Turnover Costs: 8 Hidden Costs of Employee Turnover You May Have Missed

by | Jul 10, 2017 | approachable leadership

Turnover costs a lot.

Turnover is a huge headache. It’s also expensive. You know turnover costs a lot, but do ever wonder what it costs you? Experts project voluntary turnover will hit 20% this year with direct costs over $11 billion. Yes, $11 billion.

But these direct costs are just the beginning. In addition to the hard costs of recruiting, hiring and training new hires there are many hidden costs.

8 Hidden Costs of Employee Turnover

One: Knowledge Gap

When you lose a member of the team, you also lose that person’s “tribal knowledge.” Tribal knowledge is the know-how a person accumulates in the trenches. Every person develops tribal knowledge as they learn their job and react to things that pop up. This unwritten playbook helps them be better, faster, and more efficient. Much better than standard procedure. And when they walk out the door, so does all that knowledge.

Quick Tip: Honor all this knowledge and try to document it. You’ll recognize your teammate, capture knowledge, and increase the value of your business. You will reduce the time it takes to train a replacement. And you make it a lot less likely they’ll jump ship in the first place!

Of course, there’s the darker side of tribal knowledge. Someone who’s been around knows the good, the bad, and the ugly of your company. They know where all the bodies are buried. You may prefer to keep that knowledge inside the tribe 😉

Two: Lost Connections

We talk about this all the time. Relationships and connections. When you lose a team member, you not only lose their connections with teammates. You also lose the connections they’ve built with your customers and vendors. The UPS guy and the people who cut the checks.

Each of these lost connections can damage your company. It can hurt morale and customer relationships. Things slow down because connections are often the lubricant that smooths out frictions we may never see. Some of the effects will be obvious right away. Others won’t emerge until the iron strikes the coal. These are the “thousand cuts” we don’t notice till it’s too late.

Three: Lost Intellectual Property

Taking trade secrets is unlawful. Yet it happens every single day. Customer lists, processes and procedures, formulas, sales strategies, and much more floats around the heads (and cell phones and home computers) of your team.

Often this happens unknowingly. Even when on purpose, it is very hard (and expensive) to prove. Every time an employee leaves your company you must ask: Is your “secret sauce” walking out the door?

The costs of lost intellectual property may not be obvious until months or years later. They play out in the business headlines every day. And trying to put this genie back in the bottle is difficult and expensive. These cases costs companies millions of dollars every year.

You can try to keep this valuable information from your competitors. But the best solution is the simplest. Don’t lose the talent in the first place.

Four: Added Pressure on Top Performers

When you lose an employee (even a bad apple), the best members of your team suffer. Your top people step in to carry the weight of the person who left. After all, that’s one of the reasons they are your top people. But this is a dangerous bargain. It can leave your top folks feeling unappreciated or taken advantage of. They get frustrated with other team members who don’t step up.

If these feelings get too strong you have a bigger problem. Your top performers start looking for greener pastures themselves. After all, if that slacker Karla found a better-paying gig with less stress and a more flexible schedule, why can’t I?

Maybe you feel like this isn’t too big a concern because you will reload. You can get a replacement for Karla into the game quick, right? Well… maybe yes. Maybe no. That’s the next two hidden costs.

Five: Cost of a Bad Hire

How effective is your hiring process? Do you bat a thousand at getting only “A” players? Or do you sometimes bring in a “B” player? Or the occasional “C” player?

Most companies focus too much on getting a new person in place and too little on getting the perfect person in place. After all, the business wants the position filled. Finding good people is hard. Finding the perfect person? Well, that’s nearly impossible. And that’s a very costly problem.

The hard costs of turnover can be tough to pin down. What’s your share of that $11 billion?  It varies by type of business and the position. But the financial cost of a bad hire is normally one to five times that person’s salary. (Here’s a great infographic detailing the staggering cost of a bad hire.)

But I’ve got bad news. That $11 billion figure is conservative. That’s because it focuses on the hard costs of recruiting and getting a new person in the door. But if you replace an “A” player with a “B” player (or heaven forbid your new recruit is a “C” player) you haven’t begun to figure the costs correctly.

Topgrading and the Cost of a Mis-hire

One of the best books on hiring “A” players is Brad Smart’s book Topgrading. In it he makes the case (and offers a great process) for hiring “A” players. In a study of over 100 client companies Smart and his team found that an average managerial mis-hire cost companies nearly $1.5 million per manager (14.6 times base compensation). Hiring costs were only $31,643. The cost of failure, mistakes, wasted and missed business opportunity? Over $1.2 million.

Turnover costs are much more than the cost of replacing lost talent. Do you end up with worse talent when you finally get the replacement up to speed? Do that consistently and you end up in what Smart calls the corporate death spiral:

“… we are sometimes asked to help correct an insidious corporate “death spiral” in which poor executive hires result in lower-level A Players quitting, leaving B/C Players who hire and promote more B/C Players. The shareholders are left bleeding and wounded, and the company may become moribund. Mis-hires can kill companies, individual careers, and real people whose stress causes heart failure.”

A team is only as good as its weakest link. So guess what happens to team productivity when you start adding a bunch of B/C links to your chain? That’s hidden cost number six.

Six: Productivity Plummets

Companies in the “death spiral” don’t just get poor performance from the new players. Everyone’s performance drops. Your team picks up the slack for the new players, which slows down their normal pace. They get frustrated training and re-training recruits that don’t get it. They stop helping new people, figuring they won’t last long anyway.

This reduced productivity is inevitable once turnover picks up. The entire team is stressed. They fail to meet team goals. Individual goals falter too. Rinse and repeat.

Seven: Lost Opportunity

Turnover costs business opportunity too. Time spent picking up the slack for lost teammates or training new ones is time not innovating or looking for new business opportunity. This cost is not just hidden from view, it’s enormous. Brad Smart calls it the single biggest cost of turnover:

 “The single biggest estimated cost in mis-hiring is the wasted or missed business opportunity. For decades I have witnessed multi-million-dollar fiascoes that clearly could have been avoided had an A Player been hired instead of a B/C Player. Gross neglect by a B/C Player salesperson resulted in the loss of the #1 customer in one client company. In another, incompetent information technology consultants were hired. Why? Because they were friends of a B/C Player CIO. The losses in information technology bankrupted the company. In companies that Topgrade sales departments, the sales of new A Players are sometimes twice that of the replaced Non-As; the “wasted or missed business opportunities” are easily estimated in sales organizations.”

How many multi-million dollar fiascoes and lost sales opportunities can your company withstand before it breaks? That’s what I thought. But we’re not done.

Eight: Hurts Overall Work Environment

All these challenges make for a pretty crappy work environment. Poor performance, lousy habits, and lack of engagement spread like wildfire. And they negatively impact a team even if you replace the bad hire. As Falon Fatemi mentions in Fortune, bad hires erode work environments:

“A bad apple spoils the bunch, so to speak. Disengagement is contagious, which may be why employers can’t seem to defeat it. …In many ways, a bad hire’s effect on company culture echoes beyond the employee’s tenure. Poor performers lower the bar for other employees, and bad habits spread like a virus. I once hired a manager who built a chaotic, everything’s-a-fire-drill environment. Even after removing the employee from the equation, we still had to invest time and resources to reset the behaviors of team members who emulated the manager’s approach.”

Action Steps to Turn Around Turnover

Is your company facing any of these hidden turnover costs? Next week we will offer some practical tips on how you can stop the “corporate death spiral” and get turnover under control.