New report carried out by Oxford Economics reveals that replacing members of staff incurs significant costs for employers: £30,614 per employee, often more than they were earning.

This research was commissioned by Income Protection specialist Unum, sheds light on the financial impact of replacing an employee with a salary of £25k+ in the Legal, Retail, Accountancy, Media & Advertising and IT & Tech sectors. The report also reveals that a major cost implication for firms replacing staff is the lost output a company experiences during the period of time the new worker is getting up to speed i.e. the cost of them being less effective until they reach their ‘Optimum Productivity Level’. The findings unveil that, on average, workers spend 28 weeks to reach optimum productivity which has an attached cost of £25,181 per employee. This is by far the dominant cost factor for replacing a departing employee.

The logistical cost of replacing an employee incorporates expenditure such as advertising costs and agency fees, as well as invested time such as interviewing prospective candidates. On average businesses spend £5,433 on logistical costs, with the following factors contributing: Hiring temporary workers before the replacement starts: £3,618; Management time spent interviewing candidates: £767; Recruitment agency fees: £454;Advertising the new role: £398; HR time spent processing replacement: £196. The overall financial impact of staff turnover across the five sectors analysed amounts to a staggering £4.13bn per year. To bring this cost down, Unum recommends that businesses do more to retain existing employees.

Linda Smith, HR Director of Unum said: “This report reveals a stark cost implication for businesses dealing with staff turnover. While the logistical cost of replacing an employee will probably come as no surprise to businesses, the financial impact of having replacement workers learn the ropes is probably a cost that businesses have not before considered.

£30,614 is a startling amount, and I would encourage businesses to place more emphasis on retaining talent and developing good staff to reduce the cost of staff turnover. Put simply, people stay with companies that demonstrate they value – and care for – their employees. For businesses trying to do this, financial reward is not always the answer – we know that staff increasingly value long-term employee benefits such as Income Protection so they should look at their entire benefits offering to help them keep their best people.” There are a number of additional factors which can lead to significant differences in staff replacement costs:Larger companies can learn from SMEs in keeping staff turnover costs low. On average new employees in SMEs (1-250 workers) take 24 weeks to reach optimum productivity, compared to 28 weeks for large firms with over 250 workers. What’s more, microbusinesses (1-9 workers) take an even shorter amount of time to reach optimum productivity at just 12 weeks.

The report analysed the cost implication of staff turnover in five different sectors: Retail, Legal, Accountancy, Media & Advertising and IT & Tech. Differences between the sectors are revealed in the table below. These can partly be attributed to the varying salaries for each sector, but are also driven by the different periods workers take to get to optimum productivity.The report reveals that new workers joining from the same sector reach optimum productivity in 15 weeks – much faster than those joining from elsewhere. Workers joining from another sector spend 32 weeks reaching optimum productivity, new graduates spend 40 weeks and those coming from unemployment or inactivity spend the longest time at a full calendar year (52 weeks). Linda Smith continued: “The variation in cost implications of staff turnover emphasises that it is possible to reduce these costs. It is particularly interesting to see smaller companies leading the way in keeping the cost of staff turnover low. Larger companies should take note of what SMEs are doing to accelerate the learning curve of new joiners, and see if they can adopt elements of their approach of bringing staff up to speed more rapidly to deliver significant financial savings.”