Hidden Costs: Employee Layoff and Replacement

A recent survey of more than 1,300 U.S. CEOs found that 91% of them believe the country will enter a recession in the next year and just 34% feel that the upcoming recession will be short, having a relatively small impact on businesses. With this looming economic threat, many businesses have decided to scale back on hiring or even begin to lay off staff. This is not surprising, as cutting the cost of a company’s workforce has often been a tactic to stay afloat. Yet, it would appear that the long-term solution to withstanding the effects of a recession may require businesses to invest in, retain, and cross-train their teams.

Cost to Replace an Employee

The data doesn’t lie. Keeping top talent during economic downturns may seem costly, but it is a cheaper alternative to finding their replacement, even months later. This is because the median cost per new hire is almost $4,700, though many employers have found that recruiting a new employee can actually cost as much as three or four times the position’s salary. For an employee whose salary is $40,000, this can equal $120,000 or more.

An internal cost analysis completed by McDermott + Bull uncovered that the expense to lose and replace an employee with a salary of $70,000 is nearly $92,000. This is using a cost of attrition equation from the Great Game of Business: [(base salary + bonus) x 21%] x net profit = cost of turnover. On top of this, it takes new associates an average of 12 weeks to become truly productive in their roles and even longer to catch up on the work left behind or reach the productivity levels of their predecessors. As a result, it takes a company up to six months to break even on its investment in a new, mid-level employee.

New Employees Bring Ambiguity

When you hire a new employee, you don’t know if they’re going to stay. With 30% of new hires leaving their workplaces before reaching the 90-day mark, a poor hiring decision could quickly cost a company thousands of dollars and hundreds of hours of lost productivity. When a full-time employee quits within one year of starting their job, the organization they worked for loses at least 33% of their annual salary cost, which can easily equate to $15,000 or more. This is just the expense of losing one employee before their first anniversary, if this happened five times it would cost an employer over $100,000 in replacement fees.

Maintaining Employee Satisfaction and Retention When Lay-Offs are Inevitable

Companies that are forced to reduce employee benefits or lay off associates to cut back on spending must prioritize retaining and motivating the employees that remain by continuing to meet their personal and professional needs. Employees who survive mass cutbacks in human capital will likely fear that they’re next. They may experience emotional distress because their coworkers and friends were let go. They can also face burnout because they will have to work at the same rate with significantly less manpower, meaning that they will have to personally operate at or above their total capacity.

When having to make the hard decision to lay off a percentage of your workforce, it is crucial to consider your impact on the remaining employees and, in-turn, on your business. The cost to coach an employee can be as little as $1,500 per year, making employee coaching programs an affordable investment to support those individuals. This is a small expense to ensure that the associates you can keep are unafraid, productive, efficient, and able to move your company forward during difficult times.

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