How Much Companies Spend on Employee Retention

Matt Tenney, Author of Inspire Greatness: How to Motivate Employees with a Simple, Repeatable, Scalable Process

Employee retention is a big concern for companies because retaining talented employees is important for an organization’s financial sustainability due to the expense of turnover. 

A good rate of retention is essential for maintaining high levels of productivity, job expertise, employee engagement, employee satisfaction, employee sustainability, and customer satisfaction and retention, which also all have a profound impact on profitability. 

So much of an organization’s success is determined by its ability to retain highly-skilled and engaged employees, yet it remains a daunting challenge.

Many organizations were already struggling with low retention long before the COVID-19 pandemic, but workers have grown increasingly dissatisfied with their jobs over the last two years. The outlook is grim when we take a peek at the numbers. 

Millions of US workers have left their jobs this year, with 4.53 million workers quitting their jobs in March 2022. Around 40% of workers are considering quitting their current jobs in the next three to six months. Rates of turnover are nearly 20% higher than they were before the pandemic. 

These numbers indicate we are experiencing a turnover crisis, and it is particularly troubling when you consider the costs associated with recruiting new hires. 

But how much do companies spend on employee retention? While we may not be able to answer this question with an exact dollar amount, we can look at an organization’s retention and turnover rates to get an idea of how much turnover is costing us. 

Companies spend a considerable amount on employee retention due to the high costs of employee turnover and low retention. When an employee quits, it costs 6 to 9 months of that worker’s salary, on average, to recruit and train a replacement. Turnover costs US organizations around a trillion dollars a year.

In this article, we’ll explore how much companies spend on employee retention and turnover and look at some strategies for boosting retention in your organization. 

Retention and Turnover Defined

Employee retention refers to an organization’s ability to retain its employees. A high rate of retention is achieved by reducing employee turnover. 

Employee turnover refers to employees leaving a job due to being discharged, terminated, resigning, or abandoning their job. When this happens, the organization seeks a replacement. 

There are many factors affecting retention, including compensation, job clarity, recognition, development opportunities, flexibility, autonomy, work-life balance, and meaningful work. 

Employee engagement and employee experience can also be greatly impacted by turnover and, in turn, impact retention. 

This is because an employee’s feelings about their job, their feelings of belonging, their feelings toward leadership, and the sense that their voice is heard and valued all play a major role in an employee’s decision to stay put or look for greener pastures. 

If the organization provides a negative employee experience, employees will become disengaged, which will hurt retention. Good retention strategies should be aimed at improving the overall employee experience to improve employee engagement. 

Calculating Retention and Turnover Rates

To determine how well your organization is retaining employees, and to what extent turnover may be impacting it, calculating retention and turnover rates can be a good place to start.

Employee retention rate measures the rate at which staff members stay with an organization. 

To calculate employee retention rate, divide the number of employees who have remained with the organization for a specific period of time by the initial number of employees for the same period of time, and multiply that number by 100.

(Remaining employees during a set timeframe / Initial number of employees during the same time frame) x 100 = Retention rate

If, for example, you wanted to calculate your organization’s retention rate for the year 2021. If the organization had 500 employees on January 1st of that year and 475 employees on the last day of that year, December 31st, this is how you’d calculate the employee retention rate:

(475 divided by 500) x 100 = 95% yearly retention rate

Because employee retention rate is limited in what it tracks, calculating both the employee retention rate and employee turnover rate can be more useful.

According to SHRM, “retention rate… measures the retention of particular employees over a specified period of time and complements the turnover rate metric, giving a more complete view of worker movement than calculating either metric alone.”

Employee turnover rate is defined as the number of employee departures divided by the average number of employees during the same time period. This is done by dividing the ending number of employees by the initial number of employees, then multiplying that number by 100: 

(number of separations during the specific time period / average number of employees during that same time period) x 100 = Employee turnover rate

The resulting number can then be divided into voluntary and involuntary separations to measure the percentage of employees who left by choice, were fired, or were laid off.

A retention rate of 90% or higher is considered to be a good retention rate, meaning organizations should strive for an average employee turnover rate of 10% or less. 

Retention and turnover metrics can give organizations insight into how much turnover may be costing them. A good employee retention rate is an indication that an organization has a strong retention strategy and is experiencing low turnover. 

How Much Do Companies Spend on Retention?

With companies in the US spending a trillion dollars a year on turnover, it’s clear that we aren’t doing a good job of convincing workers to stay. And if it’s costing 6 to 9 months of an employee’s salary when that employee has to be replaced, the expenses can start to pose a serious threat to a company’s bottom line. 

That means replacing a manager making $60,000 a year can cost $30,000 to $45,000! 

But it can end up costing even more, depending on the organization, the field the job is in, and a variety of other factors. An organization’s overall profitability can take a hit due to the effects turnover can have on productivity, performance, employee engagement, institutional knowledge, recruitment, and customer satisfaction. 

Productivity

When there is a lot of turnover, or, as is the case in many organizations, any turnover, employees will feel the loss through increased hours and workloads. For employees who are already stretched thin, it’s just not possible to avoid some loss in productivity when you lose an employee.

When you lose talented employees on a regular basis, the impact on productivity will be even greater and could lead to the loss of more staff as employees with increased workloads disengage and start seeking other opportunities. This loss in productivity can be costly.

Performance

As with productivity, performance can be negatively affected when there aren’t enough employees staying in their jobs, and employees who have stayed experience increased hours or workloads that can lead to burnout. 

When employees are stressed and overworked, their mental health suffers and so does their performance, which can hurt profits. To ensure employees perform well, organizations should be mindful of how the work their employees do impacts their well-being. 

Employee Engageement

When employees see other employees leaving an organization left and right, it can be a real blow to morale. This can hurt employee engagement. 

According to Gallup, productivity among highly-engaged teams is 14% higher than that of teams with the lowest engagement. Employees who aren’t engaged can cost their organization the equivalent of 18% of their yearly salary.

Institutional Knowledge

Losing talented, long-tenured employees, especially those who served in management positions, can be devastating because that employee isn’t just taking their years of experience with them, they are taking years of experience doing a specific job within that organization with them. 

When they leave, they take years of institutional knowledge with them. If such an employee is replaced by an outside hire, it can take years for the new hire to accrue the amount of institutional knowledge the former employee had.

This loss could affect an organization’s profitability through its impacts on productivity, performance, and customer satisfaction.

Recruitment

If you aren’t doing a good job at retaining qualified employees, you will have a hard time recruiting them. A high turnover rate can negatively impact an organization’s reputation, which can make it a less appealing place to work for job seekers. 

When an organization can’t recruit talented, highly skilled, and experienced employees, it can hurt its ability to perform well in a competitive market and innovate, which can be detrimental to its financial future. 

Customer Satisfaction

According to a recent Harvard Business Review Analytic Services survey, 55% of executives said they believe it is impossible to provide great customer experience without providing great employee experience.

Losing employees with strong institutional knowledge and exceptional customer service skills can be devastating to an organization’s bottom line because it can hurt customer retention. 

The Costs Aren’t Just Monetary

It is inevitable that every organization will experience some amount of employee turnover, no matter how great the organization’s culture is or how competitive the compensation is. This is a completely normal part of business.

The problem arises when there is a high rate of turnover. Unfortunately, it doesn’t just impact profits; it impacts the lives of employees.

Besides the financial costs associated with turnover, high rates of turnover can take a toll on employee morale and well-being. When this happens, it can have a negative effect on profits, but the extent to which it impacts the employee experience and an organization’s culture is immeasurable. 

High turnover can create a very unpleasant work environment that breeds more turnover, creating a retention crisis that can impact the organization at every level. It can create a toxic work environment where burnout is common and job satisfaction is non-existent.

In fact, one of the biggest drivers of The Great Resignation has been toxic work environments. An analysis conducted by the marketing platform Conductor found that searches for “toxic work environment quiz” increased 700% in April 2022. 

Quitting can also be contagious. If employees see their co-workers leaving in droves, they’ll start to wonder if it’s time for them to jump ship as well. And, when they are working in an environment that is toxic or causing them stress due to burnout, they’ll almost certainly leave. 

Money Better Spent

It is much more efficient to retain qualified and highly-skilled employees than to train and onboard new hires.

Retention strategies that keep your employees engaged and happy are a much better use of resources than constantly spending on recruitment efforts and training for new employees.

Since turnover can be so costly, strong retention strategies are crucial to recruiting and engaging the best talent and ensuring future profitability. But these strategies should not just be about profits; to keep talented and engaged employees, you have to provide a positive employee experience. 

These strategies should focus on building a strong organizational culture and developing strong leaders who are committed to helping employees succeed and build engagement.

Identifying and investing in perks employees really want can also boost engagement. While on-site gyms, nap pods, “team building” activities, and open-plan offices may have been all the rage a few years ago, employees actually don’t want these things.

As Inc. contributor Jessica Stillman points out, many organizations are offering “anti-perks,” instead of the perks employees are seeking. 

Stillman says, “Real perks, it seems, are all about empowering employees to work in whatever way allows them to do their best work over the long haul. Anti-perks might appear to support employees on the surface but are really about either trying to force them into some particular narrow definition of company culture or manipulate them into working longer and harder than is fair or sustainable.”

So don’t waste your resources on perks that won’t help you retain employees. Instead, focus on the perks employees want. 

Employees want flexibility and a positive work experience. In the era of remote work, employees are looking for location-agnostic pay. A location-agnostic work model allows organizations to recruit talented workers from local, national, and international markets. 

This model gives remote workers the option of living in areas with lower living costs compared to living near an employer’s office. Each worker’s contribution to the organization is treated equally.

They are also looking for better leave policies, with more generous maternity and paternity leave. Work/life balance matters to job seekers, and generous leave policies aren’t just great for retaining workers, they are great for recruiting top talent. 

Creating cultures that support good employee morale, high engagement, and a culture of care that promotes the well-being of workers is the key to retaining them and avoiding the high costs associated with turnover. 

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