessary. And are you confident your employees are positioned appropriately within their pay grades? If not, it might be time for an Internal Equity Analysis.

Organizations are dynamic things. Employees come and employees go. Some will find opportunities inside your company while others seek opportunities elsewhere. But because some employee defections are avoidable – and the cost of replacing an employee can be so astronomical – it can be easy to justify compensation analyses and programs that put you in a better position to avoid the high cost of employee turnover. That’s where we come in. At Total Reward Solutions, we can provide services to help keep you more in control as you protect your bottom line. Contact us today at 317.589.8529.

Cassandra Faurote

About Total Reward Solutions:

Have a referral for us? Total Reward Solutions is the outsourced compensation services provider dedicated to innovating total rewards that drive people and business excellence. Total Reward Solutions offers a broad range of compensation, benefits, performance management, and reward/recognition consulting services to help organizations attract top talent, motivate employees and retain top performers. Call us today at 317.589.8529 to discuss how we can help your referred organization develop and implement competitive and effective compensation and total reward programs.