Fiona Passantino, late April 2023
Whether by layoff, reorg or attrition, many businesses underestimate the true cost of losing talent, which goes beyond the obvious visible, “hard” expenses of payouts, fees, recruiting and training new employees. The “soft”, unseen costs are dips in productivity, customer service, morale and the depreciation of culture. Seeing the costs and moving to a more efficient model of re-use, re-purpose and re-skilling.
Disengagement, Quitting and Layoffs
At this moment in our species’ history, we find ourselves in a global workplace crisis defined by employee stress, burnout and attrition. Engagement numbers continue to fall by two points per year, landing us at 32% in 2022[i]. At the same time, levels of active employee disengagement grow two points per year, resulting in an 18% active disengagement rate in 2022; the highest in 20 years[ii].
No one likes to be disengaged at work. But aside from the icky feelings that stressful work environments generate, there is a true cost to disengagement that significantly impact a company’s bottom line. Gallup estimated that the true cost of disengaged employees was as high as $550 billion in the US alone[iii].
Where do these costs come from? Disengaged workers tend to quit. The annual quit rate is now at 3%, also a global record[iv]. When you combine this with the uncounted cost of layoffs, many businesses underestimate the true cost of losing talent, which goes beyond the obvious expenses of recruiting and training new employees.
According to HBR, companies that laid off employees saw a 20% decline in job performance from those left behind, a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a 31% increase in voluntary turnover[v]. This means that layoffs lead to more of the “good ones” quitting on their own.
The estimated dollar amounts of replacing an employee can vary depending on the industry, job role, location, and level of expertise required for the position. Generally, it’s about 6 to 9 months’ of their salary[vi].
Direct costs of filling a seat
Each new leaver requires HR teams to spring into action. This is a heavy lift given the current labor market, which doesn’t show signs of loosening up over 2022-2023. There are immediate, direct “hard” costs that are often unseen.
Recruitment – Advertising the position, screening candidates, interviewing, and selecting the new hire is the first line item we think of. Filling the average mid-senior team lead seat costs about 30 hours of a recruiter’s time, payments for job ads on a variety of platforms, signing bonuses for the candidate, bonuses for the reference (if internal) of the middleman (if external), national and international background checks and payouts to headhunters for the acquisition adding up to more than $16,000 for the average mid-level manager[vii].
Onboarding – Aside from the obvious – orientation, training and materials, there is also quite a bit of “dead time” time required before a new employee becomes productive. Provided the new joiner doesn’t ghost you the day before the contracts are signed, it will cost about 60 hours in training, 120 hours of active onboarding and up to 6 weeks of passive inculturation before the new person starts to add meaningful value to the role[viii].
Separation – Terminating an employee means payouts; severance, accrued vacation time, unemployment insurance or the European-style “golden handshake”. Depending on the country requirements and company policy, this can mean two weeks of pay for each year of employment or more[ix].
Indirect, lagging “soft” costs are less obvious, but often even higher in both dollar and depreciation. The departing employee’s knowledge, skills, and experience are lost, which can impact the company’s overall ability to innovate and stay competitive. It can take months or even years for a new employee to gain the same level of knowledge and experience as the employee who left, which can result in lower productivity and decreased revenue for an entire team.
Lost Productivity –This is a compounding calculation, made up of lost time while the vacancy is unfilled, recruited, onboarded, and trained which radiates outward, onto the team at large. When one employee leaves, the work for the rest of the team multiplies; the leaver’s tasks are heaped onto everyone’s workload until a replacement is found. This means projects are delayed, shelved or canceled for 6-8 months.
Overtime –While this is an obvious direct cost related to the extra work for the team around the missing person, it is not generally chalked up to the layoff or quitter.The remaining employees will need to work overtime to cover the tasks left undone by the departed. These are hard, time-and-a-half, out-of-pocket costs.
Decreased Morale – The loss of an employee may lead to decreased morale among remaining employees, which can result in lower productivity and even more quitting.
Knowledge Loss – The loss of institutional knowledge, client and supplier relationships, and experience of the employee who quits mean a loss of efficiency and effectiveness. In the worst case, a leaver takes clients with them to the next job.
Customer Dissatisfaction – The loss of an employee may result in a temporary decrease in service quality, which results in customer dissatisfaction.
Management – The time spent by managers and onboarding professionals on working in new employees can take away from other critical business activities. The new employee will require sustained assistance adding up to 20 hours extra effort as they work their way into teams, find the right cruising altitude with their new managers and reports.
Team calibration – The team members around the new hire will also have a dip in their productivity as they learn to work with the new person, stop to help them and show them the ropes, which can easily amount to 50% to 200% of the new employee’s salary. There may be personality issues around the new person that require time and effort to resolve.
Admin – Setting up a new employee costs HR and IT 20 hours in admin and startup, equipment readiness and tech support[x]. If the new guy discovers after 6-8 months that he’s a poor fit for the organization, the process starts all over again.
Depreciation of culture – At its core, a company is a community of people working towards a shared goal. When employees leave, this community is disrupted and it creates a sense of loss and disconnection. It affects the morale of the remaining staff, who may feel undervalued and unappreciated. If they are disengaged to begin with, seeing others leave increases it. Depreciation of culture affects overall productivity, customer service, loyalty, efficiency and more, further feeding the quitting cycle.
Keeping people on board
Retaining talented and skilled employees is not only beneficial for the organization but also reverses the negative cycle for the individuals themselves. When employees feel valued, respected, and supported, they become more productive and motivated, which leads to higher job satisfaction and better performance. Keeping employees saves an organization “hard” and “soft” costs, both visible and invisible.
About Fiona Passantino
Way back in BC (Before Covid), Fiona Passantino was an old-school comic artist, writer and video game designer.
After getting serious with an MBA in Leadership and 15 years in the corporate world in internal communications and engagement for some of the largest multinationals in Europe, Fiona wrote a few books and went on her own in 2023.
Fiona is a Culture, Engagement and Communications expert, helping teams and leaders engage, inspire and connect their teams. She is a speaker, trainer, executive coach, podcaster blogger, YouTuber and the author of the Comic Books for Executives series. She recently has a weekly radio show on Den Haag 92 FM on the Future of Work. She lives in the Hague with her family.
Get the book.
What does it mean to be “engaged” in today’s workplace? How do we inspire, inform and connect a working community, build a culture of irreplaceability, trust and listening to keep people onboard and rowing together?
Engagement is about bringing our best selves to the office, being heard, supported, feeing irreplaceable and free. This bright, funny comic book is a road map for leaders at any level, at any organization, telling the story of Covid, offering a clear, research-driven roadmap towards our future of work.
[i] Harter (2023) “U.S. Employee Engagement Needs a Rebound in 2023” Gallup Workplace. Accessed on March 14, 2023. https://www.gallup.com/workplace/468233/employee-engagement-needs-rebound-2023.aspx
[ii] Harter (2023) “U.S. Employee Engagement Needs a Rebound in 2023” Gallup Workplace. Accessed on March 14, 2023. https://www.gallup.com/workplace/468233/employee-engagement-needs-rebound-2023.aspx
[iii] Harter (2023) “U.S. Employee Engagement Needs a Rebound in 2023” Gallup Workplace. Accessed on March 14, 2023. https://www.gallup.com/workplace/468233/employee-engagement-needs-rebound-2023.aspx
[v] Codella (2022) “The true costs of layoffs: morale, commitment, readiness … your future” Better Up. Accessed on April 13, 2023. https://www.betterup.com/blog/the-true-costs-of-layoffs-morale-commitment-readiness-your-future
[vi] Charaba (2023) “Employee retention: The real cost of losing an employee” PeopleKeep. Accessed on April 13, 2023. https://www.peoplekeep.com/blog/employee-retention-the-real-cost-of-losing-an-employee
[viii] Hirsch (2017) “Don’t Underestimate the Importance of Good Onboarding” SHRM, Accessed April 14, 2023. https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/dont-underestimate-the-importance-of-effective-onboarding.aspx
[ix] Borzykowski (2020) “What kind of severance you are entitled to and how you can get more” CNBC, Accessed April 14, 2023. https://www.cnbc.com/2020/04/04/what-kind-of-severance-you-are-entitled-to-and-how-you-can-get-more.html