The Price of Turnover: Analyzing Employee Replacement Costs

When considering replacing an employee, not many people calculate the cost of a replacement.

When an employee asks for a raise, it might actually be less expensive to grant the raise rather than seeking a replacement. Additionally, when your voluntary turnover is high, it is better to invest time and money in finding the reason why people are leaving the company rather than simply replacing them.

So, what are the costs of replacing an employee?

HR professionals are well aware of how costly turnover can be. In general, it costs about 33% of a person’s annual salary to locate, hire, and train a replacement. However, according to Gallup, the cost of replacing an employee can range from one-half to two times the employee’s annual salary.

There are direct and indirect costs for replacement:

Direct Costs

Direct turnover expenses involve the process of locating, hiring, and training a new staff member. These direct costs might be financial in nature, but they can also take the form of employee time. For example, overtime for remaining employees.

Indirect Costs

Indirect costs are related to the same processes but are more challenging to quantify. They may or may not include:

• Loss in productivity: There is lower productivity during the exit period for every employee leaving the company, whether the departure is voluntary or involuntary. Employees leaving the company are no longer attempting to reach new goals and are wrapping up all remaining tasks. Their managers do not burden them with new tasks, and productivity gradually drops until the departure day. On the other hand, while newcomers have all the motivation to show results, they lack the organizational knowledge and familiarity with the company’s procedures. Sorting out simple organizational tasks can be time-consuming for a new hire when done for the first time.

• Loss of knowledge and expertise: Departing employees’ knowledge and skills, which are generally applied in the form of business processes, might not be captured in written or other forms within the organization. It may also happen that other people might not have realized the impact the departing employee had on the company’s processes and procedures. Therefore, the company loses knowledge and skills acquired by the departing employee during their stay at the company, which is, per se, the company’s intellectual property.

• Loss of motivation and company morale: It always hurts when people leave the company. It hurts even more if that person had a close relationship with their remaining teammates. It can take some time for a team to get along with a new person and reach the same level of bonding.

Let’s break down some numbers:

Imagine that a company is looking to replace a Java Developer position with a salary of USD 104,000 per year (acc. to Indeed), with an internal recruiter earning an average salary of USD 55,000 per year, and a partially involved Tech/Team Lead as a hiring manager earning an average salary of USD 130,000 per year (acc. to Indeed).

Recruitment (option1): an in-house recruiter – USD 6,029

• Posting a job opening on several job websites: USD 1,140
• In-house recruiter’s salary for a month (average hiring time): USD 4,583
• Tech Lead’s time spent evaluating candidates (one hour) and interviewing (five 45-minute interviews with top candidates): USD 306

Recruitment (option2): an external agency ABC – USD 15,906

• Staffing agency commission (average 15% of annual salary): USD 15,600
• Tech Lead’s time spent evaluating candidates (one hour) and interviewing (five 45-minute interviews with top candidates): USD 306

Recruitment (option3): outstaffing model by Echo – USD 306

• Sourcing, validating, hiring: USD 0
• Tech Lead’s time spent evaluating candidates (one hour) and interviewing (five 45-minute interviews with top candidates): USD 306

Onboarding and training: USD 2,707

Some employees may deliver results from day one, but generally, it takes a week or more to train someone to an average level of productivity. Assuming a company devotes a week solely to training with the manager spending two hours per day, and the new hire reaching average productivity levels from week two:

• One week’s salary of a new hire: USD 2,063
• Tech Lead’s time invested in training (10 hours): USD 644

Offboarding: USD 4,126

• Unemployment commission/bonuses: optional
• Accrued paid time off (on average 10 days per year in the private sector in the USA): USD 4,126

Total Direct Cost of Replacement: from USD 12,862 to USD 22,739

This means that if our Java developer who performs well asks for a USD 8,000 annual raise, it could be more economical from a direct cost standpoint to grant the raise rather than replace the employee.

What are the benefits of replacing employees with Echo using our proven outstaffing model?

1. 📝 We don’t charge for any job postings and have a large pool of candidates collected over 10 years, along with prepaid job openings on top websites and our unique sourcing strategy.
2. 🚫 You don’t need to hire an internal recruiter or worry about keeping them engaged if you only post jobs occasionally.
3. 💵 We don’t charge a recruiting fee. Clients pay only the previously agreed monthly rate for a position.
4. 🏖️ You don’t pay for paid time off or sick leave; Echo covers these.
5. ✋ There are no unemployment commissions or termination fees.

When a company needs to hire or replace a Java Developer using Echo’s model, the total cost is no more than USD 3,013:

• Tech Lead’s time spent evaluating candidates (one hour) and interviewing (five 45-minute interviews with top candidates): USD 306
• One week’s salary of a new hire: USD 2,063
• Tech Lead’s time invested in training (10 hours): USD 644

Strategies to reduce voluntary turnover

1. Invest in onboarding: Research shows that the first month at a company is vital for a long-term employment relationship. Dedicating a little bit more time and attention to newcomers will decrease the chances of employees leaving the company.
2. Provide continuous feedback: The best way to find out whether a person is happy at their workplace is by talking to them. Ask them how they are doing and what help they need.
3. Provide honesty and transparency: Open communication helps people to be more connected to each other.
4. Prevent burnout: Provide employees with a sufficient amount of paid days off and encourage them to use them once in a while.

Conclusion

Replacing an employee involves substantial direct and indirect costs that can significantly impact a company’s bottom line.

The numbers suggest that retaining existing staff by addressing their needs, investing in onboarding, providing feedback, and preventing burnout is often more economical than hiring new employees. When considering alternatives, out-staffing models like Echo’s can offer a more cost-effective solution to staffing needs. Ultimately, understanding and calculating the true cost of employee turnover is vital, and strategies that prioritize employee satisfaction and retention can lead to significant savings for a company.

Tags: attrition, cost, employee, hiring, morale.