Topic Outsourcing HR / PEO,

Why Retention is More Important than Recruitment

Why Retention is More Important than Recruitment

In the ever-evolving business world, the focus often lands on recruitment - attracting the best talent to drive a company forward.  

But what if the real key to sustainable business success lies not in the constant influx of new talent but in holding onto the talent you already have? 

Employee retention, the act of keeping and engaging employees for the long term, gets overshadowed by the allure of fresh recruitment. Yet, it's a facet that carries significant weight in an organization's overall health and success. 

Why is retention so essential? The answer lies in understanding the true cost of employee turnover.  

It's not just about the salary paid to the employee but a complex web of costs that are often hidden or overlooked. These costs can be broken down into four main categories: separation costs, replacement costs, training costs, and lost productivity costs. Each carries its own set of financial and operational implications that can strain a company's resources. 

Understanding these costs and the impact of employee turnover is the first step in realizing why retention should be a priority over recruitment. With this knowledge, employers can shift their focus from constantly filling vacancies to creating an environment that encourages employees to stay.  

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The Real Cost of Employee Turnover 

When an employee leaves, it's not just a loss of talent and institutional knowledge. It's a significant financial hit to the organization. Research from the Work Institute indicates that losing an employee typically costs approximately 33% of their base pay. To put that in perspective, for the average US employee, the cost of employee turnover is approximately $15,000. That's substantial money that could be invested in growth initiatives, employee benefits, or other areas that could boost the organization's bottom line. 

But the financial implications of employee turnover don't stop there. When an employee departs, various costs are incurred. Unfortunately, these costs don't appear on a profit & loss statement. They're spread out and mostly hidden from employers. Some companies track their turnover costs, but many do not. This lack of visibility often results in millions of dollars in lost profitability that goes unnoticed. 

Both voluntary and involuntary turnover result in costs. However, most employers choose to focus on voluntary turnover costs. It's important to note that these costs have been on the rise. In fact, the costs of turnover to employers have more than doubled since 2009. 

This brings us to the different types of turnover costs that employers should be aware of.  

Types of Turnover Costs 

When an employee departs, it's not just a loss of talent, but also a significant financial burden. This cost is spread out and often hidden, making it a silent drain on a company's resources. 

The first type of cost that employers face is Separation Costs. This includes conducting exit interviews, spending administrative time to process the departure, providing separation and benefits pay, and potentially increasing unemployment tax. These costs can add up quickly, especially if turnover is high. 

Next, there are Replacement Costs. When an employee leaves, their position doesn't just fill itself. There's a cost associated with communicating the job vacancy, advertising it, administering pre-employment screenings, conducting interviews, and performing background checks, exams, and testing. If the new hire is from out of town, there might even be a relocation cost. 

Once new hires are on board, they're not immediately as productive as the person they're replacing. They need to be trained, which leads to Training Costs. These include orientation, training sessions, materials, equipment, and job instruction. It's an investment in the hope that the new hire will eventually be as productive as their predecessor, if not more so. 

Finally, there's Lost Productivity. This is perhaps the most insidious cost because it's hard to quantify. When an employee leaves, they take their institutional knowledge with them. The remaining employees may have to pick up the slack, leading to decreased productivity. There's also the risk of legal action and potential damage to the company's reputation, leading to lost business. 

Understanding these costs is crucial because it underscores the importance of employee retention. It's not just about keeping good people; it's also about maintaining profitability. 

Most Common Reasons for Voluntary Turnover 

Voluntary turnover is a phenomenon that every organization grapples with. It's when employees choose to leave their jobs, often in pursuit of better opportunities or due to dissatisfaction with their current roles. 

A closer look at the reasons for leaving reveals various factors that influence an employee's decision to depart. These reasons are categorized into eleven themes: Career, Job, Health & Family, Work-Life Balance, Total Rewards, Relocation, Management, Environment, Retirement, Involuntary, and General Employment. 

Career-related reasons top the list, accounting for a significant portion of voluntary departures. Employees often leave for better opportunities for growth, promotion, achievement, or further education. This highlights the importance of career development within an organization. If employees feel their career progression is stagnant or the growth opportunities are limited, they are more likely to seek greener pastures. 

Job-related reasons, such as stress, lack of resources, inadequate training, or dissatisfaction with job characteristics, also contribute to voluntary turnover. These factors underscore the importance of job design and providing necessary resources for employees to perform their tasks effectively. 

Health & Family and Work-Life Balance are other significant factors. These encompass issues like child or elder care, work-related health issues, travel, commute, or scheduling preferences. In today's fast-paced work environment, achieving a healthy work-life balance is more important than ever. Employees may choose to leave if they feel overwhelmed by their work commitments to the detriment of their personal life. 

Total Rewards, which include base pay, benefits, bonuses, or commissions, also play a role in voluntary turnover. While not the most significant factor, it's still a crucial aspect. Employees who feel they are not adequately compensated for their work may seek employment elsewhere. 

By addressing these issues, employers can create a work environment encouraging employees to stay, thereby reducing turnover costs. 

Why Retention is More Important than Recruitment 

The value of retention over recruitment cannot be overstated. 

When an organization prioritizes retention, it sends a clear message to its employees: "We value you. We want you to grow with us." This not only boosts morale but also fosters a sense of loyalty and belonging. Employees who feel valued and appreciated are more likely to stay with the company, reducing turnover and associated costs. 

On the other hand, while necessary, recruitment can be costly and time-consuming. It involves advertising the position, screening and interviewing candidates, and onboarding the new hire. And even after all this effort, there's no guarantee that the recruit will be a good fit for the company or stay long-term. 

Focusing on recruitment over retention can lead to a high turnover rate, which can have a detrimental effect on a company's bottom line. The costs associated with turnover aren't just financial – they also include lost productivity, decreased morale among remaining staff, and potential damage to the company's reputation. 

But the benefits of focusing on retention go beyond cost savings. Retaining employees means preserving institutional knowledge and skills within the company. Long-term employees have a deep understanding of the company's operations, culture, and goals. They can mentor new hires, contribute to a positive workplace culture, and drive the company towards its objectives. 

In contrast, a high turnover rate can lead to losing this valuable institutional knowledge. It can disrupt the continuity of teams and projects and result in a lack of experienced staff to mentor new hires. 

Companies can reduce costs, preserve institutional knowledge, and create a positive, stable work environment that fosters loyalty and productivity by focusing on retaining existing employees. 

Improving Retention through HR Outsourcing 

HR outsourcing, particularly through a Professional Employer Organization (PEO), can be a game changer for employee retention.  

By outsourcing HR functions, companies can offer better benefits packages, implement quality HR practices, increase employee engagement, and ensure error-free payroll. 

The Power of Benefits 

A great benefits package can significantly contribute to employee retention. Today's employees seek high-quality benefits, including health insurance and voluntary benefits like dental, vision insurance, accident insurance, and more. PEOs can offer these superior benefits, attracting employees more likely to stay with your business. 

Quality HR Practices 

Outsourcing HR can lead to better overall HR practices that enhance employee satisfaction and encourage them to stay with the company. This includes better hiring practices, streamlined onboarding processes, and improved training opportunities. The administrative burden lifted from your internal HR team allows them to focus on creating a better company culture. 

Increased Engagement 

Employees working for companies with an outsourced HR partner are more likely to be engaged at work. This engagement can lead to a more substantial commitment to the company and a higher likelihood of employees planning to stay until retirement. 

Error-Free Payroll 

Payroll mistakes can cause severe difficulties for employees. They expect their employer to be trustworthy: to pay them on time and provide the payment they deserve for their work. By outsourcing HR, you can ensure error-free payroll, creating a more profound sense of security and commitment in your employees. 

HR outsourcing isn't just an excellent way to decrease HR costs and offer more to your employees. It's also a great way to increase employee retention and engagement. When you partner with a PEO, you'll find that employee satisfaction increases across your organization, making them more likely to stick with you long-term. 

Retention and Recruitment 

The costs associated with turnover, from separation to training, can significantly impact a company's bottom line. On the other hand, investing in retention strategies reduces these costs and fosters a positive work environment that encourages employees to stay and grow with the company. 

The importance of retention over recruitment is not just about saving money; it's about building a strong, committed team that drives the company forward. By focusing on retention, employers can create a stable, productive workforce that contributes to the company's success in the long term. 

As you move forward, it's crucial to remember that employees are not just numbers on a spreadsheet. They are the heart and soul of any organization. Their skills, dedication, and passion are what make a company thrive. It's in every employer's best interest to prioritize retention and create a work environment where employees feel valued, respected, and motivated to do their best. 

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Please note that the information presented above is not intended to be specific, technical, or professional advice. Our aim is to educate and provide insight into relevant topics.