Finding top talent in the trades is getting harder and harder as the skilled trades shortage continues. That said, employers must be intentional about employee retention to keep their best performers. In this blog, we answer several questions about the cost of replacing an employee:
- What is employee turnover?
- How much does it cost to replace an employee?
- What is employee retention?
- What’s the cost of hiring a new employee vs. retaining one?
Let’s start by defining the terms we’re talking about.
What Is Employee Turnover?
Employee turnover or “attrition” is the rate at which employees leave an organization – voluntarily (quit) or involuntarily (fired) – and are replaced by new employees. A high turnover rate indicates that employees are unsatisfied with their jobs, which is when companies need to start investing in retention efforts.
The Society for Human Resource Management (SHRM) offers a free Turnover Cost Calculation Spreadsheet to help organizations easily calculate the total cost of high turnover.
How Much Does Employee Turnover Really Cost?
In total, voluntary employee attrition costs U.S. businesses $1 trillion every year. According to a study by SHRM, the average turnover cost per employee is equivalent to 6-9 months of an employee’s salary, while others state it could cost up to two times the employee’s annual salary.
What Is Employee Retention?
According to Gallup, over half of employees who quit said their manager or organization could have done something to prevent it. Employee retention refers to the efforts that a company makes to keep its employees from leaving the organization, some of which may include:
- Offering competitive salaries and personalized benefits
- Providing opportunities for professional development and career advancement
- Fostering a positive and supportive work culture
- Soliciting actionable feedback from employees
- Addressing employee concerns quickly
You can calculate your company’s employee retention rate by dividing the number of employees who have been working for one year or more by the number of employees in those positions one year ago.
Unlike turnover rates, which you want to keep low, high retention rates are good. Companies with high employee retention rates are securing their most talented and valuable workers, which positively impacts the organization's overall performance.
What’s the Cost of Hiring a New Employee vs. Retaining One?
When an employee leaves, whether voluntarily or not, the company loses more than money. So, what’s the true cost of hiring a new employee vs. retaining one? Below we’ve listed some factors that contribute to the hard and soft costs of replacing an employee.
Hard Costs of Replacing an Employee
About 33% of turnover costs are hard costs, such as:
- Recruitment. According to SHRM, the average cost to recruit a new hire was nearly $4,700, and the process took about 41 days. When you work with a recruitment agency, that period can be cut down significantly based on its available pool of qualified candidates.
- Onboarding. SHRM estimates the average cost of employee onboarding is around $4,100 per new hire. A non-existent or poor onboarding process leads to lower productivity, higher employee turnover, and lower employee engagement, costing you much more.
- Training. Employee training doesn’t stop after onboarding. A study by the Association for Talent Development reported that organizations spent an average of $1,252 per employee on training and development initiatives in 2015.
Soft Costs of Replacing an Employee
Approximately 67% of the cost of high turnover is soft costs, such as:
- Human errors. The average employee makes 118 mistakes a year. It’s safe to say that new employees who don’t know what they’re doing quite yet will make even more mistakes, negatively impacting your bottom line.
- Lost knowledge. When an employee leaves, they take valuable information with them, such as the training and expertise they’ve gained while working at your company. It’s hard to put a price on that, but it’s an intangible cost of losing an employee.
- Low morale. Low employee morale comes with a high price tag. Employees who are unhappy at work cost American businesses up to $550 billion a year due to lost productivity. Don’t underestimate the cultural impact of employees leaving, either.
In short, when you retain an employee, your costs are much lower than hiring a new one. Your expenses are consistent: you pay for their salary, benefits, ongoing training and development, and raises. Hiring a new employee incurs a slew of additional costs that you won’t recoup for years to come.
Recruit Reliable Skilled Workers Faster With Skillwork
As America’s premier skilled trades staffing company, Skillwork exclusively works with employers and workers in the trades. If you’ve lost an employee and need a replacement or are looking to add top talent to your team, get in touch with us.
Our job is to connect outstanding tradesmen with employers that value them. Using a travel staffing model, we have skilled workers across the U.S. who are willing to step in as short- or long-term replacements when you need them, where you need them.
Shorten the recruiting process and get back to work faster by contacting Skillwork.