The Real Cost of a Lost Employee

Replacing top performers can cost businesses up to 213% of the position’s yearly salary

Some managers and CEOs feel like they’re saving money when a highly-paid employee leaves, but this often isn’t the case. In fact, replacing a worker, especially a senior-level one, can be a surprisingly expensive and time-consuming process, even if the new employee is being hired at a lower rate than the departing worker. The expensive nature of this process is just one of the reasons why it’s more important than ever for organizations to focus on reducing employee turnover, especially when it comes to retaining their best-performers.

Just how much do the experts believe it costs to replace an employee?

A study published by the Society of Human Resource Managers (SHRM) found that it costs an average of more than $4,000 and more than 40 days to replace an employee. Other SHRM research suggests that for management level positions, this average cost increases to around 6-9 months of the employee’s salary – which can often add up to tens (if not hundreds) of thousands of dollars, depending on the size of the organization and the specific level of the employee in question.

For example, the SHRM study indicates that if a senior manager making $150,000 leaves your firm for another company, it could cost your firm more than $100,000 in lost productivity, time, and funds used to advertise for, interview, decide upon, and train the new employee. If such turnover is continuous in your organization, it can seriously disrupt operations and reduce employee (and possibly investor) confidence in company management.

Other experts believe that the replacement costs for certain positions could be even higher; a study published by the Center for American Progress (CAP) found that, on average, it took:

• 16% of an employee’s yearly salary to replace a worker at a “low-paying, high-turnover job,” (one making less than $30,000 a year). For example, a cashier making $20,000 a year would take approximately $3,200 to replace.

• 20% of an employee’s yearly salary to replace “average-paying, average-turnover jobs,” (those paying more than $30,000 and less than $75,000, a salary range consistent with about nine-tenths of American workers). For example, an office manager making $55,000 a year would take approximately $11,000 to replace.

• Up to 213% of an employee’s yearly salary to replace “very high paying, low-turnover positions” (jobs paying $100,000 and more.) For example, a CEO making $300,000 a year could potentially require up to $639,000 to replace.

When all positions are taken into account (excluding executives and physicians) the CAP study found that it takes, on average, 21% of an American worker’s annual salary to replace them

Why is replacing an employee, especially a high-level one, so expensive?

Clearly, replacing an employee isn’t a financial walk-in the park. But what factors make it so expensive? One of the biggest reasons why employee replacement is so costly is the lack of productivity that new personnel experience in the first few weeks or months. Even if a new hire is an excellent worker and achieved outstanding success in a similar position at another firm, it can still be a challenge to adjust to new systems, processes, and procedures, as well as to adapt psychologically to a new work culture.

While this ‘learning curve’ can occur quickly, especially in entry-level and non-technical jobs (like low-level sales positions), it can take much longer in other jobs, especially those involving technology. Many coders, engineers, and high-level technical managers not only have to adapt to a new company, but they may also need to learn new software systems or even programming languages in a short-period of time to keep up with their co-workers.

For high-level, non-technical positions, a new worker’s biggest challenge may instead be learning how to foster the right relationships, both within and outside of their organization. A new CEO, for example (especially one who has been brought in externally) might not yet have trust-based relationships with people at different levels of the company, and could easily miss out on essential insights (or warnings) from employees. In some cases, new executives never match the performance of their predecessors, which is exactly why it can be incredibly costly when high-performing e-level employees leave.

Smart, customized benefits programs can help retain the best workers at an affordable cost

So, what’s the key to reducing the cost of employee replacement? It’s simple: Make sure your key performers don’t want to leave in the first place. When it comes to worker satisfaction, salary is important – but it may be more important for a worker to feel that they are truly valued and taken care of by their employer, and a highly-customized benefits package is a great way to do it. Truly comprehensive benefits packages can help an employee be more productive, streamline their financial future, and give them the flexibility to be the best person they can be, at work and everywhere else.

To learn more about how highly-customized employee benefit packages can help your organization retain its best workers, contact Karp HR Solutions today for a free consultation.