Employee Turnover

Understanding the Real Cost of Employee Turnover for Australian Employers

Direct and Indirect Costs Every Business Should Consider

In the life of an Executive, one of the KEY deliverables is to reduce costs wherever possible keeping an eye on the bottom line… what is not often realized is the direct & indirect costs of employee turnover.

Employee turnover is a reality for every workplace, but its true cost often goes beyond just replacing a departing staff member. For Australian employers, understanding both the direct and indirect costs of turnover is essential for maintaining that healthy bottom line and a productive workforce.

I hear so many horror stories of why employees leave their employer that it pays to give more attention to this whole issue of employee departures and the effect it has on business and the employees, ultimately, we should be thinking about Retention Strategies…

Direct Costs of Employee Turnover

Direct costs are those that you can easily quantify and trace back to the process of replacing an employee. They include:

• Recruitment Expenses: Advertising job vacancies, engaging recruitment agencies, and conducting interviews all add up; time is money… Depending on the role, these costs can range from a few hundred to several thousand dollars.
• Onboarding and Training: New employees require orientation, training, and sometimes formal courses. This includes the time spent with trainers and managers, as well as materials, systems access and compliance courses.
• Temporary Staff Costs: Covering the workload with temps or casuals while you search for a permanent replacement can be expensive, especially if overtime rates apply.
• Separation Costs: These might include final pay (inclusive of notice period), accrued leave payouts, and sometimes redundancy payments where applicable.

Indirect Costs of Employee Turnover

Indirect costs are less obvious but can have a significant impact on your business over time:

• Lost Productivity: When a team member leaves, the remaining staff often need to pick up the slack. This can lead to decreased efficiency and increased stress, affecting overall output.
• Knowledge Drain: Departing employees take with them valuable experience and insights, which is especially costly for specialized roles or long-term staff.
• Impact on Morale: High turnover rates can disrupt team cohesion and lower morale, leading to further resignations and a cycle that’s hard to break.
• Customer Service Challenges: Clients and customers may notice frequent changes in staff, which can harm relationships and the reputation of your business.
• Lost Opportunities: With constant turnover, management attention is diverted from growth initiatives to recruitment and onboarding, potentially missing out on new business or innovation.

Calculating the True Cost

While direct costs might be identified through invoices and timesheets, indirect costs require a broader view. Industry estimates suggest that the total cost of replacing an employee can range from half to two times their annual salary, depending on the complexity of the role and the seniority of the position.

Therefore, on a salary of say $90K this could end up costing your business between $45K to $180K, it’s frightening how much one departure could end up costing you; let alone consistently high turnover.

Strategies to Reduce Turnover Costs

• Invest in Employee Engagement: Regular check-ins, recognition programs, and opportunities for professional growth can help retain staff.
• Offer Competitive Remuneration: Benchmarking salaries and benefits against industry standards helps prevent staff from seeking greener pastures.
• Foster a Positive Workplace Culture: Open communication, flexible work arrangements, and supportive leadership can make all the difference.
• Provide Clear Career Pathways: Employees are more likely to stay when they see a future with your organisation.

In summary, employee turnover isn’t just a human resources issue, it’s a business risk that can have wide-ranging financial and operational impacts, let alone explaining this to your Board.

By recognising both the direct and indirect costs, Australian employers can take proactive steps to reduce turnover and strengthen their organisations for the long haul.

Please share this article with your executive and raise the topic at your next Leadership Meeting; it’s important that the whole Leadership team understand the impact of Turnover.

In my next blog I cover “Employee Value Proposition” commonly known as EVP.