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How Much Does It Really Cost to Replace Employees?

Good employees are the champions of your business. Their uniqueness and skills bring special qualities that help your company prosper. It can therefore be difficult to lose these types of high-quality individuals when they move on to other career opportunities. It’s challenging to see them go, but it’s even more challenging to replace these employees. No matter how much time you have to prepare for their departure, it’s often still difficult to find someone to fill their shoes. Replacing employees is also costly in many ways: it will take time, it will take funding, and it will take a lot of effort.

There are many reasons why employers may need to replace employees. Perhaps an employer wants to find more diverse talent or just isn’t satisfied with the current employee’s performance. Maybe the employee quit due to personal reasons. Or maybe an employer simply can’t afford the pay increase an employee is demanding. Whatever the case may be, employers typically need to find replacements quickly in order to maintain stability and productivity.

The Cost of Turnovers

Employee turnover can be costly for businesses, especially for smaller businesses or nonprofit organizations that don’t have tons of money to spend on hiring. Studies by Gallup say that replacing an employee can range from one-half to two times the employee’s salary. On the other hand, some studies by the Center for American Progress found that a replacement for an employee who earns $30-$70k is about 20%. The cost of employee replacement can range vastly; however, one thing is certain: it costs money.

Where Turnover Costs Come From

There are a few factors that correlate with the total cost of replacing an employee. When replacing employees, companies must advertise for the new position. Advertising can cost quite a bit, depending on where you’re publishing job openings. For example, LinkedIn charges $495 per job for 30 days, however it can cost much more if you plan on sponsoring advertisements. You may also have the need to run background checks, skill assessments, file administrative paperwork, and more. Every one of those actions require time and money, and the cost increases if you hire human resources (HR) or recruiting experts.

You also must consider the time and effort it takes to hire new employees. If you don’t employ a staffing agency or have a dedicated HR department, current employees must participate in the hiring process. While they’re helping with interviews, onboarding, and training, they’re probably not focusing on their normal job duties. This affects your company’s productivity, which then affects profits. If they’re helping the new hire acclimate to their position, they probably can’t fully focus on their own duties.

Onboarding Costs

Onboarding requires a lot of time and paperwork. After hiring an employee, you must enroll them in benefit programs, complete tax forms, create NDAs (if applicable), and more. If you’re not doing things virtually, this will put a dent in your paper and ink budget; however, it probably won’t cause serious damage to your bottom line. The real cost here is usually associated with the time it takes to complete this paperwork. To put things in perspective, let’s say that you hire someone to assist with the paperwork process, and this person makes $25/hr. If you hire 15 employees and it takes about 10 hours to process each individual’s paperwork, you’re looking at a total cost of $3,750 to complete everyone’s paperwork. If you hire more employees, such as 50 or more, you’re looking at a total cost of $12,000+ annually.

Onboarding also includes providing the hands-on tools of the trade. Your employee may need physical equipment to complete the job, such as laptops, tablets, headsets, and more. If you don’t have these in the office already, you will have to purchase everything your new employees will need to excel. Reports from SHRM show us that onboarding can cost about $4,000.

Training Costs

New hires typically come equipped with the skills needed to perform on the job, but each company operates differently. No matter their experience level, a new team member will still require some sort of training process. Your training plan should educate the new employee about the ins and outs of the company, including introductions to key individuals, and lessons on your products and/or services–all so they may ultimately apply this knowledge to their position. Similar to the onboarding process, this can be costly, because it takes time to train the employee. If the trainer earns $25/hr and it takes about 60 hours to train an employee, you’re looking at a total cost of $1,500 just to train your new employee.

Training affects productivity, which is the real cost of turnover. While an employee is learning about the company and how to do their job, they’re not necessarily contributing to the growth of the company. Employees still have to figure out how to complete their responsibilities and acclimate themselves to the work environment. It takes a while for them to learn the job before they start making a true impact on the company.

If Things Don’t Work Out…

When a new hire begins working and enters the probationary period, you can only hope that the employee will acclimate to the company culture, learn quickly, and work hard. Unfortunately, things happen and new employees aren’t always the right fit for the job. Perhaps the employee didn’t think the company provided them with sufficient opportunities, challenges, culture, or growth. Or, perhaps the company didn’t believe that the person was working well with the tasks at hand. Regardless of the reasons, an employee who’s unfit for the job or is dissatisfied will eventually leave.

If an employee resigns or you decide to terminate that employee, you’ll have to restart the entire process. You’ll once again have to post new job listings, potentially hire recruiters, create paperwork, and accomplish many other tasks to replace that person. If things don’t work out with the new hire, you’ll have double the costs that you originally planned.

This is why retention is vital. If you truly want the employee to stay, you need to show that employee why they should want to work for the company and why they should stay. Many people are looking for jobs that give them more than just a paycheck. They’re looking for a place that is a welcoming environment, a place to grow, and a place to learn. If they are not getting what they need from a company, it’s likely they’ll leave. This will force you to find a replacement once again.

Replacing Talent Isn’t as Easy as You Think

Everyone is replaceable” is a familiar refrain. It’s true that businesses can replace employees, but it does come at a cost. Hiring, training, and onboarding employees can cost thousands of dollars, but finding the right people for the job is a difficult task. When you lose valuable employees, you lose innovators, problem solvers, and experts of your services. Talent like that is hard to replace. Some employers have found that they’ve had to hire multiple employees just to replace one particularly talented worker.

Employees who’ve been at a workplace for many years typically have higher salaries and more lucrative benefits than more junior hires. Sometimes employers simply can’t keep up with their desired salaries, so they are forced to terminate the employee to cut costs. In order to save more, some employers seek out new employees who have less experience and a weaker skillset. They’ll hire this new person at 2/3 the cost of the original employee’s salary. Sure, that new hire is technically more affordable, but experts say it will take about one to two years for that employee to be “fully productive”. Therefore, you’re replacing a high-quality employee with a new employee who may not demonstrate their full worth until much later. When you look at it this way, you’re losing years of productivity. This will happen every time you trade in a valuable employee’s expertise to save a buck.

Overview

Ultimately, replacing employees is costly time-wise and monetarily. Therefore, it’s best to keep employees content, motivated, and productive so they’ll want to stay. If employees are unhappy at work due to the lack of challenges, toxic company culture, poor management, or lack of growth, they may want to leave the company, forcing you to find a replacement. Studies by Work Institute show that voluntary departures have increased by 88% since 2010. This indicates that employees aren’t afraid to leave their work environments.

You also need to be incredibly thorough when looking for new candidates. You can’t possibly know how someone will truly perform when they start the job, but you can certainly conduct a meticulous interview process. If you come equipped with the right questions about what the candidate is looking for in a job and run through a rigorous examination of their skills, it’s likely that you’ll find a good fit for the position. It’s also a good idea to give people tasks during the interview process so you can see how they work.

It’s best for your business to retain any talented team members, but it is possible to replace even the most treasured employees. You simply have to be prepared to put in the time, effort, and money to do so.


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