The REAL Cost of Employee Turnover

By Kevin O’Connor

If employee turnover costs averaged 33% of an employee’s salary for one company segment, but 200% of another employee’s salary in a different segment, would you address turnover differently in those two segments? I’m going to explain why turnover costs can vary greatly, discuss how to find the root causes, and how to reduce turnover to lessen this significant hit to your bottom line.

Turnover cost demonstration

Countless articles suggest the cost of turnover averages about 1/3 of a person’s annual salary. Generally, this would cover advertising, screening, selection, onboarding and orientation, and the cost to cover the position while vacant, but there is more.  What about the lost value the position delivers to the company? Coming from a sales/sales management and internal recruiting background, in a relationship dependent segment of agriculture, I have seen the cost of lost sales, lost dealers, and lost long-time customers easily total more than 200% of a good salesperson’s salary.

This happens often if the backfill is delayed and competitors smell the low-hanging fruit of a vacant territory. This means that for one strong performing, $80,000 sales rep, turnover may cost $160,000 or more!  Multiply this by a typical 15 to 20 percent, company-wide, turnover rate for your sales department and the numbers are staggering. We can conclude that the actual cost of turnover is much greater for roles where the transactions heavily depend on the relationship between the employee and the potential customer.

I highly recommend segmenting your turnover data between operational positions, sales and sales management, and upper-level managers.  If each company accurately tracked total turnover costs by company segment, greater effort and resources would be used to discover and fix the root causes of turnover in the segments most at risk to affect the company bottom line.

Once we truly understand this cost of turnover by company segment, how do we identify the root causes of employee turnover, so we know where to focus resources?

  • Tool number one is the exit interview. Most companies have some type of exit interview with outgoing employees. Often there is room for improvement in the system to arrange the exit interviews, capture the real reasons of departure, accumulate and analyze the data, and then develop meaningful, targeted solutions supported from the top down to reduce future turnover.
  • Tool number two is a regular company engagement survey to develop benchmark scores by department and identify trends which may attract and hold employees or drive them away.
  • Tool number three is having turnover performance metrics tied to the goals that affect bonuses. There’s no better way to focus effort than by affecting pocketbooks.

After mastering the exit interview process and identifying cultural trends, executing your new strategy to reduce turnover may still be difficult.  It’s crucial to gain buy-in from the top down if real change is needed. It will likely require a reallocation of resources and a realignment of priorities.  Solving those issues in one segment may also improve retention in other company segments if the issue is company-wide. In summary, get the right people on the bus to foster the desired culture, then execute a comprehensive onboarding and mentoring system, and regular career pathing discussions with each employee.

Focusing first on employee retention that most affects the customer relationships with your company is a smart use of resources for measurable improvements in ROI.