The cost of employee turnover is a more straightforward metric than it might seem – measured in a vacuum – but it gets complicated by all of the factors that decide its impact on the bottom line. Attrition rates in tech have historically been fairly high (averaging roughly 20%, yet bigger in sectors like SaaS), but that doesn’t mean that these costs cannot be managed when you know where they hit the hardest and what are the causes.
Continue reading below for a deeper breakdown of where turnover and attrition come from, how to identify the worst costs and a few ways to limit the losses:
Analyzing Turnover Cost
The high-level cost of employee turnover is easy to figure out, with the loss of labor for the duration, salary for a new hire, and all the expenses that will need to be sunk into sourcing and recruiting a qualified candidate. Where many organizations get lost is in taking all of the factors into account, both those that are more controllable (but easy to lose sight of) and outside forces that are harder to get ahead of.
For more information on these different cost factors, check out our in-depth Scale Series.
Most reports quote a wide range for average attrition costs, which can go anywhere from 50% to 200% of an employee’s salary when searching for a replacement. To narrow down the math when it comes to go-to-market (GTM) roles, you should start with four key numbers:
- Total employee cost
- Revenue attainment per hire
- Voluntary turnover rate
- Involuntary turnover rate
Cost-Per-Hire VS Revenue
The Cost-Per-Hire (CPH) is how much you pay to bring on an employee, which includes all the expenses that arise from recruiting and onboarding. However, looking at CPH superficially leaves gaps in your calculation – for GTM roles, you should also weigh what we call Revenue-Per-Hire (RPH) against the losses. This metric is a measurement of the potential sales an employee is expected to contribute to, and gives you better insight into the cost return from onboarding that employee – or, your Return-on-Hiring-Investment (ROHI).
Here are the top factors that help you calculate your revenue versus Cost-Per-Hire and get closer to the full price tag for replacing an employee:
Compensation is generally the biggest expense to consider, yet also often one of the easiest to start with for building a formula for measuring turnover since it’s the foundational employee cost. Non-competitive salaries and benefits plans are big contributors to attrition (though far from the only ones).
For GTM roles, turnover and unfilled seats also means revenue not being generated in addition to other costs. This is an additional loss that is easy to overlook, but very impactful to your bottom line. You can calculate this by looking at historical data and forecasting a realistic attainment rate (ex: revenue goal of $500,000 versus 60% attainment = $300,000 gross income you’re missing out on).
Something that is too often overlooked in Cost-Per-Hire formulas is the actual hiring part, which is always going to introduce additional expenses. These costs will vary depending on the specific methods used to source candidates, from referral programs to search recruitment agencies, but the general rule is that the faster and more specific your hiring needs to be the more expensive it will get.
Time to Hire & Onboarding
The factor that usually contributes most to turnover losses is time. From the period spent searching for a replacement candidate to time that needs to be set aside to onboard and ramp up a new hire, expect revenue generation to be minimal throughout. This is on top of the base Cost-Per-Hire incurred, so plan for this number to grow if you foresee your search taking a while.
Attrition can often lead to separation costs, which includes things such as severance packages, unemployment insurance and outplacement services that add up. Legal fees also fit into this category if termination becomes contested.
The loss of institutional knowledge and the disruption to team dynamics that can occur when an employee leaves can also have a negative impact on the business. This can lead to a temporary loss of productivity, which can result in a loss of revenue.
Voluntary vs Involuntary Turnover
It’s important to understand the difference between voluntary and involuntary turnover rates – one refers to when employees resign voluntarily while the other usually signifies mass firings or layoffs. While there is often a Venn diagram of shared factors connecting them, it is easier to isolate trends and identify hiring costs when you know which is growing fastest.
Attrition Rate in Tech Industry
As 2020 to 2022 demonstrated, the relatively high rate of attrition in tech can lead to an equal amount of both involuntary and voluntary employee turnover. The pandemic conditions and their economic impact created a seesaw environment where enterprises flipped between recruiting desperately one year and hiring freezes the next. This had further ripple effects within the talent pool, with many employees either more likely to jump ship or less likely to invest in their role if they believed their future in the company was unclear.
Gen Z and Millennials made up the majority of the US workforce by 2021 and the impact of this can be seen in the cultural shifts that led to the Great Resignation and Quiet Quitting. The clash between younger and older generations contributes a lot to disengagement and burnout, which creates more voluntary turnover.
Whether someone is a wrong fit, underqualified, underperforming or any combination of these or other bad hire qualities, the end result is typically just as bad as having no one to fill their shoes at all. While subjective factors are harder to measure, decreased productivity and unmet revenue goals are easier to put down on paper and calculate for total loss. Turnover is also inevitable when bringing on the wrong candidate for a GTM role, so you can expect to at least double your Cost-Per-Hire when you bring on the wrong candidate.
There is no magic button that can be pressed to make attrition go away overnight, but knowing where and by how much the costs are impacting business the most helps you in building solutions. If voluntary turnover is creating growing losses, for example, then you know you need to work on improving your employee retention and culture of communication.
Here are a few methods for managing and preventing rising attrition costs in tech:
Improve Internal Communication
According to Gallup, 52% of those who voluntarily resigned said they had been willing to stay if leadership had communicated with them more about their future. This follows a lot of the other trends we’ve seen that highlight the feeling of a lack of visibility among employees, especially Millennials and Gen Z, and reflect the need to refine how managers interact with their team.
Invest in Learning & Development
Learning and development (L&D) is a great way to show employees their career growth is being invested into and drive more engagement. The key is to match L&D programs to what each part of your workforce actually needs, not try to force a standardized version that could alienate more experienced personnel.
Re-evaluate Recruiting Strategy
Higher rates of involuntary turnover may be a consequence of budgetary constraints, but can also reflect hiring practices that are in need of a rework. If your company has to go through months of sourcing just to settle for a candidate that meets only a fraction of the criteria – and has seen this cycle more than once – then it’s time to rethink how you go about recruiting.
Hire the Right Candidates with the Betts Connect Platform
Betts Connect is our proprietary hiring platform that taps into our network of over 250,000 pre-vetted candidates and helps you pinpoint your search with a variety of KPI filters. With multiple sourcing options and a dedicated Customer Success team made up of experienced recruiters, Connect enables you to cut down on the time and costs of recruiting.