Why Are Turnover Costs So High?
Every business owner knows that employee turnover is a pain. But, do you really know how much it impacts your profitability?
Running the numbers can get pretty scary.
According to a 2012 study by the Center for American Progress (CAP), it costs your business about 20% of a full year’s salary to replace a skilled employee and about 16% of a full year’s salary to replace a low or unskilled worker.
Furthermore, the U.S. Bureau of Labor Statistics (BLS) reports that the average turnover in unskilled jobs (such as food services and hospitality) is over 75% per year.
For the sake of illustration, let’s say you run a restaurant with 50 low or unskilled employees who make an average of $24,000 per year.
That means that employee turnover costs almost $144,000 every year! (50 x 75% x 24,000 x 16%).
That’s a hefty turnover “tax” that comes right off of your bottom line profits.
Or, think of it in this way. If your average profit per meal is $1.50, you’d have to sell 2,560 meals to cover the cost of replacing a single employee.
Why Are Turnover Costs So High?
You might be thinking, “There’s no way it can cost that much to replace an employee!” But have you really stopped to consider all the costs?
- Off-Boarding – payroll, discontinuing benefits, changing locks and passwords, record-keeping and reporting, unemployment claims
- Recruiting – advertising, interviewing, background and reference checks, hiring
- On-Boarding – payroll, enrolling in benefits, training, keys and passwords, I-9s
- Lost Productivity – new hire learning curve, drag on existing employees
When you think about it, it’s easy to see how all those costs can add up.
How Can I Reduce Employee Turnover?
Turnover is a fact of life, and some things are just out of your control. However, you do have control over two of the reasons employees leave – benefits and the workplace.
Benefits – Most employees claim they’re leaving for a job with more money. Remember that salary is only one part of the picture.
Paid benefits might include health insurance, vacation, and sick pay. Optional benefits could include life insurance, a retirement plan, or even a gym membership. These make up your total benefits package.
If your overall package is good enough, employees will think twice before leaving for a bigger paycheck.
The Workplace – Employees want a safe, secure, stress-free place to work. They also want to feel that they have the knowledge and skills to be successful.
Your employees need to feel that you and your management team have their best interests in mind.
Keys to a great work environment include formal policies and procedures, a solid commitment to workplace safety, skills and safety training, and fair but firm discipline as required.
A great benefits package and a good work environment can significantly reduce turnover, and the savings will show up in your bottom line profits.
How Can I Improve My Company’s Benefits and Workplace Environment?
You can try to do everything yourself. This may be a good choice if you have hundreds of employees and can afford to hire a dedicated Human Resources staff.
Most small businesses outsource payroll to an Administrative Services Organization (ASO). ASOs come in all sizes and offer services ranging from basic payroll to advanced services like training, safety, workers’ comp, garnishments, or regulatory reporting.
ASOs are a good option; however, a Professional Employment Organization (PEO) might be a better fit.
Not only do PEOs offer the same type of services as ASOs, but PEOs can usually provide better insurance rates and “big-company” benefits like retirement plans, dental plans, disability insurance, HRAs, and HSAs.
What Does This Really Mean to My Bottom Line?
According to a 2014 survey of 102 small businesses by McBassi & Company, outsourcing your HR to a PEO could help reduce your employee turnover by 23% to 32%. What would that mean for your bottom line?
Using the hypothetical restaurant example above, reducing turnover by 23% – 32% would slash annual turnover costs by $33,120 – $46,080.
And those savings can fund future growth, newer equipment, or even personal things like college educations, vacations, or weddings.
Maybe it’s time you ran the numbers to see how a PEO can help free your time and improve your bottom line.
In the employment industry since 1968, Delta Administrative Services has grown from their beginnings as a professional recruitment service into a full-service Human Resource Outsourcing Company. As a PEO, they handle all of your human resource, risk management, payroll and tax administration, and benefits administration.