The Hidden Costs of Employee Turnover

Although employee turnover isn’t always a bad thing (for example, the departure of poor performers gives an organization an opportunity to replace them with stronger performers), most executives focus on the negative consequences of turnover and associate it with the loss of employees that they don’t want to lose. Employees are assets that appreciate: over time, they build up more knowledge of the company’s products and processes, they strengthen their relationships with their colleagues and management (and with clients), and they increase their value in innumerable other ways. The loss of valuable employees can cause great harm to a company.

The direct financial impact of employee turnover has been well documented. The exact measurements of that impact vary, but most experts agree that it “can range from tens of thousands of dollars to 1.5 to 2 times [the departing employee’s] annual salary.” (To see the direct financial impact of turnover at your own organization, check out this free online calculator. The number it produces is a simple ballpark estimate, but at the very least it will give you a sense of what kind of money is involved.)

These estimates and calculations usually consider only the cost of replacing a departing employee, though. With such a narrow focus, the usual framework for analyzing the impact of employee turnover usually overlooks other significant costs:

Negative effect on company culture. High turnover makes it difficult for employees to build strong relationships with each other. Low turnover means that people have more time to get to know each other better and learn to work well together. This has some benefits to the company’s bottom line (by increasing overall efficiency, for example), but just as significantly it makes employees happier about their jobs—and more likely to stick around.

Decreased employee engagement. High turnover can make it more difficult for employees to do their work well (or even to do it at all). In such an environment, a negative mentality can settle in. When employees feel that their work is undermined, ineffective, or unappreciated, they start to think “Why bother?”

Lost productivity. In any position, a new employee needs time to get up to speed. Sometimes that happens in a matter of days, but usually it takes longer—weeks, months, or even years. Regardless of the industry, the position, and the new employee’s experience, there is always a transition period, and during that time he or she is not productive. Now imagine what happens when a company has to deal with unproductive transition periods that are both numerous and frequent.

Lost knowledge. Employees are not one-for-one replaceable, even in the same position. Over time, each person builds his or her unique knowledge database. Some of that information (such as certain rules or procedures, for example) can be documented for sharing, but a great deal of it is informal and personal—particularly information that’s relevant to relationships with other employees, managers, and clients. The departure of an employee results in lost knowledge, which in turn can lead to customer service problems, employee errors, and other mistakes.

Damaged reputation. Any organization that becomes known as a place with a steady stream of outgoing employees will find it hard to attract top talent. Similarly, few customers will be eager to do business with a company that struggles to retain the people who create and support the products and services that those customers need.

The far-reaching negative ramifications of employee turnover are worse than most people realize. Fortunately, however, they are not inevitable: by using Insight Worldwide’s online hiring assessments, companies, both small and large, can make immediate and long-term gains. Take for example Insight’s partner, Berkshire Health, who implemented our behavioral assessments for the hiring of all frontline care staff. By using the results to accurately identify and interview the right candidates, Berkshire’s hiring managers were able to better select candidates who best fit their open positions. The outcome, as observed in this case study, reduced their caregiver/CNA and nursing turnover by 31% in the first year. This was a half of a million dollars in bottom-line savings annually, but was not the only part of their operation that benefited. Berkshire’s multiple communities improved employee performance outcomes by 10% in areas like attendance, lateness, and work ethic; and reduced annual workers’ compensation claims by thousands of dollars in out-of-pocket expenses.

Berkshire Health’s example is only one of many positive stories produced by employers when validated and industry best practices are applied. As an industry leader, Insight Worldwide can help organizations just like yours improve their hiring identification, selection, and development processes for new employees. Contact us today to find out how we can help you ask the right questions that let you gather the information you need to make the best hires.

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