Employee Turnover: How Much Money is it Costing You?

By Scott Davis posted 07-01-2017 19:55



Any experienced franchise owner can tell you employee turnover is a fact of life. Often, it’s a painful, expensive, profit-sapping fact, and while every business owner realizes that losing employees – especially good ones – and replacing them hurts, not everyone fully grasps the actual damage being done to the bottom line.


Worse, many owners and managers don’t understand how much of the problem is avoidable.


So, how much does it cost to replace an employee? Estimates can vary wildly. A former colleague with deep experience in the world of HR consulting once explained to me that for management level and above his firm always assumed a figure in the range of 18 months base salary for the employee. He also cited the case of a major clothing retailer he’d worked with and said that when they lost a store manager, they had to sell 35,000 pair of jeans to cover the cost of advertising, interviewing, hiring, training and getting the new manager up to 100% of the old manager’s efficiency.


Fun fact: if my math is correct, that’s nearly 11 acres of denim.


A great analysis from Christina Merhar at Zane Benefits examines the turnover challenge from a number of angles, and some of the research she draws on is even more dire than my colleague’s assumptions.


Some studies (such as SHRM) predict that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. For a manager making $40,000 a year, that's $20,000 to $30,000 in recruiting and training expenses.


But others predict the cost is even more—that losing a salaried employee can cost as much as twice their annual salary, especially for a high-earner or executive-level employee.


Turnover seems to vary by wage and role of employee. For example, a CAP study found average costs to replace an employee are:


  • 16 percent of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year). For example, the cost to replace a $10/hour retail employee would be $3,328.


  • 20 percent of annual salary for midrange positions (earning $30,000 to $50,000 a year). For example, the cost to replace a $40k manager would be $8,000.


  • Up to 213 percent of annual salary for highly educated executive positions. For example, the cost to replace a $100k CEO is $213,000.


As a franchisor, most of your retention headaches will probably reside in those first two bullets. Let’s dive a little deeper into the numbers.


A Korn Ferry report last year found that “hourly [retail] store employees have the highest turnover rate at 65%, followed by retail distribution positions at 23%.” A Bureau of Labor Statistics analysis (also from last year) said


…the overall turnover rate in the restaurants-and-accommodations sector was 72.9 percent in 2016, up slightly from a rate of 72.2 percent in 2015.  It also represented the sixth consecutive annual increase, after falling to a cyclical low of 56.4 percent in 2010.


So let’s say, for instance, that you’re in one of these sectors. You’re doing well, you’re growing, you have three or four stores. Maybe you employ a total of 100 people. This means you can expect to lose, on average, 65% of your workforce this year. Assuming a few are managers, and just roughly ballparking the numbers, you could theoretically be losing a couple hundred thousand dollars a year.


I understand that there’s tremendous variability in this equation, so I’d encourage you to dig a little deeper in order to understand more precisely how badly you’re being affected.


Regardless of what you find, though, I’m willing to bet it won’t be a number that makes you happy.


If you are bleeding cash at an unacceptable rate, what can you do?


Great question. Tune in next time where we’ll discuss some ledger-friendly ideas to help strengthen retention.