It Costs How Much to Replace an Employee

Retaining your good employees

The Right People in the Right Places

Studies show that the average cost to replace a worker in the US is $17,000.00 (AVERAGE!!). Some HR managers use the rule of thumb that whatever the person's annual salary is - it will cost that much to replace them. One study evaluating the effects of the US Family Medical Leave Act found that "turnover costs for a manager average 150% of salary, including real costs of hiring... and intangible costs such as the new worker's inefficiency and lost productivity while the job is vacant."

Costs of lost productivity are as important as direct costs such as advertising or temporary staff. Total costs easily reach 150% of the annual compensation. The cost will be significantly higher (200% to 250%) for managerial and sales positions.  

     Bliss & Associates Inc., Wayne, NJ consulting firm.
There are three cost categories associated with employee turnover. Separation costs account for exit interviews, termination administration, severance pay, and unemployment compensation. Replacement costs account for attracting applicants, interviews, testing, and moving expenses. Vacancy costs account for increased overtime or temporary employee costs incurred while the position is unfilled.

Facts [+]
Employee turnover costs can significantly affect the financial performance of an organization. On average, it costs a company about one-third of a new hire's annual salary to replace an employee. The cost to replace a minimum wage employee is about $3,700.

A vacated or unfilled job within an organization results in tangible, measurable costs as well as intangible costs. The intangible costs include the uncompensated increased workloads other employees assume during the vacancy, the added stress and tension during and after the turnover, declining employee morale, and decreased work group synergy.

If you think you can just hire temporary workers and avoid all those costs, think again. The cost of hiring and getting production from a temporary worker is nearly 40% of their salary, and temporary workers tend to have higher hourly rates than permanent ones - and higher turnover rates as well.

Let's put this in real terms.   The lowest number  seen anywhere says it will cost you at least 30% of an employee's total annual compensation to replace them. Assume you have 100 employees and your average salary is $10.00 per hour. At $10.00 per hour + benefits (at 20% of wages), your employees receive ~$12.00 hour in wages and benefits. Let's say that you have to replace 15% of your employees every year. Taking the most conservative estimate for employee turnover costs that I have been able to find (30% of their annual wages and benefits); each employee you have to replace is costing you $7,488.00. 

100 employees X 15% X $7488 (including benefits) = $112,320 per year.

And that is using the most conservative cost percentage one can find. If we decide to use the national average ($17,000 / replaced employee) the cost goes to $255,000.00. By using the 'rule-of-thumb' (100% of their annual salary - $20,800.00/ replaced employee), the cost will go to $312,000.00... Staggering!

Why are the costs so high?

Why does it cost so much to replace a departing employee? Some costs, like paying off accrued vacation time or the cost of a help-wanted ad, are obvious.

Other costs include:

  • Increased unemployment insurance costs
  • Lost productivity while there is a vacancy
  • Time costs for the separation (Exit) interview (If your good employees are leaving, you NEED to know why)
  • Separation agreement costs (legal, financial, medical, retirement cash-out, etc.)
  • Overtime from other employees to handle the vacancy (which can lead to burn-out or absenteeism)
  • Time costs to review resumes
  • Time costs to interview candidates
  • Interview expenses for the candidates
  • Possible travel expenses
  • Possible relocation expenses
  • Head-hunter or signing bonus fees
  • Additional bookkeeping; payroll, 401k, etc.
  • Additional record keeping for government agencies
  • Reduced productivity while the new worker gets up to speed
  • Training programs
  • Corporate history lost
  • Morale can be affected
  • Intellectual property lost
There are also risks associated with loosing an employee.
  • Threat of lawsuit
  • Bad PR from disgruntled employee
  • Threat that the employee will take clients to a new firm

What can be done about it?

Job descriptions:
Put together a complete job description with tasks and duties outlined in a clear and concise way so that when someone answers your want ad, they know what they are applying for. Minimize that catch-all phrase "Other duties as assigned". This way, the employee knows what is expected of the position and the manager knows what to evaluate for performance reviews.

Pre & Post employment testing:
Job match/satisfaction can be measured by using the testing and evaluation systems that are available through RP2-Consulting. The cost of these evaluation and testing programs is significantly less than the cost of turnover in the first example above. We can test a candidate before they even show up for an interview and tell you if they have the right attitude, will show up for work when expected and won't take everything in the supply cabinet home with them. We can match new candidates to a given position. We have all heard of the 'Peter Principle' (Peter Principle: Observation that in an hierarchy people tend to rise to "their level of incompetence." Thus, as people are promoted, they become progressively less-effective because good performance in one job does not guaranty similar performance in another. Named after the Canadian researcher Dr. Laurence J. Peter (1910-90) who popularized this observation in his 1969 book 'The Peter Principle.'). We can look at your existing employees and match their skills and personalities with open positions in the organization. We can also help you identify the right people to put on teams. When teams are balanced (one person's strengths cover another person's weaknesses), results are significantly improved. Finally, managers (and CEO's) need to know their strengths and weaknesses, as those who work with them perceive them. Testing can show you what your true strengths and weaknesses are so that you can focus on improving those things that need to be improved.

Expecting someone to produce when they do not know how to produce, or what results are needed is absurd. Yet every day, people are hired to do jobs in which they have little or no formal training. Make sure that your employees get the training and guidance they need to meet your expectations. This will lead to better employee job satisfaction and reduced management stress. As a significant side benefit, well-trained employees are more likely to win appreciation for a job well done; and appreciation and recognition among your peers is a huge motivator. We can help you design your training programs to meet your individual needs.

The best plans and initiatives are all for naught if your leadership does not focus on what is working and where you want to go. Have you ever been backing out of your driveway focused on the trash-can you had to avoid hitting at all costs - it's right there in the mirror, just behind the vehicle, if you hit it your whole morning will be ruined - and like a laser, you run right into it...

We go where we focus. One key to your success is to focus on retaining your employees. Working to make them successful is far less expensive than replacing them. Treating them with respect and honor while making them feel like they have a stake in the company and its success will lead to your success. Focus on where you want to go not where you don't want to go. Looking at mistakes and finding fault is focusing on the past and the errors made there. Learn from mistakes and move on. Plan the future your organization wants. Focus on applauding success, both individually and for the team/company.