The True Costs of Employee Turnover

Whether you’re a rising startup or a member of the Fortune 500, you can’t accomplish much without your team. You naturally want to hire the top performers in your industry: people driven and motivated by the work you put in front of them. And since your team is the engine that keeps your company running, you want to make sure they actually want to stick around.

Tackling turnover starts with recruitment — the goal is to hire great employees who will perform well and stay at your company for years to come. But employers can’t neglect their role in keeping team members engaged in the long term. Failing to take that responsibility seriously will make even the most motivated employees start looking elsewhere.

When it comes to turnover, most people are hyper-focused on the dollar signs tied to employee separations. However, it’s the consequences that fall outside of profit margins that raise the most red flags. Read on to learn the true cost of turnover.

Sunny Betz contributed reporting to this story.

Table of Contents:

• What Is Employee Turnover?
• The True Cost of Turnover
• Factors of High Turnover
• How to Reduce Turnover

What Is Employee Turnover? 

Your rate of turnover is the percentage of employees that leave your company over a given period of time. It’s closely related to your employee retention rate, though the two are not always the inverse of each other. While high turnover is largely indicative of deeper issues, it’s important to keep in mind that turnover is — and always will be — a part of business.

Turnover is split into two categories: voluntary and involuntary. Voluntary turnover refers to an employee’s decision to leave the organization, whereas involuntary turnover occurs when an employee is terminated by the employer. Ideally, you’re only hiring people you want to keep around, so involuntary turnover is kept to a minimum. Voluntary turnover, on the other hand, is more difficult to control and has unforeseen consequences that can be harmful to a business.

According to a 2021 study by the Bureau of Labor Statistics, the average annual turnover rate is 57 percent across all industries, which accounts for both voluntary and involuntary turnover. The actual rate of turnover varies greatly by industry, however. Tech companies are at serious risk with an average turnover rate of 20.9 percent, the fourth highest overall behind retail, manufacturing and consumer goods, according to a 2019 study.

The True Cost of Turnover

The cost of turnover is extremely high: it’s estimated that losing an employee can cost a company 1.5-2 times the employee’s salary. Depending on the individual’s level of seniority, the financial burden fluctuates. For hourly workers, it costs an average of $1,500 per employee. For technical positions, the cost jumps to 100-150 percent of salary. At the high end, C-suite turnover can cost 213 percent of salary.

Nichole Viviani, chief people office at Atlanta-based fintech company Xplor Technologies, notes that some of the obvious costs of turnover include ad spending for newly open positions and the extra time commitment of training new employees – but that isn’t the whole picture.

“There’s the less visible, but equally impactful, costs,” she said. “Things like missed or delayed revenue, or the risk of losing long-standing customers when customer-facing colleagues leave.”

Not only are you forced to dedicate time and resources to recruiting, onboarding and training a new hire after an employee leaves; your business simultaneously takes a hit internally while the role remains unfilled. These expenses are known as the cost per hire and cost of vacancy, respectively. It’s estimated that two thirds of all sunk costs due to turnover are intangible, including lost productivity and knowledge, which are part of the cost-of-vacancy calculation.

“It takes a while for new employees to ramp and fully onboard into a new role and a new company,” said Shirley Grill-Rachman, COO of San Francisco-based AI company Skai. “Turnover can have dual implications of opportunity cost, while that role is backfilled, [and] the cost of that ramp time for a replacement hire.”

However, the most substantial impact of turnover is not a financial cost, but the damage done to your remaining team. Your people are absolutely essential to your business’s success. Without them, current employees need to take on additional responsibilities, and your company may have to abandon or postpone plans to scale. In short, a high turnover rate cuts much deeper than meets the eye, but these are some of the factors you should be aware of.

Lost productivity 

When an employee leaves, their workload has to go somewhere. Either projects are halted altogether while the role remains vacant, or colleagues are forced to pick up the slack and spread themselves thin across multiple roles. 

“When talented and knowledgeable employees leave, you run the risk of missing targets and seeing a negative impact on customer service while a replacement is recruited and trained,” Viviani said.

Stalled projects lead to delayed releases and lost revenue, so a reduction in turnover can spell the difference between meeting your quarterly goals or missing them entirely.

Depleted employee morale

A beloved team member’s departure can be a significant blow to employee morale. Losing a close friend and colleague leaves a hole in the team dynamic. On top of that, employees may begin to look for problems; if someone they trust and respect decided to leave, should they consider it, too?

“For some employees, [losing a teammate] leads to frustration, resentment and burn out, and can prompt them to question whether they, too, should be looking for a new opportunity,” said Viviani.

Diminished employer brand

The reputation of being a revolving-door employer won’t attract job seekers. If anything, your open roles will draw in low-quality candidates — individuals who aren’t interested in a long-term position or who don’t care about making a significant impact. These employees can demotivate others and drive more new hires out the door shortly after they arrive.

More turnover 

Turnover is cyclical. As mentioned above, an employee’s departure impacts the company culture and the workload of their teammates. Overworked, unengaged employees are more susceptible to burnout which generally leads to additional turnover. Regardless of industry and company, some turnover will always be par for the course, but preventing subsequent employee separations is crucial.

“For better or worse, turnover tends to happen in waves,” said Grill-Rachman. “Obviously, when one of those waves hits, morale can be impacted as more employees reevaluate their individual relationships to their workplaces.”

Factors of High Turnover

In order to evaluate the true cost of turnover at your company, you need to understand the aspects of your business that are likely contributing to your high rate of turnover. In extremely volatile times, the factors of turnover are exacerbated. Especially then, the following common causes of turnover cannot be overlooked.

Company culture

Employees can recognize a toxic company culture from a mile away, and they won’t be loyal to an employer that neglects to make improvements. In addition to role responsibilities, organizational culture is the bedrock of the employee experience. In fact, 47 percent of active job seekers cite company culture as the primary reason they left their employer.

“While some periods of turnover are natural, chronically high turnover can be symptomatic of a company culture that leadership needs to act quickly to remedy,” Grill-Rachman said.

Managers and leadership

Managers interact with their direct reports regularly, so it makes sense that they have a significant impact on employees’ overall engagement. In fact, 68 percent of employees who don’t feel supported by management consider leaving.

“In today’s work environment, managers are the biggest drivers of culture,” Grill-Rachman said. “Employees have expectations of their managers, and they are rightfully more scrutinized for the kind of environments they create.”

In order for a business to be successful, every member of the team must have confidence in the leadership team and feel valued. Otherwise, employees will look elsewhere.

Lack of growth opportunities

A career plateau is a driving force of voluntary employee turnover. It’s widely understood that professional growth is not limited to upward mobility. However, if there aren’t opportunities for continual learning or employee development, you’ll quickly lose top performers who are eager to advance. Of all job candidates, 72 percent are driven by career growth and cite a lack of opportunities as the number one reason for changing jobs. 

“Leaders are contributing to high turnover when they’re doing things like not helping employees play to their strengths, or not providing regular feedback and development opportunities,” said Viviani.

One-way communication

Employees want (and deserve) to have their voices heard. Two-way communication between team members and senior leaders is vital to creating a positive work culture. A lack of transparency when it comes to company performance and team strategy can cause employees to lose faith in their leaders and question whether their ideas are taken into consideration.

Neglecting to ask employees for their ideas and opinions will drive them to look for a new company; 48 percent say that asking for and acting on employee feedback would reduce voluntary turnover.

Lack of employee recognition

Failing to recognize employee achievements and celebrate successes will make your people feel undervalued. If they believe that their contributions to the company aren’t appreciated, they’ll begin to disengage from their work and seek employment elsewhere. Research shows that around 82 percent of employees feel happier when they’re recognized for their work.

How to Reduce Turnover

If there’s one thing to keep in mind when striving to reduce employee turnover, it’s this: little things matter. Yes, instituting pay raises across the board is a huge plus, but not one that will leave a lasting impact. Implementing a work-from-home policy, offering a wellness stipend and finalizing your company mission statement are small tasks that result in a significant uptick in engagement. And as we know, engaged employees stick around. 

The good news: 75 percent of turnover cases are preventable. Use the following tips to improve retention. 

Recognize employees

Implementing an employee recognition program is a low-lift strategy to increase engagement and reduce turnover; 63 percent of people who receive regular recognition say they’re unlikely to seek employment outside their current company. Recognition can be seamlessly integrated into feedback sessions between managers and their direct reports. 

Still, go above and beyond by establishing a formal employee recognition program complete with employee spotlights and peer-to-peer recognition opportunities. Leverage your communication platforms to encourage employees to give shoutouts to and thank their colleagues for a job well done. Rewards are another great way to recognize employees for their accomplishments, and they don’t have to be limited solely to monetary prizes. 

Don’t limit your recognition program to internal communications. Showcase your leaders in original, thought-provoking content to stay relevant and enhance your employer brand — especially during times of erratic and unprecedented change. Engage top performers and long-term employees to promote your company across high-traffic, online platforms and in local ecosystems. Doing so is a simple yet highly effective strategy to continually build your talent pipeline.

Establish a feedback process

Assuming employees are engaged and happy is the first mistake most employers make. Give your people the opportunity to raise concerns and address issues before they become deal-breakers.

“Don’t only focus on ‘flight risks’ but rather, keep a pulse check on how your current employees are feeling by setting up a check-in on a regular basis,” Grill-Rachman said.

Thanks to software developments, it’s never been easier to implement regular employee engagement surveys for collecting anonymous feedback. Conduct stay interviews to keep tabs on what keeps great employees around. You can further automate your feedback process by implementing one of these top employee engagement tools.

Promote your core values

Values are the backbone of a strong company culture. When done correctly, core values guide business decisions, give purpose to your mission statement and inform how employees interact with one another. Furthermore, having an agreed-upon, public-facing list of core values ensures you hire the right people and continue to cultivate a positive work culture as your business scales.

Take the time to carefully consider your list of core values. Engage the leadership team, members of the HR department and some of your most-tenured employees to be a part of the conversation. When possible, bring your entire team into the fold. If employees have a say in the organization’s values and mission, as well as believe in them, they’re more likely to become promoters and share how great it is to work for your company. This, ultimately, leads to more employee referrals, which are the number one source for hires. Keep your list of values concise so as to be intentional and actionable. Once the list is finalized, instruct your team in the new core values and make value training a part of your onboarding process.

Implement your company mission

In addition to being able to see the impact of their own work on the organization’s success, employees want to work for a company that’s making a difference. Having a professional purpose matters more to employees than compensation: 67 percent want to work for a company with a mission they believe in than for one that pays more. Finalize your company mission so every individual is working toward a common goal beyond just profit margins.

“Understand what motivates your people, and how to get the best out of them,” said Viviani. “Show your people the future they can have with your company by expanding their skills and experiences while staying with you.”

Enhance your benefits package

Benefits like flex scheduling and remote work opportunities matter to employees now more than ever: 91 percent of employees want the option to work from home even after the pandemic. The perks you offer are an integral part of your employee value proposition (EVP) and a direct reflection of your company culture. 

“While it’s true that many companies are offering sky-high salaries and bonuses to win talent, that won’t keep them in the long run,” said Grill-Rachman. “Invest in your employees, not just new hires, by providing perks programs, strong healthcare benefits and generous PTO.”

Use information collected during exit and stay interviews to refine your employer offerings with benefits that employees want. Showing you care about your people as human beings, not just employees, will help you earn their trust and respect as an empathetic employer. This reputation will also help you attract and retain great talent; 77 percent of employees would work longer hours and 60 percent would accept less pay to have an empathetic employer.

Conduct exit interviews

One of the most effective, yet frequently overlooked, solutions to turnover is an exit interview process. Don’t squander the opportunity to learn from your mistakes as an employer by dismissing a great employee without asking them where you went wrong. When they’re headed out the door, employees are more likely to be candid about their grievances and provide honest feedback. You can then use this information to make improvements that matter to employees who are sticking around.

* * *

It’s true that high turnover can have a big impact on your bottom line. But more than that, it’s a sign that your company is not empowering your team to show up to work each day. Without a motivated and committed team, your company will never be able to achieve its mission. Tackling high turnover should be about more than just saving money — it should also be about helping your company reach its full potential. That all comes down to building trust and rapport with your employees. 

“Leaders need to think about the employee experience they’re creating for their people,” said Viviani. “[You must] build meaningful relationships to deeply understand what your people need to be satisfied, successful and to want to stay with your company.”