The Cost of Starting Fresh

Several years ago, I was presented with a fancy certificate of recognition from a regional workforce development board for the work I had done with them on a grant that was focused on getting unemployed and under-employed individuals into skilled, full time roles. This particular grant was designed to take fees paid to the government in the H1-B Visa process and re-allocate them to organizations that were hiring in an attempt to offset some of their training costs. I had indeed worked closely with that group for a couple of years leading up to that but I had no idea that I had written more grants than anyone else in the state. I just thought it made sense and believed doing whatever I could to alleviate the significant costs we were absorbing to train new employees was part of my job… 

The initial grant I was dealing with would cover up to 50% of the new employee’s salary for up to six months, but I had to make a strong business case for the time and costs involved in their training to receive that much coverage. While I only saw 50% of the salary covered for the entire six months one time out of around 60 employees who were approved, every little bit helped because training new employees is almost always extremely costly to an organization!

I emphasized the importance of employee retention earlier by touching on how much more likely engaged employees are to stay with the company. Let’s look at the other side of that fence now by digging into some of the costs of bringing new employees up to speed when experienced employees jump ship.

Nearly every time I talk about the importance of leadership development for individuals transitioning into new or different leadership roles, as well as when I speak about the importance of employee retention - specifically, how much leaders at every level in that organization impact that retention - I mention a study shared by Gallup stating that “it’s generally estimated that replacing an employee costs a business one-half to five times that employee’s annual salary.” The recruiting and onboarding process accounts for some of that cost, but a significant portion lies in just getting a new employee up to speed once they're hired.

An Investopedia article I found recently shared this breakdown showing how the average time for a company to begin to break even on what they’re paying a new employee is around six months:

• Roughly the first month: After training is completed, new employees are functioning at about 25% productivity, which means that the cost of lost productivity is 75% of the employee's salary.
• Weeks 5 through 12: The level goes up to 50% productivity, with corresponding cost of 50% of the employee's salary.
• Weeks 13 through 20: In this timeframe, the employee usually reaches a productivity rate of up to 75%, with the cost being 25% of the employee's salary.
• Around the five-month mark: Companies can expect a new hire to reach full productivity.

So how does this tie back to the importance of employee retention? All of these numbers point directly to the costs associated with replacing an employee and getting the new employee to a point where they’re considered productive. But if we assume that the majority of people who leave an organization voluntarily are at least meeting all of their performance expectations on a daily basis, how much more does it really cost when we consider the entire swing on total productivity, and more specifically, the cost of all that lost productivity? And how much more are we losing when that person leaves happens to be someone who had been actively engaged, one of the two or three who happened to actually be rowing the boat, but was alienated by a manager who never developed those so-called intangible soft skills?

If that’s where the costs related to high turnover and poor employee retention stopped, I believe we already have a strong case for the importance of leadership development to help avoid what John Maxwell says contributes to as much as 65% of voluntary turnover. But that’s not where the costs stop! We haven’t even looked at how this impacts engagement with the rest of the workforce, and how that in turn impacts their productivity. Before we do though, here’s a thought for you to chew on…

Stop the Downward Spiral

As I opened the case for the importance of employee retention, I referenced something I found in a Harvard Business Review article stating “Increased commitment (the actively engaged team members) can lead to a 57% improvement in discretionary effort—that is, employees’ willingness to exceed duty’s call. That greater effort produces, on average, a 20% individual performance improvement and an 87% reduction in the desire to pull up stakes.” I followed that by looking at some of the costs on the opposite end of the spectrum; primarily associated with the time it takes to get a new team member up to speed. But what other issues are we exposed to between those two distant points?

While our actively engaged employees are far less likely to leave and they’re typically quite a bit more productive, the folks who are neither actively engaged or actively disengaged, as well as those who really are actively disengaged, don’t share that same level of attachment to our organizations. Lower levels of employee engagement certainly contribute to higher levels of voluntary turnover, but high turnover also has a direct impact on employee engagement and team morale! 

One article I found while digging into the negative impacts of high turnover shared that “High employee turnover is a warning sign of low morale among an organisation’s workforce, which is one of the factors that affects the productivity of the organization.” That article went on to reference some of the same things we looked above regarding the amount of lost productivity in the time it usually takes to train a new employee.

Another article from SparkHire said “If you have a high turnover rate, then there was likely an issue with employee morale years ago. However, once a high volume of employees commits to leaving, the level of morale drops even lower,” calling it an “infectious cycle”.

If we’re OK with giving up that 20% increase in individual performance and we’re OK with continuously working to find new team members who won’t be fully productive for months, I suppose we can disregard the importance of employee retention. But I don’t know that I’ve ever met an owner or executive who is OK with either when they have a complete picture of just how much it’s costing their company! Thinking back to what John Maxwell shared suggesting that “65% of people leaving companies do so because of their managers,” we begin to see a clear picture of the tangible impact we can expect if we provide leadership development tools for our supervisors and managers. I don’t know that we can expect to eliminate voluntary turnover completely, but cutting it by just a third would make a huge difference in overall performance! It makes so much more sense to me to just stop the downward spiral...

Moving forward with this idea, I’ll begin working through some recruitment and retention strategies that can play a key role in making that kind of tangible impact. Until then, it may be worth your time to see if the next time we’ll be offering our complimentary webinar on How Top Leaders Set the Tone for Recruitment & Retention fits your schedule…