How Much Does It Cost to Replace an Employee in 2024?

How much does it cost to replace an employee? In 2024, it's more expensive than ever, with costs including recruitment, training, lost productivity, and onboarding time. According to the Labor Department's 2024 report, 3.3 million employees quit their jobs, down by 338,000 from last year. The quits rate stayed nearly the same at 2.1 percent.

Knowing that replacing employees can be costly and time-consuming, it's important to understand its impact and how to reduce it. This article tackles how much it costs to replace an employee, the downsides of turnover, how to calculate employee replacement costs, and common questions.

How much does it cost to replace an employee vs giving a pay increase?

The estimated cost of replacing an employee conservatively ranges from half to twice the employee's annual salary, according to a report. This means for an employee earning $50,000, the employee turnover costs could be as high as $100,000. Or if an employee’s salary is $80,000 a year, replacing them could cost up to $160,000. This includes hiring, training, lost productivity, and the time for a new hire to become fully effective.

Giving a pay raise, on the other hand, is often a simpler and cheaper way to retain existing employees. Recent reports predict salary increases of 3.5% to 3.9% in 2025. While pay raise costs money, it can improve employee satisfaction and loyalty.

When deciding between a pay raise or replacement, consider these factors in human resource management:

• Employee performance: Is the employee doing well and adding value to the company?

• Employee satisfaction: Are other issues, like work-life balance or job duties, affecting their satisfaction?

• Company budget: Can the company afford to give a raise?

• Labor market conditions: Is it hard to find qualified replacements for the role?

Compensation Planning Software makes it easy for companies to manage data. Managers can align rewards with performance, set pay increase rules, stay on budget, and track promotions. This can be an important part of your employee retention strategies.

Employee replacement meaning

Employee replacement is the process of hiring someone to fill a vacant position in a company. The process typically includes job posting, candidate screening, interviews, and selection. The main goal of employee replacement is to find the right person who can handle the role and help the organization succeed.

Possible causes of employee replacement include:

• Resignation

• Termination

• Retirement

• Layoff

• Death or disability

• Relocation

The average cost of new employees

The average cost to hire someone in the United States is $5000, according to a report. This covers the 40 to 50 days spent on advertising, vetting, interviewing, and hiring process. In a separate report by the U.S. Bureau of Labor Statistics, employer costs for employee compensation for civilian workers averaged $46.14 per hour worked in March 2024. Wages and salaries averaged $31.72, while benefit costs averaged $14.41.

Understanding these costs is important for building competitive pay structures that match market rates. This helps attract top talent while controlling expenses. Balancing wages, benefits, and recruiting and training costs is also essential for long-term success and growth.

Use Compensation Planning Software to calculate budgets by program or department and distribute them to all management levels. Track and control budgets for merit, promotions, and bonuses.

Disadvantages of employee turnover

High employee turnover can greatly harm an organization, particularly employee engagement. Here are some additional drawbacks:

• Financial costs

When an employee leaves, the company spends money on finding, hiring, and training a replacement. This includes job ads, interviews, and temporary staff costs, which can strain the budget.

• Disruption of operations

Turnover can disrupt workflows and operations, especially in important roles. Losing experienced employees can cause delays, lower service quality, and create a backlog of tasks while new hires are trained.

• Damage to company reputation

High turnover rates can make the company look unstable or have a poor work environment. This can hurt the company's reputation, making it harder to attract good employees and keep clients.

• Loss of institutional knowledge

When employees leave, they take important knowledge with them. It can be hard for new hires to catch up, causing delays and inefficiencies.

• Reduced innovation

Frequent turnover can slow down innovation. Other employees may avoid sharing new ideas if they feel insecure about their jobs, and new hires need time to get up to speed.

Not aligning and communicating total rewards can cause employee turnover. Compensation Software can help with this and create reports summarizing key data exported to PDF or Excel.

How to calculate employee replacement cost?

So how do you calculate employee replacement cost? The process includes the costs of recruiting, hiring, and training a new employee to take over from someone who has left.

1. Identify direct and indirect costs: Direct costs include hiring, recruiting, and training. Indirect costs cover lost productivity, team disruptions, and the time it takes for the new hire to adjust.

2. Estimate the costs: Assign a dollar amount to each cost, like $5,000 for recruiting or two months' salary for lost productivity.

3. Sum the costs and analyze: Add all the costs together to find the total employee replacement cost, then assess whether replacing the employee or giving a raise is more cost-effective.

Say goodbye to tedious manual tasks and speed up compensation planning with Compensation Planning Software. It helps prevent errors and improves accuracy when it comes to compensation calculations.

FAQs

Now that you know how much it costs to replace an employee, let's tackle some common questions:

What is the simplest way to estimate the cost of replacing an employee?

The simplest way to estimate employee replacement cost is to use a general rule of thumb. Replacing an employee usually costs between 1.5 to 2.5 times their annual salary, though this can vary based on the industry, job role, and company size.

What is the formula for replacement cost?

The employee replacement cost is the total expense of replacing an employee, including the costs related to recruitment, training, and lost productivity. The formula is: Replacement cost = hiring costs + training expenses + lost productivity costs.

Is it cheaper to keep an employee or hire a new one?

It depends. If an employee underperforms or harms team morale, replacing them may cost less than keeping them. But if the employee has potential, investing in their training might be cheaper than hiring someone new.