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Editorial · March 8, 2022

Employee Turnover Cost: How to Estimate It

By the editorial team · USA National Business Awards

Employee turnover cost is the full price a business pays when a worker leaves and someone new must fill the seat. Most owners count only the ad for the job. The real bill is bigger. A fair rule of thumb is about one-fifth of the leaver's yearly pay for most jobs, and much more for senior ones.

Why the question matters now

More people are quitting than at any time in the federal record. The Bureau of Labor Statistics said in its January 4, 2022 release that 4.5 million workers quit their jobs in November 2021. It called that a series high, and the quits rate rose to 3.0 percent. On February 1, 2022, the agency reported 4.3 million quits for December, a rate of 2.9 percent.

Those are national numbers, and every small firm feels them in its own way. When people leave in waves, hiring costs pile up fast. A business that knows its own cost per departure can decide how much to spend on keeping people.

Sources: U.S. Bureau of Labor Statistics, Job Openings and Labor Turnover Summary, releases of January 4, 2022 and February 1, 2022.

What the research says a departure costs

The best-known review comes from the Center for American Progress. It looked at 30 case studies from 11 research papers published between 1992 and 2007. Across the 27 case studies that left out executives and physicians, the typical cost of turnover was about 21 percent of a worker's annual pay.

For workers earning under $50,000 a year, the typical figure was 20 percent. For jobs paying $30,000 or less, it was 16 percent. The range was wide, from 5.8 percent up to 213 percent, because pay and skill level change the answer. Senior and highly paid roles sit at the top of that range.

Gallup gives a higher estimate. In a March 2019 article it said replacing one employee can cost from one-half to two times that person's annual salary. The two figures differ in what they count. The Center for American Progress said indirect costs are hard to pin down, and Gallup noted that turnover has costs that never show up directly on a spreadsheet, such as the loss of your best performers.

Sources: Center for American Progress, "There Are Significant Business Costs to Replacing Employees" (Boushey and Glynn, November 16, 2012); Gallup, "This Fixable Problem Costs U.S. Businesses $1 Trillion" (March 13, 2019).

A simple formula you can use today

You do not need a finance team. Add up five parts for one departure.

  • Exit costs: the manager's time for the exit talk, final pay and any payout of unused leave.
  • Vacancy cost: the work that goes undone or is paid as overtime while the seat is empty.
  • Hiring cost: job ads, recruiter fees, interview hours and background checks.
  • Training cost: paid hours spent on onboarding, plus the time a trainer or manager gives.
  • Ramp-up cost: the gap between what a new hire produces and what the leaver did, until the new person catches up.

Here is an example. A shop loses a worker who earned $40,000 a year. The research median of 21 percent gives about $8,400. Now build the same number from your own books. Say exit costs are $300, vacancy cost is $2,000, hiring is $1,500, training is $1,400 and ramp-up is $3,000. The total is $8,200. That lands close to the research figure, which is a good sign that your inputs are sound.

If your bottom-up total is far from the research number, check what you missed. Indirect costs are the usual gap. The Center for American Progress noted that only 2 of the 11 papers it reviewed counted indirect costs at all, because they are hard to pin down.

Sources: Center for American Progress, "There Are Significant Business Costs to Replacing Employees" (2012). The worked example uses made-up numbers for illustration.

Turn one departure into a yearly figure

Multiply your cost per departure by the number of people who left in the past twelve months. If you lost six workers at about $8,000 each, turnover cost the firm roughly $48,000. Then compare that with payroll. That share tells you how much the problem weighs on the business.

Track it by role, too. A departure in a skilled job costs far more than one in an entry role. Knowing which seats cost the most shows you where to focus first.

The Center for American Progress also reported that about one-fifth of workers leave their jobs on their own each year, and about one-sixth more are fired or let go for other reasons. That gives owners a rough sense of what normal looks like. If your rate is far above it, the cost is worth a closer look.

Sources: Center for American Progress (2012).

Where to cut the cost

Start with the people who leave. Ask each one why, in a short and honest talk. Patterns show up quickly. Pay, schedules, a weak manager or no path to a better job are common reasons.

Then fix the cheapest causes first. Clear schedules posted early, a real onboarding plan and regular check-ins cost little. The Center for American Progress argued that policies such as flexible schedules and better benefits can reduce turnover and save employers money. Gallup's work points to the same place: managers shape whether people stay, so training managers is a retention step.

Finally, slow the cost of each exit you cannot avoid. Keep written notes on how each job is done, so a new hire ramps up faster. Cross-train a second person on key tasks, so the vacancy hurts less.

Sources: Center for American Progress (2012); Gallup (2019).

A short checklist

  • Pick one role and price one departure with the five-part formula.
  • Compare your total with the 21 percent research median.
  • Count last year's leavers and compute the yearly cost.
  • Run exit talks and write down the reasons.
  • Choose one low-cost fix and measure the result in six months.

Do the sums once and keep them. A number you can quote makes the case for retention in any budget talk.

Sources

Filed March 8, 2022 · All news · Methodology