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What Does High Turnover Really Cost?

Hiring is a costly and complicated process, especially for small businesses. On the surface it looks easy: you place an ad, interview some people, pick one, and get on with your business. In reality, hiring is much more complex than that, partly because it is often attempted by business owners who have little or no experience hiring or managing employees.

Most business owners do not have the experience of working as a hiring manager for an established corporation where they would learn some of the basics. Small business owners have experience in their area of expertise, and are bright and brave individuals, but most lack any training in developing a staff.

The other problem is that everything in life is more complicated than it was when we were younger. Kids used to come around looking for summer work all the time. If they looked clean and responsible, you would ask them to fill out an application. After a brief conversation, you knew if their efforts were sincere and you hired them. They come at you from all angles: friends’ kids, competitors’ cast-offs, social media junkies. Experience and skills vary or are missing altogether. Some tug at your heart-strings to give them a chance though they have little to recommend them, while others seem the perfect fit except for their high salary demands.

Most business owners go into a hiring situation under great pressure. Their business is booming, and they do not have enough hours in the day to get all the work done. Someone needs to step in quickly and take over a couple tasks or the business might face total collapse.

I had a client recently who was in this situation and already had a poor track record for hiring and retaining employees. She was so frazzled after working without an assistant for a couple weeks that she made a job offer to someone without even interviewing.

When I asked her what her expectations were for her new assistant, she hadn’t taken the time to think it through. She basically told me she expected her assistant to do whatever tasks she gave her. Then, she rattled off a list of tasks that couldn’t possibly be accomplished by one person.

This client of mine is a highly intelligent professional who makes important decisions all day long. She was intimidated by the hiring process, however, and just tried to shortcut it. Her reaction was partly due to high turn over. She had been through three assistants in three years and was just worn out.

On top of that, she was in a position where she could not afford the experienced professional she wanted to hire. (That’s how she got out of the premature job offer, too.) All that hiring and firing in the previous few years had drained her coffers. She wanted to hire someone who would require less of her time to train and would increase her revenue quickly, but at the rate she could pay, that wasn’t an option.

Calculating the Cost in Dollars and Cents

You can easily add up the costs of bringing a new employee on board by considering these items:

rate of pay
taxes and fees such as workers’ comp insurance
benefits (if applicable)
setting up a new work station
tools and materials required to do the job
training programs, courses, and materials

Add to that the time that you and at least one of your other employees will spend instructing and monitoring this new hire. For the first six months to a year, your new employee will not bring in any revenue for your business or add any real value.

For the first several months, you will be paying the costs of bringing in a new employee without getting any return on that investment. If that employee leaves for any reason during this period, your investment in him is gone. You get no return on that money, and you do not get to roll it over into the next new employee.

Here is the simple math on just the wages that you lose when an employee leaves:

At $15 an hour, a full time employee costs you $2400 per month in wages alone. If he leaves, or is fired, after three months, you have lost $7200 just in wages. That is not including other fees and intangibles.

Now, you have to start over by hiring another employee. The hiring process itself can be expensive. One manufacturer told me he estimated his cost for hiring a new employee at around $3,000. There is a lot of lost time in there, plus advertising and recruiting fees.

Don’t Forget the Intangibles

Probably the biggest intangible cost of high employee turnover is reputation. When you are constantly hiring for the same positions, people take notice. You can get a reputation for being a difficult employer. When this word gets out, it can poison your applicant pool, and you might have trouble finding people who want to work for your company.

High turnover can effect your reputation with customers, as well. A solid business is based on repeat customers, and they will notice if every time they contact your business they are dealing with a different person. When people are quickly promoted up and out of those front-line positions, it is seen as a positive. But when customers find out the last person they talked with doesn’t work for the company anymore, that can be a problem.

Finally, high turnover has a negative effect within your business. Employees want to work in a stable environment, and revolving door hiring practices threaten the feeling of stability. It is hard to build a cohesive team when members come and go frequently. When people place their trust in a co-worker and that co-worker leaves, they feel let down. Building trust is always harder the next time.

Bosses are effected by high turnover, even if they do not realize it. Like the client I mentioned earlier, managers get spooked by unsuccessful hiring experiences, especially when they end badly. Your current hiring practices might be defensive against a bad experience rather than being effective for creating a winning team. This is the beginning of a downward spiral that could jeopardize your entire business.

Christine Andola
Christine Andolahttps://frameworkbranding.com/
Christine has mastered the art of human connection working for more than 30 years in the communication and marketing field. Communication, whether it is with employees and new recruits or potential customers and your existing client base, is all about the people. Christine brings people together with their employees, with the members of their leadership teams, and with their customers and clients. Her customer service perspective builds long-term relationships with clients and helps clients develop connections with their target audience. Christine is also a highly successful copywriter with experience developing copy and brand voice for companies across a wide array of industries. At heart, Christine is a native New Yorker who has traveled the entire length of the Erie Canal by boat and navigated both the St. Lawrence and the Hudson rivers.

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2 CONVERSATIONS

  1. Christine: As you note there are many costs beyond the obvious ones of payroll. One such hidden cost is lost business. It is not unusual for a new employee to make errors that can cost you a customer and it is always more expensive to find a replacement customer than to retain an existing one. There is also the time that other employees spend showing the new one the finer points of the work and the company. Those are a few minutes here and there and not easily isolated.

    I have estimated that a new employee can cost as much as three times their annual earnings. Clearly if you are turning over the same position regularly it is not only a drain on you, but the bank account too.

    The reality is that when an employee fails, the employer did something wrong.

    • You are right, Ken. I hope that by clarifying the actual costs of high turnover my article will motivate business owners to make the necessary changes to retain employees. The resulting work environments will become a benefit to employees, too.

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