The cost of hiring a new employee vs. retaining one

When a company's employees are unsatisfied with work or aren't fully qualified for their roles, some turnover is expected. In many cases, it's a better idea for company leaders to put extra effort into retaining the employees they already have, as they'll often end up paying more money in the long run to replace them. This can cause significant stress for a business, including being short-staffed or going over the annual hiring budget.

There are several ways to avoid this, though, such as prioritizing employee retention and taking the time to learn why employees who left on their own were unsatisfied. To help you determine what the best course of action for employee retention is at your company, here's a bit more information about the cost of hiring a new employee versus retaining one.

Why is employee turnover significant?

Employee turnover refers to the number of people who leave a company during a specific period. There are many reasons to try to stop employee turnover, as it can have several negative effects on a company. For example, having high turnover in a short period of time often results in a company being understaffed until it can replace all the employees who left. Similarly, high turnover rates can turn prospective employees away from a company, as they can see it as a sign that the company isn't a great place to work.

Perhaps the largest reason employee turnover can be a huge problem for companies is that it introduces the new cost of hiring someone to replace the employee who left. The average cost per employee when turnover occurs is around six to nine months of an employee's salary, though in some cases it can cost up to twice the amount of the employee's annual wages. This means that if an employee is making $60,000 annually, it may cost your business between $30,000 and $45,000 just to recruit, hire, and train a new employee to replace them.

Common reasons for employee turnover

Employee turnover occurs for many reasons, such as employees feeling underappreciated or insignificant at work. When employees don't feel valued, they're more likely to look elsewhere for employment. Another key reason for turnover is a lack of engagement in the workplace, often related to a poor company culture. This can cause people to feel uninterested in a company and even uncomfortable if the company culture is overtly negative. If an organization lacks a clear mission and goals, this can also cause employee turnover when staff members don't feel confident in the future of the business.

Many employees leave their current jobs when they don't feel a concrete possibility of advancing their careers. If your company doesn't offer many career development opportunities, such as training sessions, certification courses, and opportunities for advancement for internal employees, it may increase the chances of some employees leaving.

"The average cost per employee when turnover occurs is around six to nine months of an employee's salary, though in some cases it can cost up to twice the amount of the employee's annual wages."

What's the cost of hiring a new employee vs. retaining one?

Here's some insight into the hard and soft costs related to hiring a new employee and retaining a current one:

Hard costs related to hiring a new employee

When you need to hire a new employee, there are several hard costs you'll take responsibility for. These include the cost of recruiting a new candidate, which involves researching, assessing, and interviewing people, often for a long time. Another hard cost related to hiring someone new is onboarding, as you'll have to pay to train the new employee in your company's procedures and regulations. After onboarding, you'll likely have more training costs, especially if you're hiring for a highly technical position.

Soft costs related to hiring a new employee

Many soft costs arise when you need to replace an employee. These are expenses that may not be as obvious or immediately measurable but still impact the operations and success of a business. For example, low morale is a result of high employee turnover. A recent study showed that unhappy employees have cost businesses in the United States between $450 billion and $550 billion per year in poor productivity. Another soft cost you'll have to consider is mistakes, as a new employee is typically more likely to make errors than a seasoned one.

Employee retention strategies to try in your workplace

Here are a few strategies you can try to boost employee retention on your team:

Assess and improve your benefits offerings

Lack of sufficient benefits is a common reason for employees to leave their current jobs. By reevaluating the benefits your organization offers and improving them wherever you can, you'll enhance your employee retention efforts significantly. Look for ways to reimburse your employees for health care costs or tuition or research a different health insurance policy that provides more comprehensive coverage.

You can also try to improve your benefits offerings aside from health care, such as paid time off. By offering more paid time for sick days, family leave, and vacation, you'll show your employees that you value their time and want to reward them for their hard work. Another way to revamp your benefits offerings is to add more perks in the workplace, such as flexible schedules that allow remote work and professional development opportunities, such as seminars and guest speakers.

Take extra care to hire the right employees the first time

One of the most common reasons for employee turnover is businesses hiring the wrong person for their open roles. This can mean anything from choosing someone who isn't fully qualified to selecting someone who isn't a great fit with the company culture. To prevent this and reduce the costs you'll face when having to replace someone who might have been the wrong hire, put extra care and attention into your interview process to ensure you make the right choice the first time.

There are several ways you can do this, such as asking more specific questions during interviews. Include questions about specific job duties to ensure the candidate can handle each task they'll take on if hired. Ask questions that relate to your company culture to evaluate whether a candidate will fit in well on your team in terms of their personality, work habits, and values.

Host exit interviews

Another strategy to boost employee retention is conducting exit interviews for employees who leave, especially if they choose to leave on their own. This will allow you to ask specific questions about why they're leaving and which aspects of the company caused them to be dissatisfied with their job. Use this information to make changes in the workplace that reduce those issues for other employees, encouraging them to stay.

When you need to hire a new employee to replace a person who's leaving, it can end up costing you far more than what you'd pay to retain an employee you already have. This is why it's best to put significant thought and effort into maximizing employee retention, so you can support your existing staff and encourage them to remain with your company for years to come. Try one or more of the employee retention strategies listed above to increase your chances of making employees feel satisfied and supported so they stay at your business.