How To Reduce Turnover Costs: It’s Not Just About Retention

November 20, 2024

Employee turnover is inevitable. And here’s the tough truth: there’s no quick fix to eliminate turnover costs. Nearly half of employees—44%—feel regret about their new job within the first week, and companies have just about 44 days to make a lasting impression that encourages retention.

People are going to quit. With the statistics in mind, what hidden costs are you taking on? Could working with a recruitment agency help mitigate these risks? Let’s break it down.

What is the Cost of Employee Turnover?

Turnover is costly—typically between 50% and 150% of an employee’s annual salary. That percentage comes from a simple formula that factors in the costs attributed to turnover (recruiting, training, productivity dip, and knowledge gap).

But the exact cost depends a lot on the employee’s role. Replacing a senior-level employee? Expect higher recruitment costs and a bigger knowledge gap left behind. For entry-level roles, the costs are lower but can still add up quickly when turnover is high.

The Cost of Losing an Employee (an example)

If an employee with a $90,000 annual salary leaves, their departure could cost you anywhere between $45,000-$135,000.

That’s with the turnover cost that can fall between 50-150% of their annual salary. Here’s how that breaks down:

Lower Range (50%): $90,000 × 0.5 = $45,000
Mid-Range (100%): $90,000 × 1 = $90,000
Upper Range (150%): $90,000 × 1.5 = $135,000

What is Attributed to Employee Turnover Cost?

As mentioned, turnover costs go beyond just recruiting expenses. Turnover costs factor in:

Time to Productivity (TTP cost)

New hires take time to get fully up to speed (anywhere from 3 to 12 months, depending on the industry). During this period, companies are covering employees’ salaries even though they haven’t yet reached their full output.

Yet, it’s important to remember that there’s no universal formula for calculating TTP cost. The method your company uses to measure productivity will shape the approach. Some organizations rely on strict KPI systems to track the time it takes to meet specific goals, while others use an estimated time to productivity set by the manager.

Here’s a formula you can use if you’re opting for the estimation approach.

TTP Cost = Employee’s Monthly Salary × Estimated TTP (in Months) × (1 − Productivity Percentage)

Time to Productivity Example

Let’s assume you predict a 3-month ramp-up period to reach full productivity. In the meantime, the new employee is working at 75% capacity, meaning there’s a 25% gap in productivity.

For an employee with a $90,000 annual salary ($7,500/month):

TTP Cost = $7,500 × 3 × (1 − 0.75) = $7,500 × 3 × 0.25 = $5,625

Knowledge and skills gap

When an employee leaves, they may create a knowledge vacuum where their unique skills and industry/company knowledge are lost. You can fill the vacuum by hiring someone new or training existing staff. The cost will depend on how specialized the employee’s skills were and how long it takes to fill the gap.

Knowledge Gap Cost = Value of Lost Skills × Time to Replace or Train

Knowledge and Skills Gap Example

For instance, if a specialized role is vacant for 2 months while the company hires and trains a replacement, the cost could be significant —both in terms of lost productivity and the time spent training the new hire.

Onboarding, equipment, and training

Onboarding costs include the cost of the individual facilitating the training (likely their manager), necessary training programs, equipment, software, and anything else they might need. These expenses are incurred while the employee is still getting up to speed.

Onboarding Costs = Training Time Costs + Equipment + Software + Other Setup Costs

Onboarding, Equipment, and Training Example

For example, if a company spends:

$2,000 on training (including employee and peer time)
$600 on a laptop
$100 on work-from-home setup
$150 on software licenses (Monday.com, CRM tools, design software)

The total onboarding cost is $2,850.

Recruitment costs

Recruitment costs include all expenses tied to the hiring process—job ads, time screening candidates, conducting interviews, and working with a recruitment agency (if applicable).

Recruitment Costs = Advertising + Screening + Interviewing + Agency Fees

Recruitment Costs Example

Recruitment costs can vary based on your recruitment approach—whether you handle everything in-house, outsource to an agency, or use a mix.

For example, working with a recruitment agency reduces the need for job ads and cuts down the time spent on screening and interviews. On the other hand, managing recruitment internally means reallocating funds to cover ads and staff time for candidate screenings and interviews.

How to Reduce Turnover Costs?

Reducing turnover costs can be tough—many factors like training and adjustment periods can’t be changed. The best solution is always to focus on employee retention. However, once an employee leaves, the costs to replace them are unavoidable.

The good news? You can still cut turnover costs by rethinking something you can control: your recruitment strategy (and its associated risks and costs).

Reducing Turnover Costs: Rethink Your Recruitment

Analyze Your Recruitment Approach: In-House vs. Agency

Recruitment costs will vary depending on your team’s approach to recruitment.

At first, the answer might be straightforward. Hiring in-house means you don’t have to pay the fees that come with working with an agency. But after breaking down the price tag associated with the resources and time incurred from staffing yourself, the result may not be as simple as you’d think.

Assess Costs and Hiring Risks

What happens if a candidate backs out after accepting your job offer? Or quits just one month in?

Chances are, if you are not using an agency, you’ll need to start the process again –posting the job, screening candidates, interviewing, reference checks… Rinse and repeat.

The job market moves quickly, and your top choices may not be available a few months down the line. BUT, if you are working with a recruitment agency, this would all be included in your guarantee. With no added costs, you will be presented with a whole new batch of available candidates to consider for your role.

Hiring is an investment of your time and resources, and with every decision, there’s a potential risk. Working with a recruitment agency can help you mitigate hiring risks

Time to Reconsider Your Recruitment Strategy?

You know your business needs best. In-house recruitment gives you control over who you want to speak to, and you may think that doing so means ensuring a better cultural fit. But a good recruitment agency can deliver both cultural alignment and the right skills.

With a reputable agency, depending on the complexity of the role, you can fill a role in weeks—sometimes faster—without the painstaking hiring process in-house.

While the upfront cost may be higher, partnering with an agency can save you money over time. Remember that turnover is most likely within the first 44 days. An agency helps reduce the risk of starting the hiring process over, saving you the added cost of replacements.

Book a Call. Hire Now.

That said, if past agency experiences left you frustrated with missed promises and slow results, we get it. That’s why we don’t charge for our time spent on searches and only charge once a successful placement is made.

Book a free call with us to discuss your hiring needs. We’ll answer any questions you may have and help determine if our agency is the right fit for you. No pressure—just a clear, helpful conversation to guide your next steps.

It may take some trial and error, but working with an agency that charges on contingency can save you time and money.