Give a Raise—or Let the Employee Quit?

Many business owners have struggled with the question: Is it cheaper to give an employee a raise—or let him or her quit?

A study from the Center for American Progress suggests that you may want to seriously consider accommodating the request for a raise. Researchers examined 30 case studies from 11 research papers published between 1992 and 2007, and found the average cost of replacing an employee is 20 percent of the person’s annual salary.

That figure includes productivity decreases when someone leaves, the costs of hiring and training a new employee, and the continued productivity decrease until the new employee feels comfortable in the new job. (If you think your employees are sure to stay put, think again: Roughly one in five U.S. workers leave their jobs voluntarily every year.)

For all positions except executives and doctors—jobs that require very specific skills—the typical cost of turnover was 21 percent of an employee’s annual salary, the study found. Employees in the lowest-paying jobs—those under $30,000 a year—are the least expensive to replace: They’ll cost you roughly 16 percent of the annual salary.

For workers earning less than $50,000 annually—a group that includes some 75 percent of all workers in the U.S.—the cost is 20 percent of the annual salary. It’s also 20 percent for workers earning $75,000 or less per year—which is 90 percent of all U.S. employees.

Replacing an executive can be ridiculously expensive—up to 213 percent of the employee’s salary.

The study also found high quit rates “are often due to workplace policies.” Bureau of Labor Statistics data show that both hotels and motels and food service industries have the highest voluntary quit rate, with 37 percent of employees quitting in 2011. (That’s nearly twice as many as were fired.)

Observed the study: “These are jobs that tend to pay low wages and often have little in the way of workplace benefits or policies to help workers address conflicts between work and family.”

What has been your experience with the cost of employee turnover?  

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