The Real Cost of Replacing an Employee

As we navigate through the year, an alarming trend is emerging: Monster says that 95% of workers are either actively searching for new opportunities or planning to start, signaling a potential mass exodus from current positions. This shift is compounded by a stark reality—75% of workers report feeling burnt out, primarily due to increased workloads from ongoing staffing shortages. Despite a slight optimism in recruitment sectors, with only 2% anticipating layoffs or furloughs, the looming wave of departures poses a critical challenge for businesses.

Understanding the cost of replacing an employee and the substantial impact of turnover is more crucial than ever. The expenses associated with replacing an employee extend far beyond mere hiring costs; they ripple across the facets of morale, productivity, and ultimately, company revenue. Recruiting and training new staff demands significant investment, a burden that deepens without efficient strategies like effective knowledge management systems to preserve essential company information.

Below, we look at the dynamics of employee turnover, exploring its causes, the direct and indirect costs it generates, and crucially, strategies to mitigate these losses.

What is Employee Turnover?

Employee turnover refers to the rate at which employees leave your organization and are replaced by new workers. To calculate the turnover rate, you would count the total number of workers who leave the company over a certain time period (for example, a calendar year). You would then divide that number by the total number of employees working at the company during that time period and multiply by 100 to get a percentage.

What Causes Employee Turnover?

You can generally classify employee turnover into two categories: voluntary and involuntary.

Voluntary turnover occurs when an employee leaves a job on his or her own accord. For example, an employee may be approached by another company and offered a job that they view as a better opportunity. Similarly, the employee may be actively searching and interviewing for a new role and receive a job offer from another organization.

Involuntary turnover happens when an employee is terminated from a position. This can happen due to poor performance (for example, not meeting expectations or not receiving proper training to fulfill the responsibilities of the job), violating employee guidelines, or creating a conflict in the workplace.

How Much Does it Cost to Replace an Employee?

The financial impact of replacing an employee is more substantial than many employers realize. Recent industry insights suggest that replacing an entry-level position can cost up to 50% of the salary, escalating to 150% for mid-level positions, and can soar to 200% for specialized, high-level roles.

Many factors contribute to this high cost, including the recruitment fee paid to recruiters, the time it takes to interview and hire, and the possibility of a demand for increased salary (the University of Pennsylvania has found that external hires demand 18-20% more in salary than internal hires).

And if these direct, hard costs are intimidating, what about the indirect costs that result after losing an employee and the company knowledge they have?

The Indirect Costs of Employee Turnover

It can take eight to twelve weeks to replace a knowledge worker when they leave your company. And once a new person joins the team, you will be faced with another four to eight weeks (at a minimum) before your new hire is fully trained, comfortable, and productive in their new role. 

As an example, if the lost employee is a salesperson who typically brought in $100,000 in annual revenue, your company will incur a $25,000 revenue decrease for every three months without a fully-trained replacement (and given the maximum time stated above, it may take five months to reach full capacity). 

During those first one to two months of onboarding a new team member, one of your best people will typically be tasked with training. Tasking top talent with training may ensure excellent results from your new hire, but you’ll also encounter hidden labor costs that can quickly add up to tens of thousands of dollars.

The Cost of Lost Knowledge

During an employee’s tenure, they develop knowledge and gather insights that are beneficial to the ongoing success of the organization. However, in many cases—particularly if your company doesn’t have a way to record or preserve that information—that knowledge lives only in their mind. When an employee leaves the company, they take that knowledge with them.

To avoid losing all of this information, you must make knowledge sharing a priority. Consider implementing an intuitive, easy-to-use knowledge management platform and making documentation and process updates part of employees’ job descriptions. Foster an environment that encourages collaboration, coworking, and cross-training to seamlessly facilitate the transfer of knowledge and avoid knowledge silos in the workplace.

How Does Turnover Affect the Company?

Beyond the tangible costs it incurs, employee turnover can impact companies in many other ways.

Disruptions to customer service

Employee turnover can cause gaps in customer service. For example, if a customer’s service request ticket isn’t immediately transferred to a new representative, they may experience delays in getting their issue addressed. Considering that customer service is a direct expression of a company, a decline in customer service can cause a company to lose its competitive advantage.

Reduced employee morale

Turnover can create uncertainty for the remaining workforce. Workers may begin to wonder why other employees have left for other jobs, or, in the case of involuntary turnover, if their own job is at risk. This can create low morale, decreased motivation, and lost productivity. 

Lower company profits

When morale suffers, the company as a whole suffers as well. A lack of employee confidence and low morale correlates with lower company profits.

How to Reduce Employee Turnover

To reduce employee turnover, you must make an effort to maintain a positive working environment that supports your workforce. 

Offer competitive pay and benefits

Employees often leave a company for a role that pays better or offers more attractive employee benefits. To retain your best employees, you must offer competitive pay and benefits.

Prioritize your company culture

Employees who fit well within their company culture have greater job satisfaction and are less likely to leave their roles. That means you must hire employees who add to your culture; however, it also means that you must continually prioritize creating a positive and inclusive company culture.

Commit to employee development

Employees want to know that they have room to grow within a company. If they feel like their job is a dead end, they will likely look to move somewhere else where they can advance. To retain your best workers, make sure to offer employee development opportunities and give your workers a clear path for advancing their careers.

Listen to your employees

When you take the time to acknowledge and respond to your employees’ thoughts and opinions, you demonstrate that you are committed to them and want to support them in their roles. That support can make them feel respected and loyal to the company, which can ultimately help reduce turnover.

Securing Long-Term Success Through Employee Retention

Over time, your employees accumulate a vast amount of knowledge, experience, and industry expertise. As a result, losing those employees can be costly, not only to your company’s bottom line but to the quality of your customer service and your employee morale. Fortunately, by preserving employee knowledge in a knowledge management platform and creating a comprehensive plan to reduce employee turnover, you can set up your company for long-term success.

This blog post was originally published in December 2017. It was expanded and updated in August 2024.

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About the Author

Sam Schneider

Samantha is an expert in organizational efficiency and effectiveness, drives our customer-obsessed culture, and is a champion for inclusivity at Bloomfire. Her leadership has inspired our team to create products that our customers love, which has been rewarded with great loyalty. Sam focuses on operational excellence, particularly in customer success organizations.