How much does it cost employers to drop their workers?

How much does it cost companies to drop workers?

A standard performing employee comes to you with proof that he is underpaid by 10 percent. Your company's funds are already tight. He makes $60,000 a year. Should you:

1. Recommend a 5 percent raise;
2. Recommend nothing. In this economy he's lucky to have a job;
3. Recommend a 10 percent raise;
4. Just give that employee $100 gift card to the local mall.

With job aspirant lining up around the block, it might seem like good business sense to let employees quit rather than raising their salaries to be competitive. But a recent study from the Center for American Progress drives home why that isn't so: Employee turnover is expensive.

Turnover costs include efficiency losses during training, recruiting and lost work while a position is unfilled. For all jobs earning less than $60,000 per year, or more than 40 percent of U.S. jobs, the average cost of replacing an employee amounts to fully 20 percent of the person's annual salary, the liberal-leaning think-tank found in a study that looks at 31 corporate case studies.

So in the above example, choosing to not give even a middling performer a raise may net a temporary cost savings, but if he quits you'll be out 20 percent of his salary. The best option? Bump his pay up 5 percent. Even though employee replacement costs are a one-time expense and a salary increase is continuing, it would take four years of at higher salary to equal the price of replacing him one time.

High turnover, lower-paying jobs (those under $30,000 a year) are slightly less expensive to replace, at only 16 percent of annual salary, but that still adds up quickly. For example, 37 percent of hotel/motel and food services employees voluntarily quit a job in 2011. That represents a major expense to businesses already running at the margin.

A few employers found that such businesses could decrease their turnover by changing their internal policies. In other words, those same policies that make it a great place to work also lower turnover costs.

While the costs of losing an "ordinary" employee are high enough, researchers found that the cost of losing an executive is astronomical -- up to 213 percent of the employee's salary.

Researchers also say that offering workers low-cost benefits, such as sick days and a little flexibility, can significantly lower turnover. The conclusion is clear: While there is no perfect package of salary and benefits that will stop employees from jumping ship, companies should take turnover costs into account.