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The Cost Of Employee Turnover

The Cost of Employee Turnover

Employee Incentive Plan for Engineers

Current economic climate has often made the recent job search a tough journey to endure. Traditionally, employees were rewarded for staying with a company for the extent of their career. Bonuses, retirement, and quarterly raises were always part of the deal, acting as incentive to stay with the company longer. However, a recent article published by Forbes suggests that in the current job force climate, those that stay with a company are actually making much less than others that jump ship and move companies. Statistically speaking, Forbes reports that staying at a company for more than two years will hurt your overall lifetime earnings by 50% on average. So what’s changed from the good ol’ days?

 

Recession Reality

Based on outdated rules and HR tactics, raises for employees are at a very low rate and are measly when the inflation rate is factored into the equation. On average in 2014, an employee could expect a 3% raise overall. Coupled with the current approximate 1% U.S. inflation rate, this leaves employees with only 2% (or less) of actual increased annual spending power after everything is said and done. If inflation rises higher, an employee who stays with their company can actually lose spending power year over year. Compare these figures to when an employee leaves a company; their average raise and salary can be expected to increase 10-20%, sometimes even more!

Another reason for the problem of low raises and salaries is the slow return from the recent recession. During uncertain economic times, companies may freeze their payroll and decrease salary offerings based on “market trends”. The longer these practices continue, the more likely they start to become the “norm” rather than a temporary solution to the recession. Fear and media hype revolving around the length of the recession plays its role as a scapegoat for companies to shrink their payroll.

As employees, the lack of talented human capital is helping to make a better case and negotiate for higher pay. Many times however, despite best efforts, low salary offerings continue. This then forces employees to consider changing companies and receive higher pay. In turn, this process ends up hurting companies’ bottom line from employee turnover and replacement costs.

 

What Employee Turnover Costs

Every time a new employee is needed, it costs the organization hiring dividends. Between recruiting, interviewing, training, productivity losses, etc; it costs approximately 30% to 50% of that employee’s annual salary to replace them. Something else that may be overlooked is the cost to off-board an employee when they leave. Here are a few factors from the Society for Human Resource Management to consider when calculating the cost of turnover.

Off-Boarding Costs

  • Severance pay
  • Benefits continuation
  • Impact on unemployment insurance
  • Exit interviews
  • Admin for record-keeping, payroll, benefits, etc.
  • Amortized investment in employee for training, professional development, dues, etc.

Per-Hire Costs (External)

  • Advertising and marketing
  • Background checks
  • Campus recruiting
  • Consulting services
  • Drug testing
  • Employee referral payments
  • Immigration expenses
  • RPO fees
  • Relocation
  • Signing bonus
  • Travel expenses

Other expenses to consider include temporary labor costs to cover positions during the hiring process. Not to mention, potential for loss of customers or loss of productivity on team-based projects, due to understaffing or poor customer service during a time of turnover. These costs do add up and can easily go well beyond the 50% of annual salary calculation, especially if they are high-level or highly specialized employees.

 

Other Advantages of Switching Jobs

Based on the current hiring model with certain HR practices enacted during the recession now becoming “normal”, more employees are finding that if they switch jobs they can make more money, especially by moving to a direct competitor. Often times companies set standards on amount of promotions you can gain, and the limit a manager can raise your salary. If you stay with a company whose practices limit long-term employee incentives, it’s easy to get stuck in promotional limbo. Other employees may be up for promotion first, however based on standards set by the company, you may be next in a very slow moving line.

However, by applying for a different position with another company, this may qualify you for a higher position based on your current experiences. This could open up higher salary opportunities as well. It’s common that competitive companies may be willing to pay more knowing that they are getting experienced talent and are not afraid to pay more in order to keep it.

So if the “grass is greener” mentality truly reigns supreme in today’s world of employment, the question for organizations is, how do we retain the best talent and avoid the “up and out” culture?

 

Retention Costs Less Than Replacement

Contrary to popular belief, companies can change their practices to focus on talent retention rather than limiting employee progress; in turn, saving money in the long run. The incentives and initiatives that a company puts in place can change employee attitude about building a culture that makes people more likely to remain rather than seek alternatives. Showing employees that they are worthwhile assets by increasing raises and demonstrating their worthiness is the first step. A little incentive can go a long way, and if a company shows the employee that they are worth having (the best motivation is sometimes monetary!) then the employee may feel happier and not be quick to seek alternative employment or feel underpaid.

Another important policy for organizations is to develop internal promotional growth opportunities and programs. Organizations that can show employees rapid growth opportunities and that are built to make changes quickly are more likely to keep their best talent around. If companies continue the practices of raises based on percentages of income, or out-dated promotional restrictions, employees are more likely to feel underpaid based on their skills and expertise in their current role.

The bottom line is that instead of blindly following “market trends” or old HR tactics, truly figure out what value you place in your employee talent as a company. Not many businesses have thousands of dollars to waste replacing employees due to turnover costs, and the culture of your company will thrive if employee talent is weighed heavily on your success and bottom line numbers. K & K Technical can help you develop employee incentive programs, which will increase employee retention and lower turnover rates. Making small changes to promotion strategy and incentives for employees based on skills and professional development programs can go a long way in retaining talent and being ahead of the competition in the long haul.

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