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What is the True Cost of Replacing an Employee?

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What is the True Cost of Replacing an Employee?

If you are in a position where you manage people, I'm sure you have been in a situation where an employee has become so unmanageable that you had to make the decision to replace them. Or perhaps you have been in a situation where an employee has received an offer they couldn't refuse from another company.

Employee replacement is not without a cost, and that cost can be very high. For this reason, it is imperative for companies to do their best to recruit and retain individuals whose interests align with their own.

There are many reasons for organizations to care about keeping turnover to an absolute minimum. According to a Gallup study, employee turnover costs US businesses a trillion dollars annually.

When measuring in monetary terms, the direct cost of replacing an employee can range from one-half to double their annual salary. But the price goes well beyond the dollar amount.

Here at Stateside, we understand the true cost of employee replacement for your business. For this reason, not only do we make sure that we hire the right talent for your organization, but we also pay special attention to the retention rate and how we can help maximize it.

So, what is the cost of replacing an employee?

There are several aspects to consider when calculating the true cost of replacement:

1. Recruitment Costs for a Full-time Hire

The costs associated with finding the right person to hire can quickly add up.       
If you are using a recruitment agency, a simple number to consider is the agency fee. This can typically be around 20% of the yearly salary of the new employee. If you have an internal hiring team, you have to consider the man-hours that your internal recruiter puts into the candidate search - writing job descriptions, screening resumes, scheduling and attending interviews, and doing background and reference checks, to name a few.

Other direct costs include advertising the position, candidate assessment tools, and job board fees.

2. Onboarding Costs of a New FTE

Onboarding a new employee costs time and money. A successful onboarding process usually takes 90 days and will involve 40+ hours of internal work from start to finish. All these hours need to be considered when calculating the cost of hiring and replacing an employee.

Other direct onboarding costs include investments in additional equipment such as computers, cell phones, and workstations.

3. "Mis-Hires" 

When organizations rush to hire an employee or don't have proper screening processes in place, they can end up hiring a candidate that is not a good fit for the role or for their organization.

Hiring the wrong person can be more damaging to productivity than not hiring at all. And it's expensive. In this instance, there are direct salary costs with little to no business contribution at all.

4. The Impact on Employee Engagement 

When someone leaves a company, it can affect their co-workers and employee engagement in a negative way. This is more difficult to measure with concrete numbers but it's important to consider the impact that this factor will have on your team's productivity.

5. The Detriment to your Employer Brand

This is an intangible cost, but a high staff turnover rate reflects poorly on your company's brand. Nobody wants to work for a company that nobody seems to want to work for.

6. Loss of Organizational Knowledge

There is inevitably a loss of organizational knowledge when an employee leaves a company. Even if they give sufficient notice of their departure, it is not possible to transfer all of the expertise and familiarity that comes with spending time at an organization. A big chunk of knowledge is lost in an instant when an employee leaves.

So, how can we reduce employee turnover?

Here are a few steps that can help an organization reduce employee turnover.

1. Offer Competitive Salary and Benefits

Offering a competitive salary and benefits can help reduce employee turnover. Organizations must view a new hire as an investment for growth and improvement, not as a financial burden.

2. Prioritize Company Culture

Culture drives how employees interact and engage with their teams, their managers, and their clients. In a study of 5,000 respondents by Glassdoor, 77% of people said that they would take a company’s culture into account before applying for a job there, and over half consider it more important than salary when it comes to job satisfaction.  

3. Invest in Employee Development

Employee development does not just concern the advancement of an individual's skillset for a particular task. Instead, employee development should involve an ongoing assessment of each employee's specific needs to allow for personalized continuous learning that empowers individuals to progress on their career path.

4. Listen to Employees

Employees who know they are heard are more engaged and productive. Higher employee engagement leads to increased job satisfaction, which in turn lowers the turnover rate.

Employee retention efforts should be at the forefront of your business strategy. You want to keep your best talent, make your organization an attractive place to work, and keep employee morale high while cutting down on the unnecessary costs, wasted time, and productivity losses associated with replacing an employee.

Photo by Priscilla Du Preez

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