Employee turnover isn’t just a staffing issue – it’s a significant financial drain that affects a company’s bottom line. For HR pros tasked with managing both people and budgets, understanding the true cost of employee turnover is essential.

Turnover isn’t cheap. Recent research from Applauz suggests that replacing a single employee in 2025 could cost between 50% and four times that person’s annual salary, depending on the role and level of experience.

We can divide these employee turnover costs into two categories: direct and hidden.

Direct costs include the time and money spent recruiting and hiring new employees, onboarding, training, and missed sales quotas.

The hidden costs are indirect. For example, dips in employee morale, productivity declines, and knowledge losses are hidden costs of employee turnover. It can be hard to put a precise dollar value on hidden costs, although we can make estimates.

This article will discuss the direct and hidden costs of employee turnover, how to calculate those costs, and the importance of reducing employee turnover – with a few tips for developing a retention strategy.

Direct Costs of Employee Turnover

Direct costs of employee turnover tend to be more pronounced.

Money spent on recruiting and hiring, onboarding and training will make an unmistakable dent in your bottom line, especially if you are regularly hiring. Another direct cost of employee turnover is the sales you lose when employees leave.

Essentially, direct costs are the costs of an employee leaving, any costs incurred while replacing them, and the costs that occur when transitioning from the previous employee to a new one. Unlike morale declines or institutional knowledge loss, these direct costs show up on financial reports.

Recruiting and Hiring

A significant direct cost resulting from employee turnover is the recruiting and hiring process. It isn’t just about money spent on job postings and recruitment strategies. Time is an asset as well. Time spent reviewing applications and interviewing candidates is a substantial cost to consider.

Depending on the former employer’s salary, you may need to adjust the salary offered to remain competitive. Raising salaries will add increased costs. Adding new hires also includes the cost of benefits offered with the position.

These costs compound quickly when multiple positions are open simultaneously or when hiring efforts drag on due to talent shortages.

Onboarding Costs

Even streamlined onboarding programs demand time from HR, managers, and peers — hours that could otherwise support core work. Depending on your onboarding process, this can still require money from your budget.

The time it takes HR, managers, and other employees to bring new hires up to speed can eat into your budget as well.

Training Investments

Training investments go beyond materials—they include opportunity costs from slower output and corrective oversight during the learning curve.

You may lose money and time training a new employee when retaining an experienced employee would eliminate those costs.

Missed Sales

When an employee leaves, other employees may need to step in and cover for the lost sales. Having other employees cover those sales will work briefly, but it isn’t sustainable, and employees will begin to miss sales quotas. Those missed quotas are missed sales that would cover losing the employee.

When you replace an employee, a ramp-up period slows down sales as the new employee adjusts to the position and responsibilities. They likely will need time to gather the knowledge base that other, more experienced employees already have to make sales quotas. Until the employee is fully trained, a lack of knowledge will reduce their productivity.

Hidden Costs of Employee Turnover

Not all costs are directly related to recruiting, hiring, onboarding and training a new employee. There are indirect or hidden costs of turnover. Hidden costs include dips in employee morale, productivity declines and knowledge transfer and loss.

It’s essential to calculate the hidden costs alongside the direct costs when considering employee turnover.

Employee Morale

Employee departures can trigger uncertainty among the remaining staff, prompting questions about the organization’s stability and potentially leading to further exits and additional recruitment costs.

Widespread dissatisfaction signals a clear financial and cultural warning, indicating that turnover may be a systemic issue. When a well-connected employee leaves, peers may share similar concerns, increasing the likelihood of more exits. This scenario drives up expenses through turnover costs and the need for higher salaries and enhanced benefits to retain critical talent.

When employee morale falls, productivity often nose-dives. The most undesirable outcome of high employee turnover is less work from your employees — at a time when you’re short-staffed and need the team to step up.

Rebuilding morale often requires more than a quick fix — leaders may need to reset culture expectations and re-earn trust. Thus, raising morale may produce extra costs for the business.

Productivity Declines

Low morale can reduce productivity. Productivity also declines when onboarding new employees. To replace the departing employee, HR must onboard and train a new employee, who will not be able to match productivity until they are settled in the position.

Meanwhile, the rest of the department must fill in the gaps in knowledge and productivity to complete their tasks and the tasks of the vacant position. Once the position is filled, departmental productivity will stall as the new employee learns the ropes and makes mistakes that need to be fixed by other members of the team.

Knowledge Loss and Knowledge Transfer Ramp Up

Another hidden cost of high employee turnover is the loss of knowledge and the ramp-up time needed for knowledge transfer. If the employee did not document the knowledge they gained while working, such as processes, tips and information about the client, it might be challenging to efficiently provide that information to a new employee. In the worst-case scenario, the new employee will need to learn everything the previous employee knew through a process of trial and error.

Also, the new employee will need to gather knowledge and information from other employees, managers and company resources to do their job effectively. This diverts valuable time and resources from other employees and reduces their productivity as the new employee works to ramp up their understanding of the position.

You may also find that the departing employee takes processes and ideas for making the workflow of the department more efficient with them. The new employee will need more time in the position to come to similar conclusions or brainstorm other ways to increase efficiency.

How to Calculate the Cost of Employee Turnover

To calculate the estimated cost of losing an employee, add together the costs of:

• Covering the vacant position
• Filling the position
• Onboarding, and
• The learning curve to reach full productivity.

Then multiply by the number of employees lost and then multiply by 12 for an annual rate.

Calculating the Cost of Losing an Employee

Expanding on the simplified calculation to estimate employee turnover: First, you’ll want to estimate the cost of employees filling the vacant position on top of their regular duties. Use overtime rates for this number. Lost productivity for employees covering the vacant position should be calculated as at least 50% of the employee’s compensation.

Second, estimate the time costs of exit interviews and administrative tasks necessary to process the employee’s resignation. This includes time spent by HR and managers.

Next, tally the cost of training the departing employee the company paid. Did this include external training? Licenses or certifications? Include internal training, too. Be sure to tally the cost of resources spent on training the departing employee. This includes the time and salary of a senior employee training the departing employee.

Next, determine the departmental productivity costs. Who will cover the vacant duties? Will there be deadlines missed due to the vacancy? Is the employee taking knowledge, skills and contacts with them? Include the cost of losing customers the employee served. Also, include any costs incurred when trying to retain customers the departing employee served.

Calculating the Cost of Recruiting a New Employee

Recruiting a new employee can be incredibly costly. Finding the right candidate is crucial to the smooth transition between employees, so you will not want to cut corners during this process. Calculating the cost of recruitment means knowing how long HR spends combing through applications and preparing for interviews.

First, consider the cost of advertisements, job postings and employee referrals. Add these costs together and multiply them by the number of vacant positions.

For instance, internet job postings on job boards can run upwards of $200. Job advertisements on billboards and commercials can cost more than $5,000 per advertisement.

Next, tally the time spent by internal personnel:

• Reviewing resumes
• Scheduling interviews
• Conducting background checks
• Conducting interviews
• Assessing candidates
• Doing reference checks
• Making offers, and
• Notifying unsuccessful candidates.

The time can easily exceed 100 working hours per position. If a third party or existing software sorts resumes, you will want to include the cost of the contract or HR software in your total as well.

There is an administrative cost to handling and processing candidates’ resumes.

To calculate this, take the average number of resumes received for a position with your business and add them up at $1 to $2 per resume. This summation requires some knowledge of industry and business standards. Some industries may attract more candidates than others.

If tasks such as drug screenings, criminal background checks, and references are outsourced, then you will need to tally those costs as well. Include the various pre-employment tests that a candidate takes prior to an offer in this number. If they are not outsourced, then you will need to calculate the time and resources used by your internal employees conducting these screenings and checks.

Finally, once you have selected the best candidate for the role, you’ll need to calculate the costs of:

• Adding the new employee to payroll
• Creating security passwords
• Creating profile IDs
• Supplying telephone or internet, and
• Providing laptops and other necessary tech equipment.

This number should include all of the administrative and security tasks necessary for hiring a new employee.

Calculating the Cost of Training and Onboarding

Onboarding and training costs should be included when calculating the price of employee turnover.

First, tally the costs of orientation materials, the orientation itself, and the time and cost of the person conducting the orientation. You will also need to determine the cost of training materials, the employee conducting the training, and departmental training. An important cost to include is the salary and benefits of the new employee.

Also, there’s a productivity ramp-up period, where the supervisor will spend more time assigning, explaining and reviewing task assignments, and delivering output. A reasonable estimate for this loss in productivity for the supervisor sits at seven hours per week for the first eight to ten weeks.

Productivity may also stall for other employees within the department as they learn to work together with a new member of their team and as tasks are redistributed.

Calculating the Cost of Lost Productivity

Every job has a learning curve. Bringing a new employee up to speed takes between 16 and 20 weeks. To calculate this lost productivity, divide the ramp-up time into three periods. For the first two to four weeks, the employee is likely operating at about 25% productivity. The costs would then be 75% of that employee’s salary during that time.

From week five to twelve, the employee has likely picked up speed to around 50%; the cost during this time would be 50% of the employee’s salary. Keep in mind other departmental productivity losses as employees work with and around each other.

From weeks 13 to 20, the employee is almost up to speed but is likely still operating at 75%. The cost for this period would then be 25% of the employee’s salary.

Don’t forget to estimate the cost of mistakes the employee will make during the ramp-up period. If the departing employee is a member of management, costs will accrue department-wide because the employees no longer have a member of management directing and guiding the lower-level staff.

Tally the cost of management taking on administrative tasks if the departing employee is an assistant or secretary. There is also an impact cost for critical projects where the employee is a key participant. If deadlines or criteria are missed, then the cost of fixing these mistakes should also be estimated and tallied.

Importance of Reducing Employee Turnover

High employee turnover rates often produce staggering costs for businesses. These costs add up when considering various factors such as administrative processing tasks and productivity levels. By most estimates, losing and replacing an employee can cost upwards of 150% of their salary.

HR should use employee retention strategies to avoid these costs to prevent as much voluntary turnover as possible. Reducing employee turnover and retaining workers should be a high priority for HR.

Employee Retention Strategies

Retention must be a priority to avoid the costs of turnover. Retention strategies such as eliciting feedback, reviewing benefits and perks, and managerial transparency are great places to start developing tactics to retain employees.

Elicit Feedback

Eliciting employee feedback about the manager’s performance as leaders can help retain employees. Employees want to feel heard and respected. By eliciting feedback, you can boost morale and reduce employee turnover.

You may find that you receive more honest and open comments and suggestions from employees when you elicit anonymous feedback. Employees don’t want to feel as if they could be targeted for retaliation by their managers for making a comment or suggestion that the manager doesn’t like. Anonymous feedback helps to avoid that problem.

Review Benefits and Perks

If you see a pattern in exit interviews and feedback that compensation benefits or perks are lacking, you may want to review those benefits or perks and consider making changes. You may not make these changes immediately, but having a plan will help the business cut down on turnover costs in the future.

An example of benefits and perks that you may want to consider is employee development. Studies show that professional development is one of the top perks job-seeking candidates look for in a new position.

Other retention studies indicate that paternity leave, maternity leave and breast pumping programs are popular among working mothers and can reduce absenteeism and boost employee morale.

Retention strategy benefits include student loan perks, retirement programs and appreciation programs. While appreciation programs may seem juvenile and silly, they often boost morale and encourage employees.

Transparency

Employees want to feel like they are in the loop on decisions and have some input on changes in business processes. Manager transparency can help cut down on high employee turnover by offering employees a chance to understand what their manager is doing and why.

Transparency doesn’t have to look like weekly forum meetings. Regular memos and performance reviews offer managerial transparency.

Conclusion

Employee turnover costs businesses a great deal of money, time and resources.

These costs are both direct and hidden and can take significant chunks of money from your budget. Understanding where these costs come from and how to calculate them can help you estimate how expensive high employee turnover is.