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The Hidden Costs of Employee Turnover (And How to Reduce It)

Posted on January 22, 2015

It should be apparent that in America the days of working at a company for 25 years are long gone. This fact is most obvious with younger workers. According to a report from the U.S. Department of Labor, the median tenure at a company for workers ages 25 - 34 is three years. This is a glaring contrast from workers age 55 - 64, whose median tenure is 10.3 years.

This trend in short term work tenure is expected to continue as the number of millennials in the workforce increase. While in 2014 millennials account for approximately 36% of the American workforce, they will account for 75% of the global workforce in 2025.

If things continue in this fashion, expect to see a lot of different people coming through your company doors and leaving in three short years. In this environment, “job hopper” is no longer a pejorative. It’s the norm.

The 5 Hidden Costs of Turnover

So what’s the problem? The problem is that turnover has a high cost for business owners. Some costs are obvious - paying recruiters to post jobs, select candidates, and interview them - and can be calculated using a spreadsheet. But there are many hidden costs. Among them:

1. Lower productivity - when an employee leaves, someone has to pick up the slack. If the job is not filled, the tasks that employee performed fall on the others, who may not have the same skill set or experience.

2. Overworked remaining staff - when workers pick up the extra work from the departing employee, work quality usually declines. With this increase in work and corresponding decline in quality, employee morale and engagement can plummet. For this reason, employees might start looking for the exits. Unless contained, turnover can create more turnover.

3. Lost knowledge - Each job has its particularities and seasoned employees have years of experience navigating them. Long term employees know the company’s traditions, how co-workers operate, where to find information, and what the boss likes. All that practical knowledge disappears when an employee leaves.

4. Training costs - Sometimes this shows up on a balance sheet as a training seminar. What often doesn’t show is when a co-worker has to take the time to teach a new employee the ropes. When an employee is new and a co-worker is assisting them, the company is paying two people to do one job.

5. Interviewing costs - The task of finding a new employee often falls on the shoulders of the HR department. Jobs have to be posted, resumes culled, interviews scheduled, and discussions made with managers to select the best candidate for the job - all at a cost.

What’s the true cost? Given these variables, estimates on replacing employees run a range but go as high as 150% of the annual salary of the departing employee. With these numbers, retaining employees isn’t just being nice, it’s also a move that will save the company money and boost the bottom line.

How to Reduce Turnover

One method for reducing turnover is improving employee engagement. According to this report from Gallup, companies with high employee engagement had a 25% reduction in turnover in high turnover organizations and a whopping 65% reduction in lower turnover organizations. Considering the costs involved in handling high turnover, these reductions  translate into big monetary savings.

One suggestion for improving employee engagement is making sure information is not solely dictated from above and trickles-down. Good information, ideas, and employee suggestions need a path to flow upwards to management. The wooden suggestion box was originally designed for this purpose but it proved clunky and impractical. Fortunately there is now employee suggestion software to make it easier.

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