How Much to Replace an Employee ?

The Right People in the Right Places

Studies show that the average cost to replace a worker in the US is $17,000.00 (AVERAGE!!). Some HR managers use the rule of thumb that whatever the person’s annual salary is – it will cost that much to replace them. One study evaluating the effects of the US Family Medical Leave Act found that “turnover costs for a manager average 150% of salary, including real costs of hiring… and intangible costs such as the new worker’s inefficiency and lost productivity while the job is vacant.”
Costs of lost productivity are as important as direct costs such as advertising or temporary staff. Total costs easily reach 150% of the annual compensation. The cost will be significantly higher (200% to 250%) for managerial and sales positions.

If you think you can just hire temporary workers and avoid all those costs, think again. The cost of hiring and getting production from a temporary worker is nearly 40% of their salary, and temporary workers tend to have higher hourly rates than permanent ones – and higher turnover rates as well.

Let’s put this in real terms. The lowest number seen anywhere says it will cost you at least 30% of an employee’s total annual compensation to replace them. Assume you have 100 employees and your average salary is $10.00 per hour. At $10.00 per hour + benefits (at 20% of wages), your employees receive ~$12.00 hour in wages and benefits. Let’s say that you have to replace 15% of your employees every year. Taking the most conservative estimate for employee turnover costs that I have been able to find (30% of their annual wages and benefits); each employee you have to replace is costing you $7,488.00.

100 employees X 15% X $7488 (including benefits) = $112,320 per year.

And that is using the most conservative cost percentage one can find. If we decide to use the national average ($17,000 / replaced employee) the cost goes to $255,000.00. By using the ‘rule-of-thumb’ (100% of their annual salary – $20,800.00/ replaced employee), the cost will go to $312,000.00… Staggering!

Why are the costs so high?

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