Few things are more frustrating (or heartbreaking) than losing a great employee. But the impact changes like these can have on your company go far beyond a hit to morale. You’re also losing time spent on professional development, money due to reduced productivity, and more.

Though turnover can be tricky to address, knowing the true impact of a skilled employee’s departure is crucial. Read on for a thorough guide on how to calculate the cost of employee turnover–and how to lower your attrition rates.

The Basic Equation

To figure out how employee turnover affects your business, you’ll need to understand the basics. Fortunately, the process of determining your turnover costs and turnover rate shouldn’t be too complex – at least, not yet.

When you’re calculating your overall employee turnover cost, you’ll need to figure out how many employees have left and multiply that number by the average cost of each departure. If you write that out as an equation, it looks like this:

Number of departures x average departure cost

Meanwhile, you can also find your turnover rate through a relatively straightforward process. It also starts with the number of employee departures, but you’ll divide that number by the total number of employees at your company:

Number of departures/overall number of employees

But let’s rewind a bit. In the first equation, did you notice the lack of an explanation for calculating employee departure costs? That’s where things start getting more complicated.

Gather All Variables

The employee turnover equations shown above are attractive due to their simplicity. However, the process of calculating costs associated with employee departures is much more involved than you might expect. You’ll need to consider all kinds of variables, including:

• Reduced productivity before a departure. Even the best workers are less motivated once they give their two weeks’ notice. That means they’ll create less value for your business between the time they give you a resignation and the time they leave.
• Productivity issues while you try to fill a vacancy. With fewer employees, your office simply won’t be able to do as much work as usual. Even if other workers try to fill the void, they’ll be less productive in their own roles as a result.
• Costs for covering a former employee’s workload. The expenses of doing the same work with fewer people aren’t limited to reduced productivity. You’ll also need to consider paying overtime to the employees who are still there, whether they’re hourly or salaried.
• Expenses related to the hiring process. Finding replacements for people you’ve lost is essential, but it certainly isn’t free. Accomplishing this goal comes with a variety of costs such as advertising and time to interview.
• Time spent onboarding a new employee. Unfortunately, the costs won’t stop once you find someone new. You should also factor in the pay rate of training managers and the amount of time it will take for your recent hire to reach total productivity.

Generally speaking, you can divide these costs into two categories – “hard costs” (expenses related to the actual separation and replacement processes) and “soft costs” (expenses related to things like productivity loss and increased workloads). With that said, costs in both categories can have a very real impact on your business. As a result, it’s crucial to take both hard and soft costs seriously.

Important Equations to Consider

Not all expenses tied to employee turnover are easy to determine. Fortunately, equations exist for some of the less obvious expenses. Unfortunately, the resulting costs are probably much higher than you’d expect. In fact, the average cost of replacing highly-paid employees is 213% more than their yearly salary. Once you take a closer look at all the factors in play, you’ll understand why that’s the case:

Cost of Disengaged Employee

Employee disengagement can cause monetary losses even before an employee leaves your business. You can calculate how high these expenses are by following this formula:

Disengagement cost x employee’s daily pay x days between employee’s decision to leave and last day on the job

Are you unsure how to quantify the first variable here? According to Gallup, disengaged employees cost their companies $3,400 for every $10,000 in salary – equivalent to a rate of 34%. Thus, you can use 0.34 for this purpose.

Cost of Productivity Loss

The process you’ll follow to determine lost productivity while trying to find someone to fill a position depends on whether or not the key performance indicators (KPIs) are linked to revenue. Both of these processes use the same equation:

Productivity target/working days per year x days until a replacement is hired

For employees with KPIs tied directly to revenue–salespeople, for example–finding their productivity target is as straightforward as it gets. Plug the dollar value they’re expected to generate annually into the equation.

Figuring out a measurable productivity target for employees with KPIs that aren’t revenue-related is trickier. Your best bet is to determine the performance metrics and how they are measured from a financial standpoint. Even in fields like marketing (where lead generation is a standard indicator of success), you can look at how much of your company’s revenue is generated by the leads they generated.

Cost of Productivity Loss for Employees and Managers

Even when one of your best employees has called it quits, you still have a job to do. In most cases, some tasks will have to be temporarily delegated to someone else. And whenever you need one person to do two jobs, your overall productivity level will take a hit.

There are a few different ways to figure out how much productivity your employees are losing. One way is by looking at how they’re spending time on the job:

Hours spent on additional workload x hourly wage

You can calculate the latter variable by dividing their salary by 2,080–the number of hours in an average year of work. Still, the catch with this method is that it requires your already-overworked employees to track their time carefully. Instead, it may be wiser to use a more generalized formula. Research shows that covering another employee adds roughly 30% to a worker’s daily pay:

Cost of one day’s work x 0.30

Cost of Reduced Productivity for New Hires

Even if you’re able to hire the most qualified, motivated new employee in the world, they won’t be able to match their predecessor’s output instantly. That lower productivity rate will cost you in the months and years to come:

Cost of productivity x daily pay rate x number of days needed to catch up

To complete this formula, you can use 0.25 for the first variable. Determining the third variable is trickier–it could be based on the time needed to complete training, the point at which your new employee can independently complete specific tasks, or something else entirely. Talk to other people in your organization to determine what metric works best for you.

Reducing Your Attrition

Once you know how to calculate the cost of employee turnover, it should be easy to see just how much impact a single person’s departure can have on your business.

Of course, the numbers don’t tell the whole story. Attrition is likely to lower the morale of the employees who are still at your company, too. That means the best way to deal with turnover is to prevent it from happening in the first place. That’s where the experts at PeopleAK come in. 

PeopleAK garners over 40 years of experience in business consulting and executive recruitment. We know that business strategies are not one-size-fits-all so we work hard to get to know your team, company, and goals to find the best approach for your unique situation.

PeopleAK has worked with many companies to reduce turnover costs and we can help you build a stronger organization with the team you have. If you’re serious about decreasing your turnover rate and want to motivate your employees, PeopleAK is on your side.