An article from Forbes made the rounds last week with some pretty startling statistics:
- The average raise an employee can expect in 2014 is 3%, but given the cost of inflation, it actually amounts to more like 1% in additional spending power.
- If an employee leaves a company, however, they can look forward to a 10%-20% increase in salary. In extreme cases, they may even see as much as a 50% increase.
In other words, we’ve cultivated a system in which employees who are loyal to their companies are financially punished and those who jump ship every few years are financially rewarded. The cause? Well, one culprit is certainly antiquated HR tactics that only allows raises as a certain percentage of the employee’s current salary, regardless of external market conditions. Others argue that employers are not equipped to rapidly promote, develop, and reward their employees in ways that aren’t simply monetary. But regardless of the reason, what this information exposes is a fundamental lack of understanding about what turnover really costs an organization. When you consider all of the costs associated with employee turnover – including interviewing, hiring, training, reduced productivity, lost opportunity costs, etc – here’s what it really costs an organization:
- For entry-level employees, it costs between 30% and 50% of their annual salary to replace them.
- For mid-level employees, it costs upwards of 150% of their annual salary to replace them.
- For high-level or highly specialized employees, you’re looking at 400% of their annual salary.
Let’s play a game called “Fun With Math” A business loses 12 employees in one year, averaging one per month.
- Six of these employees were entry level, with an average salary of $40,000. It costs, on average, $16,000 to replace each employee at 40% of their annual salary, for $96,000 total.
- Four of these employees were mid-level, with an average salary of $80,000. It costs, on average, $120,000 to replace each employee at 150% of their annual salary, for $480,000 total.
- Two of these employees were senior, with an average salary of $120,000. At 400% of their annual salary to replace them, you’re looking at almost $1 million, specifically $960,000.
Add everything up and you’re looking at costs of over $1.5 million to replace just 12 employees. Numbers seem high? Fair enough – there are organizations that estimate replacement costs to be lower. So let’s cut the cost of replacing all of those employees to the lower end of what it costs to replace an entry level employee – 30% – across the board. Here’s how it breaks down:
- It’s going to cost your company $72,000 to replace the six entry level employees.
- It’s going to cost your company $96,000 to replace your four mid-level employees.
- It’s going to cost your company $72,000 to replace the two senior employees.
That means that at the absolute lowest estimated end of the spectrum – your best case scenario – you are looking at almost $250,000 as the cost of the turnover of just 12 employees. If your company has a quarter of a million dollars that it can just light on fire at the next office BBQ social activity, then maybe you don’t really need to invest in these areas. But my guess is that the vast majority of companies are simply not in that position. It costs less to retain than it does to replace. I once had a job where I had experienced an absolutely miserable working environment for months. At the same time, I had been able to advance a number of initiatives that had made a real impact..and I’d been able to do it with an absurdly small budget – one that was less than 0.5% of what the company thought it would take to outsource the same project. I knew it, and the company knew it. They wanted to keep me there and working, and to reward me for my efforts in a miserable working environment, I received a $2,000 raise. This amounted to less than 3% of my overall salary, and was so small that I barely noticed the difference in my paycheck. I didn’t ask for the raise and, frankly, wasn’t really expecting it. But when I received it, it did more to reinforce how little the organization valued me than it did to increase my morale. I had saved the company hundreds of thousands of dollars, and simple math told them that it would cost, with a conservative estimate, 50 times the amount of the raise to replace me. Think they could have dug a little deeper into those pockets for a raise that would have made me feel valued and appreciated and still have made a good business decision for the organization given the cost to to lose/replace me? Of course. It’s time to start taking the costs of employee turnover into consideration. When you factor in those costs, it changes the conversation about how the organization approaches compensation, benefits, training, development, engagement, and morale. It can be expensive to invest in these things without a direct line to return, but it costs significantly more to lose your best employees when they jump ship for a few thousand more dollars over the course of the year.
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I’m sorry, where are you getting 400% for employees making $120K? Everything I’ve found so far shows a cluster around 10-30% of the employees salary, including executives. Perhaps you’re adding an additional cost not sited in those studies. I will also be leaving a note on the original article.
Not that 10-30% is something to dismiss, I just prefer to know the source behind statistics before I share them.
I also responded on LinkedIn but I will post here as well. $120K is an arbitrary number – it could be anyone with a senior salary in a senior position. The 400% is an aggregate of a number of different studies I looked at when research this. If you’re only seeing 10%-30%, I have to say that seems incredibly naive and can’t possibly encompass all of the impact of an executive leaving. Just think about the impact of a senior person leaving a company: recruiting a replacement, on boarding the replacement, all of the staff/structural changes that the replacement will inevitably want to make, the middle/jr staff you lose because they follow the executive, the decrease in morale because of the loss which leads to a decrease in productivity across the staff that was impacted, lost opportunity cost all around. And that’s a very short list of the potential impact but it’s still something that 30% could not possibly cover.
The article implies that you can retain employees by giving them more money. A lot of studies show (and maybe some people know the feeling) that a raise gives only a short-term motivation and plays just a minor, however important, role in sustainable job satisfaction. Replacing a person costs a lot of money, no doubt about that. But I question the fact that more money will prevent people from quitting their jobs – more satisfaction does.
Hi Martin,
I agree with you wholeheartedly – money is just one of many many factors at play and I do not think you will retain a person long-term purely by bumping their paycheck. What I am saying is that it changes the conversation about how a company invests in other measures to keep their employees happy.
Money doesn’t play a minor role, it’s still one of the main reasons an employee leaves a company. Satisfaction encompasses multiple variables: pay, manager, culture, personal development, and so on. Since pay is a variable, not increasing pay leads to reduction in satisfaction overall.
“Money Talks”
Jonathan, if money was such a major factor than the person wouldn’t have accepted the job in the first place. When you look at root causes, money is rarely the core reason.
Hello! I’m curious as to where you found these statistics:
For entry-level employees, it costs between 30% and 50% of their annual salary to replace them.
For mid-level employees, it costs upwards of 150% of their annual salary to replace them.
For high-level or highly specialized employees, you’re looking at 400% of their annual salary.
Overall, enjoyed the article. Very informative and helpful!
Hi Jessica,
To be honest, I wrote this article about two and a half years ago and at the time I did a lot of research into the topic, and did an aggregate of multiple sources for those percentages. I made the mistake of not documenting what those sources were, so I don’t have them on hand anymore. But spend some time in Google and you’ll likely find some of the same materials I did. Wish I could be of more help!
Hi,
I really enjoyed the article and like many others am trying to find hard details on the cost of turnover. A shame you were not able to recall the sources for cost in terms of % of annual salary as I really wanted to use them in my current project where I created a model to predict the probability of resignation 🙁
I’ve searched around and found huge variation in figures from 20% up to 150%