Estimates vary on how much it costs a business every time an employee is replaced. One study found that at the low end, a typical business spends over $3000 in direct costs to replace an entry-level employee who was working for $10/hour.
At the high end, it can cost two times an annual salary, or more, to replace a top executive.
The truth, however, is that no one fully knows how much it costs a business to replace an employee because there are many costs that are difficult if not impossible to measure.
PRICE TAG FOR REPLACING EMPLOYEES
When an employee is fired or quits—or simply stops showing up to work without giving any notice, or never shows up at all after being hired—the business will absorb certain known, direct costs to replace that employee: advertising a job opening, interviewing, screening, hiring, on-boarding and training.
But there are also many indirect costs to the business:
- DECREASED PRODUCTIVITY: It often takes a new employee months or even years to become as productive as the person he/she replaced.
- DAMAGE TO EMPLOYEE CULTURE: Every time an employee is replaced, remaining employees might start focusing their attention on looking for another job.
- DECREASED QUALITY OF SERVICE FOR CUSTOMERS: New employees are far more likely to make mistakes, and far less adept at addressing customer concerns and solving customer problems, all incentives for customers to take their business elsewhere.
- OPPORTUNITY COSTS: Employees who spend time poring over applications, interviewing applicants, filling out forms for new-hires, providing orientation and training for new employees, are not doing the actual productive work for which the business was created.
These are all real costs associated with employee turnover that a business pays. But how much is the price of each? No one really knows with any precision. But for many business owners, the cost of replacing employees is much higher than they assume it is.
Employee turnover rates of 200%, 300%, 400%, or more, drive up the operating costs of a business. But these are not increases in productive operating costs. Unlike costs associated with research and development of new products, or capital investments in new equipment or more efficient technologies, or expanding an employee workforce to increase production or serve more customers, growing costs associated with increasing employee turnover rates means a business is spending more money merely to tread water and maintain the status quo.
A reduction in employee turnover rates, however, directly helps a business’s bottom line. Lower costs associated with lower employee turnover can translate into:
- Higher profit margins
- Higher and therefore more competitive wages/salaries for higher quality employees
- Higher customer satisfaction, growing customer base, and larger market share
More, there’s a strong correlation between the employee culture at a business and the rate of employee turnover. Employees tend to stay where they’re happy, after all, and leave where they’re not.
IMPROVING EMPLOYEE CULTURE: EVERYONE WINS
So what makes for happy employees? How does one improve employee culture?
Here, a few reminders of what philosophers discovered long ago about human nature can be especially valuable: Employees, like all human beings, are happiest when they feel good about what they’re doing, when their actions serve a noble purpose, when they improve their own lives by helping others, when they produce something others want, need, appreciate, or otherwise value.
These basic features of the human condition are intrinsically, beautifully woven into the basic philosophic idea of what a business is: A human organization for the purpose of producing value for other people. The very purpose of a business, in other words, is to serve others by producing something others want, need, or appreciate.
So if you’re looking to improve the employee culture at your business, remind your current employees, or teach new ones, that the basic purpose of your business is honorable: to provide value for other people. Encourage and inspire them to focus less on themselves, more on the people around them, especially their coworkers, managers, and customers.
And never forget the concluding punchline: As employees become more valuable to more people at your business—assisting those with whom they work, learning new skills, finding efficiencies, solving problems, putting more smiles on more faces—they are creating new wealth for themselves. The more others value what a person has to offer, after all, the more wealth that person has.
You started your business to help others, right? After all, every start-up business plan is a plan…to help others. Even the idea of profit is inseparable from helping others by offering something they want, need, appreciate, or otherwise value. And helping your employees understand the noble purpose of your business is why we at Speakeasy Ideas created Upward: Because we know that when the employee culture at your business improves, and turnover rates and associated costs go down, everyone wins. Your employees win. Your business wins. Your customers win. You win.