WorkLore

Developing your employees is good business, but sometimes when things get tight, it can feel like a nice to have rather than a need. Employee development is an investment that pays a healthy ROI though. 

Let’s consider a case. 

You have a small company of 100 employees. Say 12 of those employees left last year and had to be replaced. 

Estimates suggest that it costs between 3 to 18 months’ worth of salary to replace someone. 

Those costs come from: 

• Separation costs = severance pay, continued benefits (if applicable)
• Soft costs = time to process termination (HRIS updates, email and systems access updates, CRA paperwork, exit interviews)
• Recruitment = updating job descriptions, placing ads or recruitment agency fees, temporary backfill staff, time spent to screen resumes, conduct interviews, select, screen or assess candidates
• Productivity = reduced team production based on picking up work in the gap, time for new hire to be onboarded and learn the job

Some of these are hard costs that will show up on the balance sheet, but many are soft costs, especially the reduced productivity, that nonetheless impact our bottom line. 

Let’s take 6 months’ wages as a conservative average and an average annual salary of $70,000. That’s a cost of about $35,000 per employee who leaves. 

Average turnover rates are around 20%, with strategic human resources recommending a rate of 10%. So let’s start with a conservative 12% turnover rate. With our 100 employees, we are now experiencing an annual turnover of 12 employees per year at an annual cost of $420,000. 

McKinsey estimates that 41% of employees who leave do so because they don’t see a way forward in their career with their current employer. So, in our hypothetical company, that’s about 5 of those people who left. 

If we can make even 3 of those people happy through development so that they don’t leave (under the principle you can’t win them all), we now are only losing 9 employees, and our annual turnover cost is $315,000.

We just saved ourselves $105,000 by providing our employees with a development plan. 

With cost savings like this, employee development is no longer just a nice to have. It’s good, solid business.