The High (And Often Hidden) Costs of Employee Turnover

Most businesses today are facing an unprecedented shortage of skilled labor, so it’s more important than ever to hang on to the employees you have. Manufacturers have been hit particularly hard. One reason for this: When the COVID-19 pandemic caused most schools to shift to a remote model, enrollment in many vocational programs — where hands-on learning is essential — declined sharply.

Recognize the Full Cost

You may be reluctant to devote already scarce resources to employee retention, but it’s important to consider how much it costs to lose employees. In a recent study, the Society for Human Resource Management estimated that the average replacement cost of a salaried employee is six to nine months’ salary. That means, for example, that if you lose an employee earning $50,000 per year, the cost of replacing that person will be approximately $25,000 to $37,500. Other estimates are even higher, especially for executives or other highly paid employees.

Some of the costs of employee turnover are obvious, such as those associated with advertising a position, screening and interviewing applicants, and training and supervising new hires. Plus, you may temporarily lose productivity while a new employee gets up to speed. Others are less apparent, such as the cost of overtime or temporary help needed as a result of staff shortages or the negative impact on company culture or morale.

Stabilize Your Workforce

Employee turnover also can affect product quality — a significant hidden cost. A recent study titled “The Hidden Cost of Worker Turnover: Attributing Product Reliability to the Turnover of Factory Workers,” found a direct link between worker turnover and product reliability. The authors of the study partnered with a major smartphone manufacturer, tracking failure rates for 50 million phones over a four-year period. They were given access to data that 1) allowed them to trace units that required replacement or repair back to their exact manufacturing dates and locations, and 2) provided staffing information for those dates and locations. The authors found, among other things, that each 1% increase in the weekly turnover rate increased the product failure rate by 0.74% to 0.79%. This finding confirms that “products are more reliable when the workforce is more stable.”

Make the Investment

Given the shortage of skilled workers and the steep cost of employee turnover, manufacturers can reap significant benefits by investing in their existing workers. This may include increasing salaries and bonuses, enhancing benefits, offering flexible schedules or providing training and upskilling opportunities. In most cases, the benefits of a stable workforce will outweigh the cost of higher wages, better benefits and improved working conditions. Contact us for additional ideas.