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09.22.2021

Business Breakdown: Can You Afford the High Cost of Employee Turnover?

In the natural course of doing business, your company may lose team members to layoffs, furloughs, terminations, retirements, resignations—or some combination thereof. However, if the scale tips and you find yourself consistently losing employees—or struggling to fill open positions—it’s time to take a step back and look at your organization’s big picture. Is the turnover you’re experiencing a blip on the radar caused by external factors, or is this a sign of a deeper problem you need to address? And how is employee turnover affecting your company’s bottom line?

“The impact of an employee leaving spans far beyond just headaches for your HR team; it can wreak financial havoc across an organization,” writes Melanie Fellay in her Forbes article, “Why Your Employees Are Leaving En Masse And The Surprising Factor That Will Keep Them.”

Eleesha Martin, Manager of Recruitment Process Outsourcing (RPO) Services for G&A Partners, estimates that the average cost of replacing just one employee ranges from one-third to two times their annual salary, not to mention the negative impact it can have on company culture and employee morale.

Many business owners believe they can do little to prevent employee turnover, but, in fact, the opposite is true. If you proactively invest time and effort into your recruiting, onboarding, training, and retention efforts, you can keep employee turnover in check and even prevent some of it from happening in the first place.

More than 25 million people voluntarily left their jobs during the first seven months of 2021.

— U.S. Bureau of Labor Statistics

Food for Thought: Employee Turnover is Trending

The U.S. Bureau of Labor Statistics reports that more than 25 million people voluntarily left their jobs during the first seven months of 2021, with record numbers quitting April through July. Experts predict this trend will continue throughout 2021 and then some, giving credence to the "Turnover Tsunami" theory conceived during the onset of the COVID-19 pandemic.

"This all points to a skyrocketing labor market, fueled by huge demand from employers reopening and expanding after last year's lockdowns, and by a labor supply crunch from workers seeking better, safer, and higher-paying jobs," say the authors of Insider's "The record number of workers quitting is now in its third month, and it looks here to stay." "There hasn't been anything like this in decades, and there's no reason to believe it will stop anytime soon."

Even more concerning is the number of employed workers who indicate they are actively searching for a new job or are open to quitting if an opportunity presents itself. Achievers Workforce Institute reports that only 33% of employees plan to remain in their current positions—down from 47% in 2019—due to "a build-up of problems they've encountered at work over the course of their stay." Another 17% are undecided but open to looking for new opportunities.

The pandemic did not start this trend, but it did magnify it. In March 2020, involuntary turnover surged to approximately 16.3 million as many companies were forced to furlough or lay off employees due to mandatory closures or a sharp downturn in business activity, according to the U.S. Bureau of Labor Statistics (BLS). The leisure and hospitality, food services, trade, and transportation industries were hit hardest during the pandemic's early days. Employees in those fields were forced to look for other work or get by on unemployment and stimulus payments. Additionally, the BLS reports that an estimated 3 million people voluntarily left their jobs to care for children and loved ones or searched for employment that allowed remote work.

Voluntary and involuntary employee turnover declined significantly by mid-2020 as businesses reopened and employees headed back to work. But then something changed. By December 2020, the number of people voluntarily leaving their jobs began to rise again. They retired, switched positions or industries, freelanced, started their own businesses, or left the workforce altogether. This led to the current talent shortage affecting all industries—some more than others.

Businesses that were forced to lay off or furlough workers in the pandemic’s early days are now having the toughest time with employee turnover. According to turnover statistics released by the BLS for 2020, these industries were hit hardest (based on percentage of turnover):

Accommodation and Food Services

130.7%

Leisure and Hospitality

130.5%

Arts, Entertainment, and Recreation

129.3%

Retail Trade

69.7%

Professional and Business Services

69.2%

Construction

68.6%

Trade, Transportation, and Utilities

60.5%

Bottom Line: How to Calculate Employee Turnover in Your Organization

It's essential to dedicate dollars to recruiting top talent, but the real ROI of recruitment is retaining employees over the long haul.

According to G&A’s "How to Manage and Minimize Employee Turnover" guide, "Companies across all industries continue to lose great employees, sometimes without understanding why. And the rate at which a company loses employees can have a significant impact on a business's bottom line."

The first step in addressing your turnover rate is to admit you might have a problem. You can then take steps to quantify that problem. By calculating your employee turnover rate AND the cost of employee turnover, business owners and HR professionals can identify turnover trends and evaluate the effectiveness of managers or recruiting processes, employee satisfaction, and overall organizational culture.

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Calculate your Employee Turnover Rate

Many businesses calculate employee turnover on an annual or monthly basis, but you can choose a time period that works best for your business. For example, if your company employs seasonal workers, it might make sense to calculate turnover every quarter.

Follow these steps to calculate your turnover rate:

  • Decide the time period you will measure.
  • Determine the average number of people your company employed during the specified period.
  • Divide the number of employees who separated from your company during that time by the average number of employees working during that time, and multiply by 100.
  • Compare your company's turnover rate to those of other organizations as well as industry averages. In addition, the BLS’ Job Openings and Labor Turnover Survey (JOLTS) program releases monthly reports outlining national trends in turnover.
How to Calculate Your Employee Turnover Rate

Number of employees who left during a given period

x 100

Average number of employees during the given period

Calculate your Employee Turnover Costs

The total cost of employee turnover varies by industry and company. For your calculation, you can use the method above or the following sample online employee turnover calculators to estimate what it costs your business:

  • Determine the average cost of employee departures per your preferred time period (monthly, quarterly, annually). Consider using the following business expenses when calculating this cost.
    • Recruitment costs are those you will incur to search, locate, interview, and select potential candidates for a newly vacant position. These include costs to create an updated job description, recruiting services, time dedicated to evaluating resumes and interviewing candidates, and onboarding and training costs.
    • Separation costs are those incurred during the process of terminating an employee, including severance pay, costs associated with unemployment insurance claims, the expense of continued benefits, and so forth.
    • Productivity costs include lost hours of work as the position remains unfilled, time other employees spend fulfilling the vacant role's responsibilities (in addition to their own), and costs associated with managers getting a new employee up to speed.
  • Multiply your average cost of employee departures by the number of voluntary departures during your preferred time period (monthly, quarterly, annually) to get your cost of turnover.
  • Consider other impacts of employee turnover, including lowering employee morale and engagement.

HSD Metrics' online Turnover Rate Calculator and The Cost Of Employee Turnover (Free Calculator) add depth to your calculations with additional metrics, such as industry type and average employee salary rates. Also, check out this chart published by G&A that illustrates the average cost of employee turnover by position type.

Take Action: Top 5 Reasons Employees Leave and How You Can Improve Retention

Once you’ve identified your employee turnover rate and associated costs, you can better understand the significant impacts on your company’s culture and bottom line—so you can begin to reverse negative trends. Experts say voluntary turnover can be curbed by learning what employees lack—and what they want—and working within your company’s means to make positive changes. Fortunately, many employees would rather stay where they are than start over and risk what they’ve built with your business.

Work Institute’s Retention 2021 Report: The COVID Edition – Employee Turnover Insights and Trends in 2020 states that nearly two-thirds (63.3%) of employee departures were for “more preventable” reasons , meaning employers could have taken steps to encourage them to stay.

Here are the top five reasons employees left their jobs in the past year and actions you can take to boost employee retention efforts in your organization:

1. Career Development

Approximately 20% of employees cited a lack of career development opportunities as the primary reason they left their job. “More and more, candidates are considering opportunities for personal and professional development as a desirable perk. And if employees don’t see potential to move up within your company, you can bet they’ll start looking for those opportunities elsewhere,” states G&A’s Employee Turnover guide.

  • Take Action: Encourage each employee’s progress and provide regular feedback through one-on-one meetings, performance appraisal tools, and training programs. Ask them what they want to achieve in their role—and your organization—and help them map out a pathway to get there. Then, give them the room and tools to grow in their chosen career.

2. Employee Well-Being and Work-Life Balance

The pandemic triggered a seismic shift in how and where we work, and now employees are pondering the “why.” Many were profoundly affected by fear, loss, anxiety, financial struggles, food insecurity, and other challenges they experienced in March 2020 and beyond, and are determined to achieve a better work-life balance. Three-quarters of workers say they have experienced burnout, and almost half of them say they resent their employers for it, according to Limeade’s “2020 Employee Care Report: The hidden causes of turnover.” This indicates that there’s room for improvement in many American workplaces.

  • Take Action: Employees who believe their employers care about their well-being and life outside the office are more satisfied with their work, and more inclined to stay with the company. Consider allowing flexible start and end times or remote work. Encourage employees to use their paid time off and consider offering mental health days, if financially feasible. Implement an employee wellness program or initiative as part of your employee benefits package and demonstrate understanding and empathy if a member of your team is struggling with a mental health issue, or if they are caring for loved ones under similar circumstances.

3. Company Culture

Company culture plays an increasingly significant role in employee retention efforts. “After all, it will be nearly impossible for a worker to thrive in an environment where there is toxic competition, supervisors who don’t listen to your concerns, and rampant burnout. These can easily suffocate employees and snuff out any passion they may have for their jobs,” according to Finances Online’s “112 Employee Turnover Statistics: 2021 Causes, Cost & Prevention Data.”

  • Take Action: Determine the present state of your company culture by revisiting your mission, vision, and goals to determine if you remain aligned with each or if you’ve wandered off course. In addition, watch for signs that indicate your company needs a cultural reset. Here are a few things to consider:
    • Do your employee show signs of disengagement or apathy?
    • Are they distracted during meetings?
    • Are there indications of internal strife?

    Resetting your company culture requires long-term planning and action, but you can make immediate changes. Create a more positive work environment by celebrating employee’s successes and communicating how they bring value to your team. Design opportunities for employees to bond and feel more connected to one another, such as game nights, virtual happy hours, team lunches, and volunteer activities. Seek feedback through employee surveys, one-on-one conversations, and focus groups. By doing so, you can better understand employee concerns and develop targeted strategies to address them.

4. Employee-Manager Relationships

The Achiever Workforce Institute study reports that an estimated 19% of employees who are considering leaving their job would stay if they had a good working relationship with their manager. Though managers are not solely to blame for high employee turnover, it is vital to recognize shortcomings in your company’s management training programs, conflicts between managers and employees, and overall management culture when evaluating areas for improvement.

  • Take Action: Support your managers with the training, development tools, and the flexibility they need to support employees and create a favorable work environment. Help your managers find new and creative ways to support and mentor employees, improve your company culture, and allow them to guide and inspire teams instead of strictly managing through rules, processes, and procedures.

5. Compensation and Benefit Packages

The number of employees who cite pay as the root cause of their departure has declined 23% since 2018, according to Work Institute’s Retention 2021 Report but it is still a top reason employees leave. They also look for companies that offer benefit packages that holistically address their mental, physical, and financial well-being.

  • Take Action: You can give employees pay raises—or increase your overall salary structure—to encourage them to stay, but this may be difficult if you are a smaller business with tight financial resources. Instead, try a creative approach by offering bonuses tied to accomplishments, additional paid leave days, or a flexible work arrangement. If you are concerned about the cost of expanding your benefits offerings, consider partnering with a professional employer organization (PEO) to access its collective buying power, which will allow you to provide your employees with high-quality, medical coverage—as well as ancillary benefits such as dental, vision, and life insurance—all at affordable rates.

How G&A Can Help

G&A Partners is a leading PEO that offers world-class HR services and a team of experts who can help you identify retention issues and develop strategies to reduce employee turnover. To learn more, schedule a consultation with one of our knowledgeable business advisors.