Budgets are tight, deadlines are looming and your prized office manager appears in front of your desk to say, “I’ve been researching salaries, and I’ve found out that I’m underpaid. The general rate for office managers here in Sacramento is around $65,000. I’m currently making $55,000. What do I need to do to bring that up to a competitive rate?”

What indeed. Money doesn’t grow on trees, and every penny is already budgeted out. So, do you cut elsewhere and give the office manager a raise? Or do you tell her you’re sorry but there’s no money, increasing the chance that she’ll quit, saddling you with another expenses. Just how much does turnover really cost?

Experts battle over the costs of turnover. For lower-level positions, where skills are not important and available labor is abundant, the costs can be minimal — a couple months salary for the employee. If an executive or top performer leaves, it can cost you 150 percent of the annual salary to replace that person.

If your eyes are bugging out or you’re saying, “That’s nuts! It doesn’t cost us anywhere near that to replace someone!” it’s because most turnover costs are hidden. They don’t hit a budget line; they are easy to ignore. But here are a few of the places where you’ll pay dearly:

RECRUITMENT. Someone has to do the recruiting. If you’ve got an HR department, you can say it’s part of their job, no extra cost. That’s true. But what could they be doing if they weren’t screening candidates, sorting resumes and contacting references? Plus, interviews take a lot of time. How much does this person’s manager make? Every hour she spends interviewing candidates is an hour you’re not getting “real” work accomplished. This costs.

UNFINISHED BUSINESS. Just what did this departing employee do? It’s either not getting done, or it’s getting done at the expense of other tasks your staff has to drop in order to make accommodations. And when some work doesn’t get done on time, it costs additional money. Your clients aren’t as happy, or you get a late fee on a bill that should have been paid. What about that departing office manager? If she handled all the office-supply orders and now she’s gone, and you go to print 30 binders of information for tomorrow’s client meetings and there’s no paper … Think about the consequences. Not only does someone have to take the time to go to the store, the people who were going to put the binders together have to sit and wait until the guy gets back with the paper.

If an executive or top performer leaves, it can cost you 150 percent of the annual salary to replace that person.

LOST KNOWLEDGE. Everything your employees do is written down and everyone is cross-trained, right? Sorry, a little joke there. When someone leaves, there is undoubtedly a bit of necessary wheel reinvention. The smaller the business, the more of that there tends to be, as one person often handles numerous different functions. It’s often the little things that don’t get written down that are the most problematic.

So, turnover costs a lot. Which means it may be cheaper to make sure all your employees are paid at market rates — and a little higher if you can swing it.
But does that mean you should throw money at people to get them to stay?
If your employee comes to you and says, “I have an offer to work for [another business]. I’d like to stay here, if you can match the salary,” the correct answer is always, “Wow! Congratulations on the new job. We’ll miss you!” Why is that? Because 80- to 90 percent of people who accept a counter offer end up leaving within a year anyway. You’re not avoiding turnover, you’re just postponing it.

If your employee is just asking for more money or you notice yourself that your employees are underpaid for their skills and responsibilities and you simply do not have the money to give, what can you do?

GIVE ANOTHER PERK. These, of course, depend upon the type of work done by your employees and what they need. But what about allowing people to telecommute, work a flexible shift, work four 10-hour days or have half-day Fridays? All of these can be more valuable than an increased salary for some people.

If you sincerely tell your employees how much you value their work, they will feel appreciated. And employees who are appreciated are more likely to have positive feelings about their jobs. People who genuinely enjoy their jobs are actually willing to work for less money than people who hate their jobs.

GIVEN THEM A PIECE OF THE COMPANY. If you have no money in the budget to hand over cash, consider handing over stock. After all, someone who deserves more money may be willing to accept it via a delayed payment through stock. And giving them a piece of the company motivates them to want the company to succeed almost as much as you do. Of course it needs to be noted that this gift has tax implications for the recipient.

ASK FOR THEIR IDEAS. An honest, “I can’t afford to give you a raise, but I don’t want to lose you either. What can I do to show you how valued you are?” You may be surprised at the responses.  

YOU MAY HAVE THOUGHT THIS WAS ABOUT CUTTING TURNOVER DOWN TO ZERO. It’s not. It’s about doing what is best for your business. Your rotten employees will happily stay on for years because no one else wants them. Your best employees will go elsewhere. Solution?

GET RID OF THE JERKS. Sure, it costs to replace the shiftless lay-about, but at least you can replace that person with a hardworking, honest, straightforward person. And the bonus? Your good employees will be much happier working if you only have good people on board.

It’s impossible (and not even necessary) to totally eliminate the costs of turnover. 
But, if you realize how much it can affect your bottom line, you can make the necessary adjustments to make your business a place where good people want to work — making everyone, including your accountant, happy.