The Cost of High Turnover
Over the last several years, I frequently referenced a study I initially found from Gallup that cited some Bureau of Labor Statistics data in saying that “According to a Gallup study, “The U.S. Bureau of Labor Statistics has found that the U.S. voluntary turnover rate is 23.4% annually. It's generally estimated that replacing an employee costs a business one-half to five times that employee's annual salary. So, if 25% of a business' workforce leaves and the average pay is $35,000, it could cost a 100-person firm between $438,000 and $4 million a year to replace employees.” While I believe that alone makes a strong point about how expensive turnover really is in an organization, the cost of high turnover can be so much more - and that’s the next profitability killer we’re going to address!
Nearly every time I’ve shared that with a group of leaders, I’ve challenged them to consider how even the most conservative numbers in that quote impact the profitability of their own organization but I’ve come to realize that doing this doesn’t capture the entire picture… First, let’s consider how much a company’s average wage is today since minimum wage has nearly double in the last two years - going from $7.25/hr to $12/hr as I share this, with $15/hr being the widely discussed target that’s likely to be achieved sooner than later. Now let’s factor in the combination of the Covid pandemic and the “Great Resignation” that’s resulted in Help Wanted signs at just about any business we drive by or walk into on any given day. At the risk of having a flag thrown on me for piling on, think about companies like Sheetz or Walmart offering $17-18/hr as a starting wage for full time positions combined with the significantly higher minimum wage all but forces companies to increase even the entry level wage for skilled and semi-skilled roles that had been between $14 & $17 per hour as recently as 2019. Oh, and we can’t hardly pretend that all this doesn’t spill over into each and every other pay range on up the company ladder!
Quite honestly, I’m convinced that $438,000 for a 100 person company, the low end referenced in that now dated Gallup study, no longer exists! When I’m seeing starting wages for full time retail positions at or above that $35k annual salary in the sleepy (and beautiful) Shenandoah Valley, where the cost of living has traditionally been way lower than the larger metropolitan areas only an hour or so away, I have a really tough time imagining many organizations maintaining an average salary under $50,000… And everything I’ve hit on to this point has been tied to those BLS norms, so just how much is the cost of high turnover and how can we capture the profit it’s killing?
Before we begin working through any of that though, let’s make sure we’re on the same page with exactly what turnover I’m referring to - because it ain’t all bad! Let’s be honest, there are times where turnover is necessary. That doesn’t mean it’s not difficult or that there’s no cost involved, but every business will have situations to deal with where performance isn’t where it should be or someone isn’t aligned with the culture or values. And from time to time, we get to celebrate a team member’s retirement… Neither of those are what we’ll be addressing. The turnover I’ve always been most focused on minimizing, regardless of how high it is, has been the voluntary kind; the kind where a great team member chooses to leave and it could have been prevented. I believe that’s a significant profitability killer and each of the two things we’ve addressed recently - top-down leadership and poor communication - play a role in driving our turnover percentage up.
Moving forward, we’ll take a look at how those, as well as a few other things, can be causing high turnover.
Causes that Drive the Cost
Once we’ve worked through an employee turnover calculation and developed a turnover meaning that focuses on the part that’s killing our profitability, it’s time to get serious about identifying the causes! If we want to get a handle on the cost of high turnover, specifically the voluntary turnover that involves team members who could genuinely make our organizations better if they stayed, we have to take a hard look at the reasons behind this type of turnover…
An article from PeopleKeep.com called Employee Retention: The Real Cost of Losing an Employee shared this as “Some of the top reasons for employee turnover”:
- Lack of career development opportunities
- Lack of employee engagement
- Poor company culture
- Lack of or poor employee benefits and annual compensation
- Disagreements with co-workers or management
- No clear business goals or direction
- Employees feel like their honest feedback or thoughts aren't considered
I’ve shared what John Maxwell said in Leadership Gold as it relates to the profitability killers we’re looking at already but I believe this list calls for considering it again here… “Some sources estimate that as many as 65% of people leaving companies do so because of their managers… The ‘company’ doesn’t do anything negative to them. People do. Sometimes coworkers cause the problems that prompt people to leave. But often the people who alienate employees are their direct supervisors.” As I think about each of the seven items listed in the article, I believe they all tie back to how we lead our teams; YES, all of them! The other thing that grabbed me about this list was that benefits and compensation didn’t merit being listed separately AND they didn’t take the top spot on the list - not even together…
Let’s get incredibly honest with ourselves here, pay is definitely AN ISSUE in the overall turnover equation but it’s rarely THE ISSUE! To start, I believe if we were to consider any given individual on our team and ask ourselves if they would have ever become part of our organization if we paid half of what our competition does, the answer would be clear… We wouldn’t have to wonder why they left because they would never have been there if we weren’t at least in the same ballpark! That being said, it’s still our responsibility as leaders to provide the best opportunities for each individual in our organization that we possibly can, not look for ways to milk every ounce of energy from them so we can keep all the benefits for ourselves. (Just in case you’ve never seen it, there’s a pretty cool law of sowing and reaping in 2 Corinthians 9:6.)
I’ll challenge you to consider one more thing that I believe contradicts the idea that much turnover is tied to wage… If compensation were the only, or even the biggest factor motivating what folks did, how many volunteers would we see in civic organizations or fire & rescue? And how many people would enlist to serve in the military? In every one of those things, we raise our hands to be part of a cause or to serve a greater purpose, usually at our own expense. So as long as the total compensation we’re offering someone in our business is competitive, I can’t realistically consider it much of an issue in the big picture.
Now that the money part has been addressed, the real causes of employee turnover deserve our attention! As leaders, we impact each of the other six items on that list each and every day. The hard part can often be coming to terms with why each of those things deserve time out of our busy day. To make a case for that, we need to have a clear understanding of exactly who pays for the cost of high turnover…
Who’s Paying the Price?
For the majority of folks who are investing their time into reading this, I’m guessing you need little additional convincing to ensure you’re being intentional about addressing each of the things that made the list of top reasons for turnover… But at some point in time, each of us will have someone on our team who holds leadership responsibility but hasn’t come to terms with just how important it is to take care of their people while they push for results. And if we’re being completely honest with ourselves, even the best servant leaders among us will still face times where the pressure to produce impacts the focus we have on our people at least slightly… Sometimes, this really boils down to having a crystal-clear understanding of exactly who’s paying the price for high turnover!
Several years ago while helping a friend recruit a few key people to his rapidly growing business, I learned something incredibly valuable through how he asked one simple question in the interview process. My friend drew several circles on a sheet of paper that each had one word inside; you (the candidate), his name (the owner), the company name, team, and customer. He then asked the candidate to point to which one they felt was most important in the overall picture. The circle the candidate pointed to mattered far less than their explanation for that decision. The part that resonated with me the most was how the owner differentiated between himself and the company as a whole. He explained that in so many cases individual team members can see the company as this larger-than-life entity that exists outside of any of the names in the other circles. While it immediately made sense with regards to large corporations, I had never considered how much that idea applied to smaller, locally-owned businesses too.
My key take-away from that was that, in any business, every decision and action does indeed impact every single member of the organization. The challenging part, something that rarely happens, is ensuring that each member of the team has a clear understanding of how their daily behaviors and responsibilities have a direct impact on “the company” as a whole, their own livelihood, and each individual around them. When it comes to how high turnover kills our profitability, especially for those of us who have accepted the responsibility for leading a team (not just managing a department by cracking the ole whip), it’s critical that we understand how the cost of high turnover ultimately touches everyone in the organization in one way or another!
There are indeed decisions that are made at a “company” level that dictate things we’ll need to do in our roles or how we’ll need to handle certain situations but even then, those decisions are driven by people; the “company” isn’t a self-perpetuating entity with a life of its own… The approach we take in those situations plays a significant part in how any given team member resonates with those reasons that cause high turnover. And while the cost of that turnover is a price the “company” pays, it’s also a price that cascades down to us as leaders, every individual on our team, as well as the customers we serve.
To make matters worse, this cost isn’t isolated to just the human resource team’s budget; it spills over into several other critical parts of our business, some parts that are tracked closely on a daily basis and some that are often considered intangible because of the difficulty in measuring them. Moving forward, we’ll dig into several of the other areas that are impacted, then we’ll work through a list of specific things we can each do to give our best people every reason to stay!