Cost of Replacing an Employee

Cost of Replacing an Employee

The cost of replacing an employee is not only a financial burden for a company it also has negative impacts on the remaining employees productivity, morale and the company’s reputation and other areas of revenue.

Hiring and training an employee involves money and staff time. According to the Bureau of Labor Statistics, employee turnover is highest in the following industries:

• Hospitality
• Utilities and trade
• Construction
• Retail
• Customer service

The Cost of Employee Turnover

Studies on the cost of replacing an employee is all over the board.

Some studies indicate that every single time a business has to replace a salaried employee, it can cost on average between six to nine months’ salary.

For example – A manager that makes $40,000 a year, the employer will spend roughly $20,000 to $30,000 to hire and train a new employee.

While other studies and statistics from the Bureau of Labor Statistics claim the cost is even higher, by as much as twice the lost employee’s salary. The higher the salaried employee the higher the cost to replace them.

Let’s look at a few examples:

• The cost to replace a $10 an hour retail employee, based on the lower-end positions – 16% of their annual income would be $3,328.
• The cost to replace a salary employee based on a mid-range position that made $30,000 to $50,000 annually – 20% of their annual income would cost $6,000 to $10,000.
• The cost to replace a salary employee based on a high-end position that made $100,000 annually – up to 213% of their annual income would cost close to $213,000. That’s more than double what the original employee was making annually!

It is difficult to predict an actual cost to replace an employee. There are so many variables that need to be taken into consideration. Often times, there is a multitude of untracked and intangible things that make coming up with an exact cost nearly impossible to pinpoint to exact dollar amount.

Additional Costs of Replacing an Employee

• Advertising, interviewing, (driving, drug, health etc…) screening, health exams and hiring.
• Cost of training and the managements time.
• Lost productivity during the training process.
• Errors and customer service, a new employee takes longer and are often less skilful at problem solving.

One of the biggest reasons the actual cost of replacing an employee is unknown, is because most cooperation’s or company’s do not have exit strategy plans in place to keep track of all the costs of hiring a new employee.