How to estimate the true cost of changing employee turnover levels or engagement levels

published on 31 January 2024

No one would argue that high employee turnover and low engagement hurt a company's bottom line.

Calculating the true cost of these issues can be tricky, but this guide will walk through detailed frameworks to quantify turnover and disengagement expenses.

You'll get actionable insights on measuring separation and vacancy costs, productivity losses, and more. Plus, discover best practices for enhancing retention and engagement through culture, management, recognition, and technology.

The Real Price of Employee Turnover and Engagement

Understanding the true costs associated with employee turnover and disengagement is critical for organizations looking to strengthen their human capital strategies. With the war for talent intensifying, retaining top performers and keeping employees motivated and productive has become a competitive imperative.

This article will provide an overview of key metrics to factor when calculating the impact of turnover and engagement, outline a step-by-step approach to estimating these costs, and discuss leading practices to proactively manage talent and foster a thriving workplace culture.

By leveraging analytics to quantify the tangible and intangible expenses related to replacing and disengaged employees, HR leaders can more accurately forecast budgets, align investments to maximize ROI, and gain buy-in for progressive initiatives that support attraction, development and retention.

How do you measure the real cost of employee turnover?

Calculating the true cost of employee turnover requires a comprehensive analysis across several factors:

Vacant Position Coverage

This includes the costs associated with temporarily covering an open position, such as:

  • Overtime pay for other employees taking on additional work
  • Temporary staffing services
  • Lost productivity from being short-staffed

Hiring Costs

Expenses related to recruiting and onboarding a replacement employee:

  • Advertising and job posting fees
  • Background checks
  • Interviewing time from hiring managers and staff
  • Hiring bonuses or incentives
  • Relocation costs

Onboarding & Training

Investing time and resources into integrating new hires and developing their skills:

  • Formal training programs
  • Manager and mentor oversight
  • Reduced productivity during ramp-up period

Business Impact

The toll on operations, sales, innovation and growth from turnover:

  • Loss of organizational knowledge and expertise
  • Lack of continuity with customers/partners
  • Delayed or abandoned projects

Multiplying these costs by the number of employees in a given position turning over each year provides the total cost, often equaling 90-200% of the lost employee's annual salary. Tracking this data enables smarter investments into engagement, culture and retention initiatives.

How do you calculate the cost of staff turnover?

Calculating the cost of staff turnover is crucial for organizations to understand the financial impact of losing employees. Here is a simple formula to estimate turnover costs:

Total Cost of Annual Staff Turnover = Number of Staff Resignations x (Average Hourly Rate x Hours per Week x Weeks per Year) x 1.3 x 0.25

Let's break this down:

  • Number of Staff Resignations - The total number of employees who voluntarily left the organization in the past year
  • Average Hourly Rate - The average hourly wage across resigned employees
  • Hours per Week - The average hours worked per week per employee (often 40)
  • Weeks per Year - 52 weeks
  • 1.3 - A multiplier used to account for things like lost productivity and hiring expenses
  • 0.25 - Assumes only a quarter of employee's annual salary is lost to turnover costs

Putting this together:

If 10 employees left making $25 per hour working 40 hour workweeks, the cost of turnover would be:

10 resignations x ($25 per hour x 40 hours per week x 52 weeks per year) x 1.3 x 0.25 = $325,000

As you can see, turnover costs add up quickly. Using this formula can quantify the impact and help justify investments in employee retention.

Monitoring metrics like resignation rates and satisfaction alongside turnover cost calculations provides crucial insights for talent management strategy. This ultimately boosts the bottom line by reducing the high expense of replacing valued employees.

How do you calculate the true cost of an employee?

Calculating the true cost of an employee is crucial for organizations to understand the full financial impact of their workforce and make informed business decisions. Here are the key steps:

Gather Data on Direct and Indirect Costs

  • Wages/salary - The gross pay an employee earns. Ensure to account for any bonuses, commissions, or overtime pay.

  • Benefits - Health insurance, retirement contributions, paid time off, etc. Calculate your organization's cost.

  • Taxes and insurance - Payroll taxes, unemployment insurance, workers' compensation. Know the rates you pay.

  • Training and development - Costs of onboarding, continued learning programs, conferences, etc.

  • Tools and technology - Equipment, software, support needed for each role.

  • Facilities - Office space, utilities, other overheads per employee.

  • Management time - Time managers spend hiring, training, managing each direct report.

Calculate Costs Per Employee

Tally all the above costs over a year and divide by the number of employees to determine the cost per employee.

This gives the fully loaded cost - the total employer investment made in each team member.

Consider Turnover Impact

High turnover leads to major additional costs through recruiting, lost productivity, knowledge drain.

Calculate cost of turnover per employee using metrics like:

  • Cost per hire
  • Cost of vacancy
  • New hire training time
  • Lost engagement impact

Make Data-Driven Decisions

With true employee cost and turnover cost data, organizations can:

  • Budget and forecast more accurately
  • Prioritize retention initiatives
  • Assess workforce risks and opportunities
  • Optimize labor efficiency
  • Identify high-performing teams

Having total visibility into the investment in human capital allows for smarter talent management strategies tied directly to the bottom line.

What is the true cost of turnover?

Employee turnover can have a significant financial impact on an organization. Here are some key points on understanding the true cost:

  • Direct costs of turnover include expenses related to hiring a replacement such as advertising, interviewing, screening, onboarding, training, etc. Estimates typically range from one half to two times an employee's annual salary.

  • Indirect costs are harder to quantify but still substantial - these include loss of productivity as the role remains vacant, costs of colleagues covering work, loss of organizational knowledge, cultural impact on team morale, etc. These have been estimated to range from 1-2x annual salary.

  • The impact varies by role - turnover of higher level roles generally incur greater expenses due to greater hiring costs, longer vacancy periods, and greater productivity loss. Costs to replace senior executives can exceed 2x annual salary.

  • Intangible costs matter too - the loss of high performers can significantly impact innovation, service quality, customer relationships, revenue, etc. Engaged employees also boost productivity.

To accurately estimate turnover costs, organizations should track metrics like average time to fill roles, hiring expenses per role, salary levels, and productivity loss estimates. Regular exit interviews also provide insights into causes behind turnover.

Proactive retention initiatives like competitive compensation, development opportunities, positive culture, and stay interviews are key to reducing preventable turnover and avoiding replacement costs. Tracking turnover rates and costs over time shows the ROI on retention programs.


Industry Insights: Gartner and Gallup Benchmarks

Understanding Average Employee Turnover Rates

Employee turnover is a critical metric that all organizations must track. According to Gartner research, the average voluntary turnover rate across all industries is 10-15% annually. However, turnover rates can vary significantly depending on factors like industry, company size, role type, and regional differences.

For example, Gallup has found that the average turnover rate in the hospitality industry tends to be much higher at 60-300% annually. High turnover industries like hospitality, retail, and healthcare face greater recruitment and onboarding costs from continually replacing staff.

Turnover rates also tend to be higher for entry-level roles and customer-facing positions. Companies should benchmark turnover rates internally across departments to identify pain points and opportunities to improve retention through better engagement initiatives.

Benchmarking Employee Engagement Levels

Gallup's most recent State of the Global Workplace report found that only 20% of employees worldwide are engaged at work. This indicates that the vast majority of workers globally feel indifferent or actively disengaged from their roles.

Low engagement directly correlates with higher absenteeism, lower productivity, and increased turnover intent. Gallup estimates that actively disengaged employees cost organizations 34% of their salary in lost productivity each year.

To benchmark engagement, organizations need to conduct annual employee engagement surveys and pulse surveys to track progress. Gallup's Q12 survey can serve as an industry-standard measurement for comparison.

Goals should be set around improving engagement levels by 5-10% year-over-year. Investing in improving engagement through better manager support, career development, and workplace culture initiatives can significantly impact retention and performance.

The Financial Impact of Turnover

Understanding the true cost of turnover is critical for organizations looking to improve retention rates. By calculating tangible separation costs, productivity losses from vacancies, and expenses related to hiring and onboarding, leaders

Quantifying Disengagement Expenses

This section will quantify indirect costs from disengaged staff through absenteeism, quality issues, and hampered output.

Evaluating Productivity Loss from Low Engagement

Research shows that engaged employees exhibit higher levels of discretionary effort, going above and beyond their core responsibilities. Gallup estimates that actively disengaged employees cost the U.S. $483 billion to $605 billion each year in lost productivity.

To quantify the impact of disengagement on productivity for your organization:

  • Conduct regular employee engagement surveys using a standardized tool like Gallup Q12. Track engagement levels over time.
  • Gather data on key productivity metrics like sales conversions, support ticket resolution rates, quality error rates, etc. Normalize per employee.
  • Statistically analyze the correlation between engagement survey scores and productivity KPIs.
  • Using the correlation coefficient, model the potential improvement in productivity metrics if disengagement was reduced.

For example, if a 10 point increase in engagement correlates to 7% higher sales conversions, you can quantify the cost of disengagement in lost sales. Tie to revenue and profitability impact.

Assessing the Impact of Disengagement on Team Dynamics

Disengaged workers can spread negativity and reduce the effectiveness of those around them. For collaborative roles, model the downstream impact.

  • Leverage organizational network analysis to map out working relationships and interdependencies between roles.
  • Identify central or highly collaborative roles that have an outsized impact.
  • Estimate the magnitude of influence using academic studies on contagion effects.
  • Combine with engagement data to model risk, e.g. a disengaged manager oversees 5 teams = productivity loss amplified by 5x.

This analysis highlights high-risk areas where disengagement could spiral. It builds the case for targeted interventions to support managers and teams with low engagement.

Enhancing Retention and Engagement

Retaining top talent and keeping employees engaged are critical for organizational success. There are research-backed best practices that can positively impact key performance indicators around turnover and engagement when effectively implemented.

Building a Positive Organizational Culture

Fostering an inclusive, growth-oriented culture focused on meaningful work drives retention and engagement. Tactics include:

  • Defining and regularly communicating organizational values and purpose
  • Promoting collaboration and inclusion through team-building
  • Offering advancement opportunities and new challenges
  • Encouraging work/life balance with flexible schedules
  • Prioritizing diversity, equity and inclusion in policies and practices

Strengthening culture requires buy-in across all levels to nurture talent and exceed employee expectations.

Empowering Managers with People Management Skills

Managers directly influence their teams' engagement and desire to stay through:

  • Providing regular feedback and career development guidance
  • Exhibiting empathy, building trust, and motivating through autonomy
  • Setting clear goals and recognizing achievements
  • Fostering open communication and welcoming ideas

Equipping managers with coaching skills and emotional intelligence cultivates higher-performing, stable teams.

Implementing an Employee Recognition Program

Recognition programs giving rewards for accomplishments, milestones, and peer-to-peer appreciation boost engagement and retention by:

  • Fulfilling basic needs for appreciation and belonging
  • Reinforcing desired behaviors and achievements
  • Promoting morale, motivation, and job satisfaction

Public, personalized recognitions given frequently and tied to core values have the greatest impact.

Creating Opportunities for Continual Learning and Development

Ongoing learning and career development are highly valued by top talent. Tactics include:

  • Offering tuition reimbursement, training stipends
  • Hosting workshops, mentorships, stretch assignments
  • Providing clear paths for advancement and growth

Development investments exhibit commitment to employees, thereby increasing engagement and tenure.

Taking a multifaceted approach across these areas creates a sticky and engaging employee experience that retains top talent.

Leveraging Technology for Engagement and Turnover Analysis

Technology and analytics provide powerful capabilities to measure and understand employee engagement and turnover trends within an organization. HR leaders can leverage solutions to gain visibility into these critical workforce metrics and guide data-driven strategies.

Utilizing Employee Engagement Surveys for Immediate Feedback

Conducting regular pulse surveys gives insight into employee sentiment and engagement levels. AI-powered tools like HRbrain's Culture Assessment simplify running short, targeted questionnaires to capture employee feedback. Key indicators around satisfaction, belonging, growth opportunities and more are tracked over time. This enables analyzing engagement fluctuations, determining drivers of disengagement, and taking timely, appropriate action.

Frequent measurement allows for understanding the impact of various initiatives and events on engagement. After a new policy rollout, leadership change or restructuring for example, surveys diagnose how employees are responding. Issues can be rapidly detected and addressed before escalating.

Predicting Turnover with Advanced Analytics

Sophisticated machine learning algorithms within solutions like HRbrain's Employee Churn Predictor analyze multiple datasets to uncover predictive patterns and likely causes of turnover. Factors like performance ratings, compensation history, tenure, demographics, peer group dynamics and more are assessed.

The output is an accurate projected turnover rate and risk scoring for individual employees and segments. This guides proactive retention programs, talent development plans, stay interviews and other interventions to reduce regrettable attrition.

The Role of Stay Interviews in Retention Strategies

Stay interviews provide a mechanism for managers to have forward-looking career conversations, understand engagement levels, and gather direct feedback from team members. Rather than waiting for exit interviews when employees are already leaving, stay interviews give actionable input to improve retention.

Discussion topics cover reasons employees might consider leaving, desires for career growth, frustrations with processes, and suggestions for improvements. The insights shape stronger employee value propositions through enhancing culture, work practices and advancement opportunities. This nurtures talent and curtails turnover.

Conclusion: Synthesizing Cost Insights for Strategic Decisions

Employee turnover and disengagement are complex workforce challenges that can significantly impact an organization's bottom line. As discussed, quantifying these costs requires a comprehensive framework that accounts for both hard and soft costs across the employee lifecycle.

By leveraging AI-powered solutions like HRbrain's predictive analytics tools, leaders can gain unprecedented visibility into workforce risk factors and proactively guide investments in the following key areas:

  • Strengthening onboarding and culture: Focus on clarifying values, improving manager relationships, and creating engagement opportunities early on.

  • Providing development and growth: Invest in continual learning, career pathing, and skills development to unlock potential.

  • Recognizing contributions: Celebrate milestones, provide meaningful rewards, and give timely feedback.

  • Listening and acting: Regularly survey engagement, hold stay interviews, and quickly resolve issues.

As organizations grow more dynamic, the ability to accurately estimate human capital risks and respond strategically will be key to both financial and cultural success. HR leaders must harness the insights now available to them to nurture productivity, innovation, and growth for the future.

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