What are the Costs of Losing a Key Employee?


What are your costs for replacing a key employee?

How do you calculate the costs of losing a key employee even before you add the recruiting costs?

(Note: The following is full of math and planning considerations)

An employee may leave a company for many reasons, a new job path, they’re starting their own business, lack of corporate wellness and so on but if it is a crucial member of the team then it can be a hard hit for your company to take. There could even be a disagreement between them and the company over pay and they’ve had to contact a Wage and Hours Attorney to help out. Always keep on to of payments and hours to ensure you don’t disgruntle your employees. Anyway, here we look at the costs of losing a star employee.

First calculate separately the hourly and weekly cost of fully loaded payroll costs (salary plus benefits) of the vacant position, the management staff and others as below. If your business needs support in calculating these costs and processing payroll, you may want to check out some companies that offer Payroll Services to take a big weight off your mind.

Please note that the costs of time and lost productivity are just as important and real as the cost associated with paying vendors, consultants or temporary staff.  All of these costs will affect the bottom line.
These costs will reach 150% or more of the employee’s annual compensation.  The cost will be considerably higher (200%-250% of annual compensation) for managerial and sales roles.

Let’s run the numbers:

Assume for the sake of this exercise that the average salary of employees in your company is $50,000 per year (probably a bit low in our industry).

If the cost of turnover is at 150% of salary then the cost of the turnover is $75,000 for each employee who leaves.

If your company has 500 employees and a 10% turnover rate (likely to be more as the economy improves), then the annual cost of turnover is $3.75 million – far too much for even a mid-sized biotech company of 500.  And this does not even include the costs of the surrounding staff in overtime, inefficiencies and added work.
Who would not want to add that to the bottom line?  And it would also affect timing, success of various product lines and more.
All the costs due to an open position:

  1. Cost of person(s) who fill in while the position is empty – a temp?  overtime for other employees?
  2. Cost of lost productivity at a minimum of 50% of the ex-employee’s compensation and benefits cost for each week the position is vacant, even if other people are attempting to do the work or solve the problem.  Use 100% if the position is completely vacant for any time.
  3. Include the cost of the exit interview to include the time of the person conducting the interview, the time of the person leaving, the administrative costs of terminating payroll, benefit deductions, benefit enrollment, COBRA notification and administration, and the cost of processing all the forms needed to complete the resignation of the employee.
  4. Cost of the manager who has to understand what work remains and how to cover that work until a replacement is found.
  5. Cost of the manager who conducts their own exit interview with the departing employee.
  6. Cost of the training your company invested in this exiting employee, both internal and external programs and academic education.  Include licenses or certifications the company has helped the employee attain to do their job better.
  7. Cost of the impact on departmental productivity:  who will pick up the work, whose work will suffer, what deadlines will not be met, what products delivered late or abandoned? What is the cost of the time in staff meetings to discuss all this?
  8. Cost of severance and benefits continuation for the employee who is eligible.
  9. Cost of the lost knowledge, skills and contacts that the exiting employee is taking out the door with them. Use a formula of 50% of the annual salary for one year of service, increasing each year of service by 10%
  10. Cost of the impact on unemployment insurance premiums as well as the time spent to prepare for an unemployment hearing or the cost paid to a third-party to handle the unemployment claim process on your behalf
  11. Cost of loss of customers (if you are losing a salesperson) or the amount it will cost to keep these customers?

What else might I be missing?

CEO, CFO, Cost-to-Hire, HR and Hiring Managers , , , , ,

7 responses to What are the Costs of Losing a Key Employee?

  1. Pingback: Costs and Benefits of DIY Recruiting « SF Bay Biorecruiter's Blog

  2. SF Bay Biorecruiter,

    It’s great to know I’m not the only one out here looking at quantifying the cost of turnover. Back in collage as an economics major I did an independent study on the subject. It took some time to find a professor who would sponsor me because many thought it couldn’t be done. Although, not all the costs can be quantified, there are enough concrete measurable costs that make the calculations worth the time and analysis.

  3. There is also a cost in lost productivity from the individual before they leave the organization. Once a person makes a conscious decision to leave it can take them anywhere from 3 to 6 months to find their next position. The focus in that time frame then becomes finding a new job rather than giving 110% to their current one. They likely will do just enough to stay under the radar.

    If they leave to go to a competitor the costs are incalculable.

  4. Pingback: Do You Know What Employee Turnover Really Costs You? | CallCenterBestPractices.com

  5. Pingback: Changing People In Your Organization Can Be Difficult But Rewarding « Innovations in Piping Systems

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