INSIGHTS

How to calculate the cost of employee turnover

In this article, we share the formula for calculating the cost of employee turnover, the related yet often hidden costs of employee turnover, as well as our top tips for calculating this figure accurately and get the most out of the data in your own organisation, including some key employee turnover benchmarks.

The formula to calculate the cost of employee turnover

To understand how much employee turnover costs your business, we must first have clear sight of what the turnover rate is currently.

The calculation for this is:
Turnover rate = (total number of leavers over a period divided by the total number of employees over the same period) x 100

The “period” could be any period of time, but this is typically assessed on a monthly or annual basis.

The “number of leavers” also tends to include all leavers from the business— including voluntary leavers, any redundancies and those who have been dismissed.

Many companies will also calculate separate figures to show departures that are unplanned or unpredictable that could have an adverse impact on the business.

Tips for better employee turnover calculations

Here, we explore our tips and tricks for better understanding your current employee turnover to get the most out of your calculations.

Think about your metrics.

Depending on the tools you have available, many HR teams segment the data to measure the areas in which turnover is highest or lowest throughout the business. This can help leaders identify the departments that require closer assessment and improvement, especially high levels of voluntary turnover are more consistent.

You might also want to calculate employee turnover more specifically against different roles. For example, you can also calculate turnover metrics focused on:

High-performance roles as opposed to roles that are likely to be high in turnover due to their nature e.g. temporary positions, early talent schemes or seasonal jobs
Turnover due to promotions, internal secondments or transfers
Average employee tenure across the whole workforce or specific departments

Benchmark your employee turnover rate.

According to CIPD 2024 data, the average UK turnover rate is approximately 34% per year. Of this, 27.4% is accounted for by voluntary turnover.

Be careful when benchmarking. Turnover rates vary massively depending on the industry and organisational set-up. For example, professional office-based jobs are likely to have a much lower turnover rate than fast-paced retail and hospitality roles that are more typically ‘revolving door’ businesses.

Consider the effect on company culture.

It’s obvious that when considering the costs of employee turnover, you’d look at the direct expenses related to the specific person leaving, but employee turnover goes beyond this.

The impact of frequent turnover can end up damaging employee relations more widely. Importantly, it risks leading to diminished company culture, lack of trust in leadership and damage to the employer brand in the eyes of future talent.

Another key consideration surrounds productivity of those who are at risk of leaving the business – if employees are unsatisfied and disengaged, their overall contribution may be reduced in the run-up to their exit.

Calculate the direct and indirect costs.

As we’ve explored, it’s easy to consider the direct employee turnover cost calculation, but there’s a lot more to the picture to think about. And sometimes, the indirect expenses of lost talent can be equally as significant.

Now, let’s explore what both of these are.

The tangible and direct costs of staff turnover

When calculating the total cost of employee turnover, let’s first explore those more obvious.

Of course, it’s likely you will have already considered these – but don’t stop here. Next, we’ll discuss the hidden and often overlooked costs.

Advertising and agency fees. These cover the expense of hiring a new employee, such as recruitment fees (typically 15-20% of their salary in their first year) or advertising fees.
Cost of temporary workers: If you require temporary cover whilst you find the right permanent candidate these roles often incur higher cost-per-hour wages.
Lost internal time: With every interview and candidate assessment comes an opportunity cost due to the time allocation required from the hiring manager(s) and wider team involved.
Training: Depending on the type of role, some candidates will need compulsory training to enable them to do their job (such as manual handling training for a new warehouse operative) and often the employer will absorb these costs in terms of the training itself and the time lost to this.
Equipment and uniform: Whilst certain equipment (such as corporate devices and accessories) can often be returned to the employer to pass onto an employee’s replacement, other costs can add up from uniforms, stationary and wider investments which need to be replaced for new hires.
Employee entitlements: Outside of an employees’ salary, employers also of course need to cover wider associated expenses such as holiday and sick pay, performance-related bonuses, pension contributions and maternity/paternity leave. Whilst these are a legal entitlement, they are costs that should be factored in.

The hidden costs of employee turnover

While many costs of staff turnover are more obvious and mostly accounted for in financial spreadsheets, research shows there are also intangible costs that are often overlooked by employers when facing high voluntary turnover across their business.

Some of these can include:

Reduced productivity: Research suggests that is takes on average between 8 months and 1 year for a new employee to reach full productivity. Investing time and resources into the onboarding process can lessen this, and this will vary depending on role, but the time it takes for new starters to reach full productivity is often underestimated by employers.
Slower speed-to-hire: When losing talent due to higher than average turnover rates, the business risks a damaged employer brand against other competitors in their industry, meaning hiring new employees is more time consuming, and therefore more expensive – two steep costs to the organisation.
Decreased profitability: Whether a current employee is at risk of voluntary turnover and has become disengaged, a new starter is taking time to get up to speed in their role, or a role remains vacant for a period of time, this has a direct impact on the business’ overall output and profitability.

To explore how to minimise your turnover costs through optimising employee engagement, chat to us.

The cost of employee turnover according to research

There’s a lot of data and studies surrounding the true costs of employee turnover and what businesses should expect as a result of replacing lost talent. According to research:

As a rule of thumb, data suggests that it costs between 6 and 9 months of a salaried employee’s annual wage to replace them.
The cost of replacing a junior position is around 16% of the annual salary, while replacing highly specialised or executive positions can exceed 200% of the yearly salary.
The UK’s average rehiring costs are estimated at £25,000, and for specialist or more senior roles, this can climb to between £40,000-£100,000.

What causes employee turnover, and what can you do about it?

The bad news: A 2020 study found that a huge 78% percent of “the reasons employees quit could have been prevented by the employer.”

The good news is this means voluntary turnover is largely within business’ control – as long as they’re willing to uncover and prevent the reasons behind employees looking to leave.

So, lets review some of the reasons employees seek their next role.

Lack of career development

Naturally, if employees stagnate in their role, they’re more likely to seek a new opportunity that develops their skills and leans into their strengths.

How managers can support team members feeling a lack of career development

Provide regular upskilling opportunities and clear career progression paths. When employees understand how their role contributes to the wider business goals, and how they can continue to develop in their responsibilities, they are naturally more engaged. This, alongside a purpose-led culture can bridge the gap before the best talent is lost.

Poor wellbeing

Following the pandemic, employees increasingly seek healthy balance in their life in- and outside of work, and want to feel meaningfully empowered to achieve their best. The effects of recent years has led wellbeing strategies to take centre stage in employee engagement and retention – with the businesses undervaluing this facing the cost of high turnover – 75% of employees say they’ll remain in a business longer if offered tailored perks.

How employers can champion meaningful wellbeing

Implementing a tailored wellbeing strategy that holistically encompasses perks and benefits that reflect the unique needs of the business will be fundamental to retaining its people. First, businesses need to understand what their employees need to deliver their potential at work, and then need to implement an informed strategy. This can span flexible working, financial wellbeing tools, discounts, offers and savings, and mental health support and services.

Feeling underappreciated

Employees who receive effective recognition are 20x more likely to be engaged at work, are nearly 5x more likely to understand what’s expected of them within their roles and are 56% less likely to seek a new role. Yet, recognition often goes overlooked in its power by employers.

How managers can implement a culture of recognition

For recognition and appreciation to be most effective, the message needs to be personalised and delivered with meaning. Generic, tick-box approaches will lack impact and authenticity – instead, messages of thanks should come from all levels, at both senior and peer level, and be delivered in the moment so employees feel seen, heard and valued for their contributions.

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When does employee turnover become troublesome?

In truth, having staff come and go can healthy for a business. New people bring fresh ideas and skills into the company, ensuring the talent hired is right for the business’s goals.

Some companies embrace this benefit, such as Netflix, which states on its jobs page, “Since a high performer in any role is many times more effective than the average employee, our Dream Team is driven by performance — not seniority, tenure or unconditional loyalty. It’s also why we focus on maintaining a high-performance culture. To recruit and retain stunning colleagues, we pay personal top of market for the role and location — a judgment about what that person could make in a similar role at another company, and what we would pay to keep or replace them.”

Netflix has previously been quoted, saying, “We keep only our highly effective people.”

Netflix is comfortable with the notion that good employees cost equally; there’s a consideration to be made when it comes to replacing employees.

That said, we know that high performance cultures rely on engaged and empowered employees who feel they’re able to bring their full potential to their role – which, all comes back to an effective engagement strategy.

Why calculating the cost of employee turnover is important

High turnover can significantly impact a business, bringing with this increased costs, decreased productivity, poor workplace culture and damaged employer brand.

Tracking the cost of employee turnover gives People leaders insights into the true implications of employee turnover, including both direct and indirect costs. And, by prioritising an exceptional and measurable employee experience strategy, businesses are able to unleash their workforce potential and retain the brilliant people behind their brand.