The cost of poor employee engagement
November 28, 2018
It cannot be denied that a lack of employee engagement causes many areas of financial downfall. The latest 2017 Gallup report showed that employee engagement has only gone up by 3% since 2016, and unfortunately these disengaged employees are causing losses in the U.S. alone of between 450$ and 550$ billion annually. The recent Gallup report also shows that managers are a key factor in employee engagement and the main reason 50% of employees will quit their jobs, but yet nearly the same percentage of managers are as disengaged as their employees. Only 35% of managers are engaged at work, causing only 30% of their employees to be engaged. Good leaders promote engagement -- the best leaders get to know their employees personally, recognize their strengths, and remember that they are people first. They relate to their issues and make business decisions that suit company needs, while also considering the employee’s needs. After all, what is a company without its employees? The less engaged or incentivized a worker is, the less they will be invested in doing any more than just the bare minimum, eating into profit margins. This bad management is causing people to walk, and the real killer that disengagement provokes is turnover. Unfortunately, the higher paid and more specialized the job, the greater the cost of turnover. Depending on position, salary, and specialization, employee turnover can range anywhere from 40-400% of an employee’s annual salary to replace.
The losses companies incur from turnover result from a variety of factors, including a dip in employee productivity after giving notice, investing in recruiting, onboarding and training costs, a decrease in revenue while transitioning, or experiencing a gap in replacement. But the worst nightmare is when an expert employee leaves unexpectedly. Not only are there “hard” financial losses like administrative and replacement costs, but there are many “soft” costs that are often overlooked when turnover is involved.
Lost expertise can be especially difficult to replace. Some positions require a highly skilled specialty, which not only takes years of training but also specified hands-on skills within the position itself. Bringing someone up to par with a long-term employee could take years, additional training, all the while costing the company.
The Ripple effect
Disruption of workflow and missed deadlines are only natural until the replacement employee is comfortably settled. Duties fall by the wayside, are forgotten, or are handed-off to other employees. Employees taking on additional responsibilities may feel stressed, causing higher absenteeism or even shine a light on the idea of leaving too.
Decreased office morale is the ultimate result. Once the employees feel it, the customers suffer. Employees naturally exude how they feel about a company or product, it is very easy to see they’re faking it. Employees are more likely to slack off and make errors, resulting in customer complaints. If these complaints occur too often, you’ve got yourself a real problem. Too many customer complaints will lead to a loss of reputation, forcing the company to spend on PR and rebuild its reputation.
It is possible to calculate the approximate cost of turnover for your company. Create a spreadsheet with employee replacement costs. A major factor, of course, is the employee salary. A Zen Workplace study showed that an average income takes 40% the salary to replace, whereas a higher paid income can take up to 150% to replace, on average. This can be difficult to calculate exactly, as many turnover costs are qualitative, but the quantitative ones are often enough to show the impact on your company’s finances.
Check out these resources and comprehensive examples of turnover calculators to help you get started:
- Canada Human Resources Centre Turnover Calculator
- Drake International Turnover Calculator
- ERE Recruiting Intelligence Turnover Calculations
Sometimes, turnover can be a positive thing. Recognizing the value in “good” turnover allows you an opportunity to work with it, rather than letting it catch you by surprise. A disengaged employee can often affect your business equally to that of turnover loss. Assess where the money is better spent by using an employee disengagement calculator like this one from GroHawk. Slacking employees with outdated skills, too much seniority with no fresh ideas, and long-term employees accumulating benefits and bonuses may actually cost less if offered an exit package. This also requires strategic decision making, as it is a delicate subject and a fine balance to create and maintain a company with mixed skills and experience levels. For example, Zappos tried implementing exit incentives and it backfired. Instead of choosing specifically where they wanted a change, they offered a severance package to all their employees. As a result, 14% of their most skilled employees took the deal and left the company spending even more money trying to replace them. The key to strategic turnover is to truly assess who stays and who leaves: too much turnover results in considerable financial loss.
To resolve these issues, view employee engagement as a business strategy. Start by conducting an assessment of your employees’ level of engagement. And consider investing in employee recognition, with platforms like Qarrot. Through your recognition program, you can foster a stronger culture and improve employee morale. For example, with peer-to-peer recognition, your staff build stronger relationships and are motivated to improve performance. With goal-based motivation and awards campaigns, goals can be incrementally achieved, while promoting employee drive. Not only will your employees feel recognized, celebrated, and rewarded, but your investment will pay off in lower turnover costs.