The Cost of Unhappy Employees to the Company

Published by Anoo P on

As per a Gallup estimate, unhappy and disengaged employees cost the U.S. alone $450 – $550 billion in lost productivity per year.  The numbers are equally grim over the world. Disengaged employees cost the U.K. £85 billion per year, Germany 75.6 billion to 99.2 billion euros per year, Japan 26 trillion Japanese yen (JPY) and about $232 billion U.S in lost productivity.

In fact, according to the Gallup report, an overwhelming 85% of employees worldwide are not engaged and also admitted to hating their jobs when surveyed anonymously.

The U.S. fared slightly better where 70% of the working populace declared they hate their jobs, while China and Japan fared among the worst with an overwhelming 94% of the working populace being completely disengaged from their jobs and suffering from acute stress and burnout.

The report states, “Many people in the world hate their job and especially their boss. Many companies are experiencing a crisis of engagement and aren’t aware of it.”

The causes of unhappiness and disengagement among employees could include:

  • Being underpaid
  • Bad work-life balance
  • Dissatisfaction with the job-role
  • Lack of recognition/not being appreciated enough
  • Personality clashes
  • Limited career-growth opportunities
  • Difficult managers

Employee unhappiness or dissatisfaction has a direct effect on a company’s performance, productivity, and earnings.

Below are a few practical ways to measure financial loss your company is facing because of disengaged employees.

1. Decreased Loyalty & Declining Productivity

Organizations are dependant on customer loyalty and customer loyalty, in turn, is dependent on the quality of service received from the employees. Happy, and loyal employees are emotionally committed to becoming brand advocates by providing great service.

Employee engagement is the differentiating factor between the success and failure of any organization because it defines the quality of work, productivity levels, customer satisfaction/dissatisfaction and the resulting revenues.

Disgruntled employees on the other hand lack loyalty. Their quality of work drops in proportion to their loyalty.

They go to the office to do their job instead of providing value to their organization through great work.

The sure signs of an employee’s disengagement and resulting decrease in productivity include procrastination, rushing through things, making mistakes, missing out on deadlines and important features, and an overall decline in the quality of work resulting in a much less than an ideal product that finally affects customer satisfaction negatively.
Due to their resentment, unhappy employees may even leak crucial company information.

Each disengaged employee costs you 34 percent of their salary because of, their tardiness, low to none productivity, and spreading negativity whilst undermining their peers.

The report states disengaged employees cost their organization $3,400 for every $10,000 of salary (i.e. 34%), which means, for example, an actively disengaged engineer in your organization who makes $80,000 a year, will cost the company $27200 a year!

Now, using both the metrics Dr Britt Andreatta suggests you can predict the amount of money disengaged employees cost their organizations.

For example, let’s take an organization that has 6000 employees. If the average number of disengaged employees is 17.2 percent, then the number of disengaged employees would be 1032 (6000 x .172).

Now, to figure out the cost of lost productivity of those employees, if the median salary is $60,000 per annum, each disengaged employee costs you $20,400  on an average or 34 percent of their salary ($60,000 x .34).

Which means, altogether the disengaged employees are costing your organization (1032 x $20400) $21 million a year!

Further, if a disengaged employee finally resigns, the performance and productivity levels of the organization drops even lower.

When well-experienced people leave an organization, loss of institutional knowledge occurs. It is a loss of trained and experienced staff who were specialized and well-tuned with the goals of the organization.

A missing employee makes his presence felt through his absence when the level of performance and production in the company drops down.

Besides, it takes a year or longer for a new employee to reach the full productivity level of an employee who has resigned.

According to the Studer Group, “A survey of 610 CEOs by Harvard Business School estimates that typical mid-level managers require 6.2 months to reach their break-even point.”

In other words, mid-level positions need more than six months to recover the investment made on the hired resource. Which in turn means it takes more than six months for the organization to start performing at an optimum level.  

Bill Bliss, from Bliss & Associates, breaks it down even further. He writes, “The following formula can be used:

  • the employee is only 25% productive for the first four weeks
  • 50% productive for weeks 5 – 8
  • 75% productive for weeks 9 – 12
  • and will finally reach full productivity after week twelve

Since this person is being paid at the full rate of pay during this period, there are still more lost productivity costs. Naturally, for more senior-level positions, or those requiring longer periods of time to develop full productivity, the costs will be higher.”

Attrition of employees from a company, thus, is not only a loss of investment but also a loss of profit due to decreased organizational productivity.

2. Cost of Employee Turnover

A study from the Society for Human Resource Management (SHRM)  shows the cost of an employee turnover is six to nine months’ salary on average for salaried employees.
The Center for American Progress (CAP) study states that the average costs to replace an employee are:

  • 16 percent of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year).
  • 20 percent of annual salary for midrange positions (earning $30,000 to $50,000 a year).
  • Up to 213 percent of annual salary for highly educated executive positions.

According to TLNT on the other hand, the turnover costs for:

  • entry-level employees, is between 30-50 percent.
  • mid-level employees, is upwards of 150 percent.
  • high-level or highly specialized employees is around 400 percent.

On the whole, there are many costs both direct and indirect connections to replacement hiring, not all of which is tracked by the company, but which hurts it nonetheless.

The costs, both direct and indirect, include:

  • Advertising & events
  • Agency/outsourcing/vendor’s fees
  • Hours of manpower fees
  • Travel expenses for interviews if necessary
  • Background checks
  • Medical screenings
  • Onboarding costs
  • Training costs
  • Vacancy costs or the impact on productivity due to a talent shortage
  • Hours spent in training the employee
  • Medical benefits
  • Cost of integration into the workplace, from providing new computers to possibly other new gadgets.
  • Loss of productive revenue generating time as the new employee takes longer to provide solutions and effective customer service
  • Low morale in high turnover situations
  • Reduced business, or possible loss of business deals due to customer dissatisfaction

Jack Altman, suggests that though some major intangible costs like dampened employee morale cannot be captured in numbers, organizations can get a good sense of the costs involved by evaluating four major buckets:

  • Cost of hiring
  • Cost of onboarding and training
  • Cost of learning and development
  • Cost of time with an unfilled role

This provides the approximate overall annual cost of turnover.

Let us consider the example of a single employee in a year:

The Cost of Training

The cost of training warrants a special mention here, as it is a very crucial and major cost during the employee turnover process. Training requires planning, investment of time, materials and aids for training, a trainer, and paying the employee for the hours of training. All these costs are incurred by the company, while the new employee takes time to learn, apply the knowledge, and gain experience before he/she can be effectively productive.

Instead, it invests money during this phase without immediate returns and even risks running into a loss, should the new employee for any reason suddenly decide to resign.

3. Loss of Reputation Leading to Higher Hiring Cost

Unhappy employees affect a company’s brand image which leads to a loss of reputation. Dissatisfied employees can post negative reviews of the company in public forums, and networking sites such as Glassdoor, LinkedIn, Twitter, Medium, Indeed, Facebook.

The power of such negative reviews is real. Disengaged employees can actually stop potential hires from joining the company, through bad reviews.

Added to this is the possibility, that the more negative the reputation, the more the organization may have to spend towards damage control and rebuild its image. It then becomes crisis management, not risk management.

A few surveys actually confirm that new job seekers do a thorough research of potential employers before applying for jobs.

The Bayt survey shows that 76 percent of the working populace research a company before considering job opportunities.
Software Advice discovered that 48 percent of the respondents used Glassdoor during their job search to research on companies.

Whereas, an Indeed study shows “83% of respondents said employer reviews influenced their decision on where to apply…This data suggests that employees and their online reviews are constantly acting as informal recruiters.”

Negative reviews and loss of reputation can actually lead to higher hiring costs.

LinkedIn’s VP of Talent Solutions, Wade Burgess, says, after using some research results, along with publicly available data on salaries, anecdotal evidence from friendly HR professionals about turnover rates, the numbers they crunched up were pretty startling:

  • “The cost of a bad reputation for a company with 10,000 employees could be as much as $7.6 million in additional wages. Based on the average US salary being $47,230 (according to BLS), assuming an annual turnover of 16.4%, and a minimum of 10% per cent pay rise.”
  • “Employers who fail to invest in their reputation could be paying up to an additional $4,723 per employee hired.”

In an article in HBR, titled Reputation and its Risks, Eccles, Newquist, and Schatz states, “in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations.”

4. Impact on Work Culture & Lowered Morale of Peers

Employee morale is the most important thing that can define performance and production in an organization and yet it is one of the most difficult factors to manage. Though the common belief that employees leave for better paycheques may be true in some cases it is low employee morale, difficult managers, and a feeling of being disconnected from overall company goals, and objectives that cause large-scale attrition.

To understand why employees quit, see: Why Do Good Employees Quit? What Can the CEO, HR, and Managers Do to Stop Them?

Disengaged employees put in their time grudgingly into work, but not their energy and passion.

This affects the morale of the actively engaged employees. Gallup found 30 percent of U.S. employees and 13 percent of the employees worldwide are actively engaged. Which means, disengaged employees undermine the hard work of the engaged 30 percent/13 percent of the workforce that is driving the performance and productivity of the company.

Usually, negative events affect humans more than positive ones. Therefore, humans are more likely to spread bad experiences on a larger scale than good ones.

If there are layoffs it gets worse, as now even the actively engaged employees may get psychologically affected.

5. Dissatisfied customers

One critical area which gets affected when the employees of an organization are unhappy and disengaged is customer satisfaction. Dissatisfied employees lead to dissatisfied customers.

Vineet Nayar, the former CEO of HCL technologies, and the founder and chairman of Sampark Foundation, as well as the author of the widely acclaimed management book, “Employees First, Customers Second: Turning Conventional Management Upside Down”, (Harvard Business Press, June 2010), writes in an article titled, ‘Why I put My Employees Ahead of My Customers,’ in Forbes,  “Employees First, Customers Second is a management approach. It is a philosophy, a set of ideas, a way of looking at strategy and competitive advantage. Every employee who works in the value zone is capable of creating more or less value. The whole intent of Employees First is to do everything we can to enable those employees to create the highest possible value.

We have found that the Employees First approach produces far more passion than any motivational or recognition program. Why? Because it proves that management understands the importance of the work being done by the employees in the value zone.”

Dissatisfied employees lead to poor customer retention, which in turn affects the revenue generation. Let’s say a product costs $500, and the company sells around five such products every day. Due to negative reviews, with four customers gone, the company will miss out on $2000 in sales every day. That’s a whopping $730000 lost in sales per year!

If one wants more customers, then the oft-quoted line to be followed to a T is ‘Happy employees equal happy customers.’

Promoting employee satisfaction and engagement can work wonders for a company. It can bring in bonus rewards in the form of happy, satisfied customers and a great business reputation. This, in turn, can accelerate growth and reputation exponentially. As Peter Druker famous said, “If you can’t measure it, you can’t improve it”. The first simple step can be to start measuring employee satisfaction at work using a real time employee engagement software.  Remember, conducting an engagement survey is just the first step though. If HR conducts an engagement survey and leaders do not act on it, then engagement may become worse than if the survey never happened.