Hidden Costs: Employee Layoff and Replacement

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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 have even begun to lay off staff. 

This is not surprising, as cutting a company’s workforce has often been a business tactic to stay afloat. Yet, when considering layoff costs, 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. 

Employee Replacement Costs

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 — meaning layoff costs and the replacement of an employee whose salary is $40,000 can add up to $120,000 or more. 

Another 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 eight weeks for clerical jobs, 20 weeks for professionals, and more than 26 weeks for executives to reach the performance levels of their predecessors. As a result, it takes a company up to six months to recover its layoff costs and 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 in employee replacement costs 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 cost 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 workplace anxiety 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 — much less than the possible employee replacement costs of a burnt-out worker, making employee coaching 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.

Activate 180 has a proven track record of increasing employee engagement and productivity through unique and customizable performance coaching. Try a limited-time trial today to see how our holistic approach can help you reduce your employee replacement costs. 

Cost to Rep

Patrycja Skurzak

Patrycja is a Professional Certified Coach (PCC), Facilitator, and Neurolinguistic Practitioner, empowering employees to operate at their peak performance level. With her background in neuroscience and psychology, she has strengthened and developed the Activate 180 coaching methodology to produce optimized results for companies and their teams.