Employee Retention — What is the True Cost of Losing an Employee?
By Simply Benefits Marketing
July 25, 2020
The most valuable asset of a company is its people, especially when they are outstanding in what they do. Hiring the right team of employees can be tricky, but keeping them in your business is equally, if not more challenging.
Believe it or not, the cost of losing an employee is EXPENSIVE. Most companies overlook this fact, believing that they can easily find a replacement for a position if they ever lose an employee. Some employers also think that it can cut costs since you’re paying fewer people for salaries. But it’s not just about losing an individual who does the job. Losing an employee also puts your business at risk of losing productivity, morale, profit, and most importantly, valuable time.
For those of you who are running a business or are in charge of managing people in a company, you have to keep in mind that a high turnover rate can do serious damage to your company’s bottom line. It could even outweigh any short-term savings that your business might have. Employees are considered appreciating assets, meaning, they produce more and more value for the company over time. Losing a key employee is costly.
Now, we should also take into consideration which type of employee you’re losing. If you think that the employee creates a negative impact on your business and is not contributing any good within the workplace, then letting them go may undoubtedly be a good option. But if it’s the type of employee who does get the job done, gives a significant contribution to the business’ success, and creates a positive impact to your company, then losing someone like that would be a huge waste and disappointment.
What is employee retention?
Employee retention is the ability of a business or organization to retain its employees and can be represented by a simple statistic. For example, a retention rate of 70% indicates that a company kept 70% and lost 30% of its employees for a certain amount of time. It’s normal for businesses to experience employee turnovers. Some industries are also more prone to higher turnover rates than others due to work difficulty, wage, benefits, and other factors.
Many consider employee retention to be the efforts or methods by which employers attempt to retain their employees in the workforce. Every organization invests time and money to train a new employee. They implement rules and teach certain practices to make an individual corporate ready and bring him/her at par with the existing employees. The organization tends to lose a lot of tangible and intangible investments when an employee leaves her job once she is fully trained. Therefore, employee retention takes into account all the various measures taken so that an employee stays in an organization for the maximum time. In this sense, employee retention becomes a strategy rather than an outcome.
To give you more insight into the concept of an employee retention strategy, here is a situation that an HR manager might come across.
Olivia was a talented and hard-working employee who managed to deliver her best in every project and completed her work within the desired timeframe. She was innovative, detail oriented and lacked errors in her given tasks. She gave a good and positive contribution to the workforce and never interfered in anybody else’s work. She was passionate about her job, and her performance was always commendable. Jake, her immediate boss, was insecure about Olivia and considered her as his biggest threat in the workplace. He constantly insulted and demotivated Olivia. Soon enough, Olivia got fed up with Jake and decided to leave the company and move on.
This situation can have two outcomes:
Scenario 1: The HR manager can accept Olivia’s resignation and do nothing to retain her in the company.
Scenario 2: The HR manager can intervene with Olivia’s decision and discuss the issues which caused Olivia to think of resigning. They can try their best to convince her and even suggest to assign a new boss to make things better for her.
Scenario 1 may cause a significant fallback for the company. It will be hard for the company to find someone who gets well with the company system and understands the job. Hiring an employee, training him for the job and getting him to fit in an organization may cost a lot, and thus, sincere efforts must be made to retain the employee. Therefore, employee retention strategies are essential.
How much does it cost to replace a salaried employee?
According to research by LinkedIn, Canada ranked as the 4th country with the highest turnover at a global level in 2018. It has an average of 16%, way higher than the worldwide average of 12.8%. It also says that retail, tech, and media sectors are the most “liquid” in terms of the workforce globally. Among the listed top reasons why employees decide to leave the workplace are lack of opportunity to advance, dissatisfaction with senior management, and the work environment or culture.
You may have noticed that salary was not mentioned above. Many believe that an employee’s salary or being underpaid is one of the top reasons why they decide to quit their jobs. That’s not always the case. Employee turnover goes beyond wages and figures.
Speaking of figures, how much does it really cost to replace an employee? Here is a simple breakdown. But before that, let me tell you about the hard and soft costs an employer needs to deal with on employee turnovers. Note that these costs refer to positions that were vacated and must be filled, not for role that are entirely removed from the company.
Hard Costs are mostly visible and are similar at most companies.
Administrative processing of an employee’s departure
Advertising and recruitment to find a replacement
Interviewing and testing of candidates
Orientation and training of new hires.
Soft Costs are sometimes harder to see but have an impact nonetheless
Lower productivity of the departing employee
Lower productivity of the supervisor or employee who covers the job until the departing employee is replaced
Time spent in training the new hire
Lowered productivity because of a high employee turnover, therefore damaging the company morale.
In figures, studies show that the cost of losing an employee depends upon their position.
An entry-level employee turnover cost is between 30% and 50% of their annual salary to replace.
A mid-level employee turnover costs 150% and above of their annual salary to replace.
A high-level or highly specialized employee costs approximately 400% of their annual salary to replace.
For example, an entry-level employee earns $20,000 annually. Hiring a replacement would cost $6,000 – $10,000. That’s for a single employee only. Imagine having multiple employee turnovers. It could easily cost you hundreds of thousands of dollars for replacement alone.
How is employee retention linked to job satisfaction?
Employee job satisfaction is one key ingredient and is also a reliable predictor of employee retention. Employee satisfaction significantly improves when employers engage in practices that support good working relationships. It makes their employees believe that the company appreciates their hard work, contribution, and skills, thus, elevating job satisfaction.
Job dissatisfaction or dissatisfaction with leadership is commonly the reason why many employees leave and search for other jobs. Satisfied employees fully engage in their tasks and feel that the company appreciates their effort and hard work. Given this occurrence, an employer’s best interest is served when the company focuses on ways to improve employee satisfaction, thus reducing turnover and help maintain a stable and motivated workforce.
Resolving job dissatisfaction requires a diligent effort from employers. Identifying dissatisfaction is the first step. They could open a communication path from management to staff to determine what helps and what does not inside the workplace. They could also focus on a consistent application of the company policy and implement a consistent application of the rules.
Employee Retention Strategies:
With all of this being said, it is pretty clear that employees should aim for retention. Here are some strategies on how you can improve your company’s employee retention.
1. Hire the right people
Screen your candidates carefully from the start. Pay close attention to signs and the characteristics of the job candidates. Do they switch jobs too often? While there’s nothing wrong with changing careers, it will be best if you look for someone interested and willing to grow with your company rather than just getting job experience to take somewhere else.
2. Set the right workplace and culture
Provide a comfortable work environment and culture. Some companies even have game rooms or recreation areas to help their employees unwind for a while when things get stressful. Provide a sufficient amount of training and support to newcomers to help them adjust and manage freely on their own.
3. Give proper compensation and benefits
Pay your employees right and provide the right benefits. Keep try tab on industry standards and offer attractive compensation packages. That includes salaries, of course, but also bonuses, paid time off, health benefits, retirement plans, and all the other perks. Providing enticing benefits can be hard when the budget is tight, and funds are low. But it will save you more than replacing an employee.
4. Have a recognition and rewards systems
Make it a habit to let your employees feel that they are appreciated. Provide recognition and thank them for going the extra mile or for a job well done. You can also provide different perks like VIP tickets to an event, gift cards, movie passes, or an extra day off. You can set-up a rewards system even on a small team with a low budget.
5. Offer flexible work schedules
Many employees prefer flexible work schedules. Take into consideration the condition and situation your employees are in. Ensure employees are well prepared to do what their job requires like travel, late nights, vacations, and so on.
6. Help your team improve
You can provide training, mentorship programs, or even a simple career road map that can help your employees elevate their skills. Employees will be able to grow and improve, which will be an excellent contribution to your company.
7. Be a good boss
Another factor that makes employees want to leave their jobs is their bosses. Don’t take everything too seriously. Be kind and treat your employees well. Trust me, having a kind and understanding boss can create a significant impact on employee retention.
Employee retention can make or break your company. Aside from the cost, losing employees may hinder your company’s growth. Losing capable and talented people could seriously hurt your business.
If you come across a great team, try your best to keep them and help them grow. Having competent and loyal employees stand by you and your company is worth more than closing a hundred thousand or even a million dollar worth of a deal. Hopefully, you’ve learned something today that you can apply to your workforce. Good luck!