The Hidden Costs of Replacing an Employee that Total Over $65,500
Everaldo Coelho - http://www.digitalcameraworld.com/2012/05/31/gallery-the-most-amazing-lighthouse-photographs/

The Hidden Costs of Replacing an Employee that Total Over $65,500

Employee retention is one of the most overlooked aspects of managing your team…right until you start losing good employees. It costs much more than you might expect to replace them. I've read a bunch of articles quoting huge numbers for replacing an employee, but I was skeptical. 

Below, you'll find a breakdown of the kinds of real costs that go into those numbers everyone quotes. I surprised myself once I dove into the details.

The Surprising Costs of Replacing Your Employee

Note: All salaries are assumed to be $100,000, which is $40/hr assuming you work 50 hours a week for 50 weeks a year. Adjust the numbers accordingly if anyone costs more or less for you.

Cost #1: Sourcing a Hire

Unless you’re a really hot company, it’s unlikely that great people are beating down your door to fill open roles. And even if you are well known, the best people probably aren’t refreshing your jobs page for an opening. You have to go find them.

You can source candidates a ton of different ways, but they all cost money either in the form of payment to another company or in time invested by one of your employees.

With just a few attempts at sourcing some good hires, between third party costs and labor in your company, sourcing costs can easily reach over $26,000. The scariest thing is, you haven’t even interviewed any of these candidates yet!

Cost #2: Interviewing a Hire

Now that you have a full funnel of candidates kickstarted, you start the dreaded interview process. You’ve got to filter through all their LinkedIn profiles, social accounts, resumes, and cover letters to find the gems who will then navigate your hiring process.

Here the costs are a bit more hidden. It’s all about lost time for you and various team members. What other great work could your team be doing instead of working on candidate hiring? Every minute spent hiring is a lost dollar invested in your business.

Assuming you have a clear funnel where you only have to look at 120 resumes, only have a third of them make a phone screen, a quarter of those make it to in person interviews, and you prep 3 offers, interviewing costs you over $5,000. For some specialized roles it could be significantly higher if you have many more interviews and phone screens.

Cost #3: Onboarding a New Hire

Congratulations! You found the candidate you’ve been looking for. Now you need to onboard them so they become a productive, integrated member of your team. Again, you have hidden costs. Now, you have losses both in how productive a new hire is versus a veteran on your team, and your team training them (an important investment, but also a significant time sink for your team).

When you hire an employee, there’s often some kind of bonus you need to give them. It might be a salary bump, moving costs, or something else to sweeten the offer. It’s part of the cost of doing business. When you combine that with your costs as they start on your team and get up to speed, onboarding can cost you over $10,000.

Of course, we’re assuming your hire works out, which unfortunately, it won’t always. You can go ahead and double these costs and many of the ones in earlier sections if you have to go back to the drawing board on another candidate.

Cost #4: Lost Productivity

While your team member has departed, the show must go on. The rest of your team has to cover for them, whether that means writing their code, calling their leads, or finishing their reports. As much as you’d like to think the rest of the team can just make up for them, if the hire really was good, that’s impossible.

When someone leaves, team members are distracted. Those that were close to them in particular will be less focused and productive. They’ll probably grab beers with their friend before they leave, when they otherwise may have worked late.

Meanwhile, if you push your team to cover for them, the stress and extra hours can affect their physical and mental health, which will lead to vacation and sick days. If hiring drags on, you’ll probably hire a consultant or freelancer to cover which could easily exceed $100 an hour for their work.

All of this combines to lead to a Productivity loss cost of over $24,000.

So let’s add this up…

 

 

 

 

Ouch! Replacing even a single team member is expensive! And this assumes you can pay a new hire the same as the past hire and can hire someone relatively quickly, which are both unlikely in today's competitive market

Wouldn’t it be a lot cheaper to retain all your good people?

How do you avoid losing your good employees?

Next time a good employee asks for a raise, investment in equipment to help them on their job, help in developing them in their career, or a morale boosting opportunity is presented, consider the cost of losing them before saying, “we have no budget for this.”

If your manager is blocking you from helping your team, remind them what you’re asking for is a lot less than the $65,000 cost to replace a lost member of your team (let alone the cost of multiple losses!).

While free lunches, ping pong tables, extra vacation days, and other perks are a nice bonus, they aren’t what keep people at a company. Even raises only satisfy people for a short period of time.

What really retains teams is managing people well.

This comes by having discussions with them about their personal growth & goals, company and self-improvement, and recognizing the things that are important to them personally.

I know that’s easier said then done. You have a million things on your plate as a leader and what little time you can spare has to be maximized. And it probably isn’t right now.

You have notes on people all over the place. One on ones are sporadically effective, because you may not always be prepared for the next one. Goals are a great idea in theory, but they’re buried in your HR app you can’t stand. There must be a better way.

That’s why I started Lighthouse. It helps you stay on top of what matters quickly and efficiently for each of your people. It’s designed with managers like you in mind, because I’m a manager myself.

If you want to be the manager people love to work for & save the costs of replacing people, sign up at GetLighthouse.com.

Brandon Hoyer ⭐

Solutions Seeker experienced in Operations & HR Management | Process Improvement | Open to Networking Opportunities

8y

Great article Jason! Thank you so much for your in depth insight into this. Someone recently told me that the main reason people leave is due to poor training... I guess this fits in with a lack of leadership, no?

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Senthil Kumar

Techno-Functional Business Analyst | Treasury & Capital Markets | Kondor | Finacle | Summit

8y

Very Nice Article Jason.

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Lee Wright

Founder of The History List and President of The Pursuit of History

8y

Nice job, Jason, putting a number no this. As you note, this may understate the impact. The costs, in all respects, to a move by a senior employee in a large firm are probably much greater, as are situations in which the employee was key to retaining a large customer. I wouldn't be surprised if the figure wasn't 10x this in some situations.

Vlad Leo Antohi, PMP

Commercial Real Estate Appraiser in Training & Regenerative Real Estate Entrepreneur 🧘🏰🌿

8y

Nice one Jason Evanish! Love the easy to understand breakdowns!

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