Is Poor Compensation Costing You More in Employee Turnover?

Employee compensation is simplistic in its description. Companies often research the wage of specific job functions, establish a range, and pay the individual employee based on their experience and performance within the organization.

While this is a common practice, it doesn’t take the full value of the relationship into consideration. Aside from the actual compensation, there are other costs associated with employee turnover that are often not included in the valuation:

  • Hiring costs – Recruiterbox recently estimated the total cost of a new hire between $1,000 and $5,000.
  • Productivity costs – Along with the cost of recruiting and hiring an employee, the average employee isn’t capable of hitting the ground running. Every employee works through a period where they ramp up their productivity as they learn the systems, culture, and products within the organization.
  • Training costs – Employees often require specialized training within the organization. Training Mag put that cost at an average of $702 per learner.
  • Bad hires – A CareerBuilder study estimated the cost of a bad hire to be between $25k and $50k per employee. Productivity, morale, poor performance, and legal issues all increase the cost of a bad hire. 95% of companies make bad hires according to FurstPerson.

How To Calculate Employee Turnover Costs

To calculate the cost of turnover, we now need to identify all of the budgets for these items:

  • What is your total annual budget for hiring new employees? Include recruitment, signing bonuses, and relocation.
  • Do you spend any additional budget on hiring temporary or overtime employees to fill the vacancy?
  • What is your total employee training budget for new employees? Be sure to include your hourly costs of the employees assisting.
  • How long does it take an employee to reach maximum productivity? If it requires three months to onboard an employee, then 25% of their annual pay is the cost.
  • How many bad hires have you made? You can calculate this by the number of new employees that left within a year, or the total number of employees who left the company divided by the total number of employees. What percentage of their salaries was lost in productivity or additional administrative costs?

You may wish to generate this cost per position or provide an average across your organization. Using a comprehensive strategy for measuring the cost of turnover, it’s no surprise that costs can exceed tens of thousands of dollars. Not to mention problems with morale, overworked hiring staff, and recruitment budgets that are out of control.

Why Do Employees Leave?

Study after study states that pay is one of the reasons, but not the most important reason, for leaving a job. A salary is indicative of the value a company places on the work that an employee accomplishes. An excellent employee who is not paid competitively isn’t leaving because of the pay – they’re leaving because they feel the organization doesn’t value them.

Lack of upward movement is top reason for attrition.

Global Employed Labor Force

According to the Harvard Business Review, turnover in the employees’ lives typically happens during times of reflection – work anniversaries, birthdays, reunions, and other occasions where the employee assesses where they are in life and whether they’re advancing as quickly as their peers or as they would like.

In other words, a company can control the turnover of great employees by providing them other opportunities within the organization or providing them with salaries that better reflect their value to the company. Companies like Credit Suisse have internal recruiters that cold-call employees to alert them of job openings in the company. This move alone reduced attrition by 1% and saved the company an estimated $75 million to $100 million in turnover costs.

It may seem counterintuitive, but you can actually pay your employees better and save money in the long run.

Don’t Bother With a Counteroffer

You may be tempted to wait until an employee leaves before offering them more money. However, that’s not a good idea. The CEB Corporate Leadership Council found that 50% of employees who accept a counteroffer leave within 12 months anyway.

The choice to leave an employer is an emotional one. An employee who feels undervalued but is offered a stopgap to keep them isn’t going to find the offer credible.

89% of jobseekers are actively networking.

The majority of job seekers have been dissatisfied with their current career and are actively looking for a job. By the time they decide to resign, they’ve been working on a new opportunity for quite some time.

Compensation Need Not Be a Salary Increase

If you’re finding that employee turnover is costing you tens of thousands of dollars, we’re not proposing that you simply divert this cash into your employee’s bank account. However, you are much better investing the money into making your employee feel more valued by the organization beyond pay and benefits.

Here’s a List of 5 Strategies to Invest In to Reduce Turnover

  1. Invest in an employee engagement and survey tool like Emplify. This will improve communication between employees, collaboration, and will help you proactively attack issues causing the turnover.
  2. Implement cross-development programs within the organization to better align employees with their career aspirations.
  3. Only one-third of employees are aware of internal career opportunities. Establish internal recruiting, an internal online board, and internal job fairs that offer employees career advancement without the cost of replacing them with new employees.
  4. Invest in technology. Knowledgable workers are becoming more and more frustrated with passed down hardware. Inexpensive investments like dual screens will not only make employees happy, they’ll increase productivity by 20% to 30% according to Jon Peddie Research.
  5. Improve the work environment by investing in a comfortable workspace, by providing flexible schedules, offering work from home strategies, and other amenities such as transportation, education, and other professional development options.

And of course, it’s always free to recognize your employees for the value they’re bringing your organization!