How to Calculate the Real Cost of Turnover

In business, people come, and people go. Senior staff members depart as entry-level employees arrive. Some workers will head to your competitors or pivot to a new industry. Others will start their own business or drop out of the workforce entirely. Whether you’re eating another goodbye cake or attending another retirement party, it’s all part and parcel of working life. The problem? Even if regular changes don’t cause your overall compensation bill to fluctuate too much, the constant flow of departures is expensive. 

This guide describes the financial impact of voluntary and involuntary turnover. We also help you calculate the specific cost of employee turnover in your organization, which you can use as a benchmark to improve employee retention. 

Employee turnover explained

Turnover happens when employees leave your company. Voluntary turnover refers to employees who hand in their resignation, while involuntary turnover occurs if you terminate their employment contract. At first glance, your turnover levels may seem fine, especially if you can fill the open roles. For example, some industries, such as hospitality, experience high seasonal turnover but restock roles before the next busy period. But turnover in the corporate world can be costly, both in terms of the upfront costs associated with replacing every vacant position and many other costs “hidden” from the company’s balance sheet. 

As a guide, the Society for Human Resource Management estimates that replacing a staff member is approximately 50 to 60% of that employee’s salary, and the cost of a new hire is $4,700. 

Employee turnover leads to more turnover 

When an employee leaves the company, it can prompt a wave of mass departures. In voluntary employee turnover, people will be intrigued by what has caused their team members to quit their roles. Some will also experience burnout due to taking on their ex-colleagues’ workloads. And in the case of layoffs, surviving employees often grow distrustful of their leaders. They may worry about the company’s financial stability or the direction their leaders are taking the business in.  

In either of these cases, turnover has a snowball effect—the more employees depart, the more others will follow, leading to a never-ending cycle of turnover that can greatly impact the organization’s overall functioning and success.

Types of turnover costs

Consider how the below list of direct and indirect costs associated with employee turnover might impact your organization: 

Hiring and training costs 

General recruitment costs refer to the upfront costs you’ll pay to third parties and the time it takes your salaried or hourly employees to handle specific hiring tasks. This category includes: 

• Advertising job vacancies
• Investing in applicant tracking systems 
• Paying for background checks, drug tests, and other pre-employment screenings
• Investing in third-party cognitive skills testing
• Paying recruiting agencies
• The time spent recruiting or conducting interviews
• Paying existing employees for their referrals 
• Using IT resources to set up new profiles and access 
• Buying or providing assets, such as uniforms, ID cards, computers, and phones 

Lost productivity 

Lost productivity costs the global economy $8.8 trillion each year, the equivalent of 9% of GDP, with employee turnover undoubtedly contributing to this figure.  

When employees depart an organization, there’s usually a handover period during which productivity dips. Often, the new hire arrives several weeks or months after the departing employee has vacated their position. But even if you’re able to smoothly hand the baton over from one person to the next, you can expect a gap before the new joiner hits peak productivity. 

Here are some of the specific costs associated with lost productivity: 

• Remaining team members absorb extra work, resulting in lower quality output and the risk of employee burnout 
• Lost institutional or specialist knowledge means customer service drops 
• Distracted employees taking time away from their daily tasks to train new hires or answer questions 
• The cost of mistakes made by inexperienced new hires

Employee morale 

Whether people quit or are laid off, a revolving door of talent undeniably impacts employee morale, which in turn damages employee retention. Although it’s much harder to put a figure on costs associated with employee sentiment, an unhappy team will be less productive and more likely to leave in the future. Here are some of the ways employee turnover lowers morale: 

• Increased stress for remaining team members, resulting in absenteeism 
• Decreased trust leading to reduced employee engagement, motivation, and lower productivity
• Negative impact on company culture and team dynamics

Company perception 

High turnover rates negatively affect how your company is perceived by potential hires and customers, meaning you’re less likely to attract the best talent in the industry. If you’re not hiring candidates with the right skills or experience required to perform the work, this will impact your company financially in the following ways: 

• Potential investors may not believe in the capabilities of your workforce 
• Negative reviews and word-of-mouth from current and former employees may discourage potential customers
• Difficulty in attracting top-quality candidates could slow business growth

How to calculate the cost of turnover at your organization 

As we’ve seen, some employee turnover costs are easy to pin a number to; others require you to dig deep to determine how factors like low mood or poor employer branding financially impact your business. While each company must decide how turnover impacts their operations specifically, the below calculation is a good starting point: 

Add the following together to calculate the cost of turnover: 

• The average cost of hiring an employee (including all recruitment costs) 
• The cost of any signing bonuses or other benefits offered at the hiring stage 
• The hourly rates of any salaried workers (such as your recruitment and HR teams) who spend time on screening, shortlisting, interviewing, and any other candidate communications 
• The hourly rates of any team members who spend time creating onboarding sequences or other employee development materials 
• The hourly rates of team members who onboard new employees, set up their profiles, and go through the training with them
• The average cost of an employee ramping up to hit full productivity. For example, if it takes three months, this would equal 25% of the employee’s annual salary lost in comparison to retaining the previous team member. 

3 ways to reduce employee turnover rates 

High employee turnover is a business cost that many businesses will want to keep in check. Follow these three simple steps to retain talented employees and keep recruitment costs low. 

1. Offer fair salaries 

According to MyPerfectResume’s 2024 Workplace Trends Survey, 69% of people agree or strongly agree that employees will quit in 2024 if they don’t consider their salaries rewarding. On the other hand, when employees feel they’re compensated equitably and fairly for their skills, experience, and the value they bring to the company, their satisfaction and loyalty increase significantly. 

In a competitive job market, where skilled professionals have numerous opportunities, offering an attractive salary package is crucial in: 

• Minimizing turnover rates
• Saving on the substantial costs associated with hiring and training new employees
• Ensuring the organization maintains a strong, capable team that drives business success

2. Respect your employees 

Creating a positive company culture environment where transparency is valued plays a significant role in employee trust and loyalty. Show respect to your employees by: 

• Openly sharing information about company policies, goals, and the steps you’re taking to ensure equality 
• Rewarding their contributions to team and company goals, no matter how big or small, using a deliberate employee recognition system  
• Respecting their time and work-life balance by introducing flexible work arrangements, allowing them to set their own hours, and creating strict boundaries about sending emails or taking calls in personal time
• Encouraging them to share their ideas and feedback creates a collaborative environment where everyone feels heard and contributions are appreciated
• Prioritizing inclusivity, ensuring that every member of the organization feels valued and welcomed 
• Offering professional growth opportunities and investing in employee development programs

3. Provide enticing benefits 

Employees will leave if they don’t receive the personal and professional support they need from their employer. While comprehensive healthcare and retirement benefits are staples that employees can’t do without, modern benefits packages also offer a breadth of creative perks that can be a game-changer for your retention rates. 

A lifestyle spending account is a flexible way to package these benefits; employers fund each individual’s account each month, and employees choose how to spend their allowance on a range of eligible spending categories, such as wellness, professional development, childcare, etc. 

Our Benepass Guide to Launching a Competitive LSA outlines how an LSA can lower employee turnover rates in an organization with 1,000 employees. In this example, each person receives $100 per month into their LSA fund at an annual company cost of $1.2 million. 

The average turnover rate among U.S. companies between 2022 and 2023 was 17.3%, according to Mercer’s Turnover Study. This drops to 9.7% in organizations that score highly on compensation and benefits (such as those that invest in a flexible LSA). Therefore, we project the following results, based on an annual average salary of $57,200: 

• Total turnover costs when turnover costs are 50% of employee salaries = $4,947,800 without an LSA or $2,774,200 with an LSA 
• Total turnover costs when turnover costs are 100% of employee salaries = $9,895,600 without an LSA or $5,648,400 with an LSA 
• Total turnover costs when turnover costs are 200% of employee salaries = $19,791,200 without an LSA or $11,096,800 with an LSA

Download the complete guide to learn more about the ROI of a flexible LSA program. 

Keep turnover low with Benepass

Benepass offers a range of customizable benefits loved by employers and employees alike. Along with our employee-led LSA accounts, we also offer: 

• Pre-tax benefits, including Health Savings Accounts, Flexible Spending Accounts, and Health Reimbursement Arrangements 
• Perks programs, including Commuter Benefits, Remote Working Accounts, Wellness, Food, Professional Development, Family & Childcare Benefits, and Benepass Rewards and Recognition Programs 

Ready to save money and minimize disruption in your organization by retaining your best workers? Learn more by booking a free Benepass demo, or contact sales@getbenepass.com to connect with one of our benefits specialists.