Graph numbers by American Progress Labor Report

Money isn’t the only reason employees leave a company, but when the local job market averages higher wages than an organizations—it becomes significant. Employees may leave for lack appreciation or better benefits, but when pay is significantly lower it’s like someone once told me, “Money may not be the main reason someone quits a job but if they’re not making enough money to survive then it’s like air, we don’t think about air, but ask a drowning man how important air is.”

How much does it cost?

Studies vary as to the cost of employee turnover, from 16% to 150% of annual salary. The low end of 16% is according to a study (below) for employees making an annual salary of $30,000 or less.

Do the Math

An employee making $8.00 an hour without overtime earns $16,640 per year. Sixteen percent or $2,662 can be lost due to turnover, but that’s only the direct costs such as interviewing, hiring, onboarding, benefits, and training. Indirect costs such as, lost production caused by inexperience or short-staffing, lost knowledge, rookie mistakes, and loss of customer opportunities due to not meeting expectations are difficult to assign a cost to, but may be more significant than the direct costs. If these indirect costs impacted the bottom line only one-half as much as the direct costs, then the total cost of losing one $8.00 an hour employee would be $4,000. Likewise, wages impact a company’s reputation, employee morale, production, and recruiting, as well as, affect how customers view an organization.

*Direct costs. This category includes:

Separation costs such as exit interviews, severance pay, and higher unemployment taxes
The cost to temporarily cover an employee’s duties such as overtime for other staff or temporary staffing
Replacement costs such as advertising, search and agency fees, screening applicants, including physicals or drug testing, interviewing and selecting candidates, background verification, employment testing, hiring bonuses, and applicant travel and relocation costs
Training costs such as orientation, classroom training, certifications, on-the-job training, uniforms, and informational literature

Indirect costs. This includes:

Lost productivity for the departing employee who may spend their last days on the job writing exit memos or with reduced morale
Lost productivity due to the need to hire temporary employees
Coping with a vacancy or giving additional work to other employees
Costs incurred as the new employee learns his or her job, including reduced quality, errors, and waste
Reduced morale
Lost clients and lost institutional knowledge

*Information from American Progress Labor Report

Additional Insights

“What do all these costs add up to? Well how much? Estimates run as high as 150 percent of annual salary. Much less for lower level positions, but still significant enough to make retention a high priority for your business.” Inc. Magazine–Why Employee Turnover is so costly

“High turnover, lower-paying jobs (those under $30,000 a year) are slightly less expensive to replace, at only 16 percent of annual salary, but that still adds up quickly. For instance, 37 percent of hotel/motel and food services employees voluntarily quit a job in 2011. That represents a major expense to businesses already running at the margin.” CBS News — How much does it cost to lose employees?

In Conclusion

Raising pay to meet market standards isn’t only about employees or what they gain from it. It’s a cost savings business initiative that can positively impact the bottom line.