Investing in Employee Retention

26 Nov

Employee retention is often framed as a HR issue. But from a finance standpoint, it’s a core value driver and one worth careful investment. The cost of turnover is high, and smart retention strategies can deliver strong returns. Here’s how to think about it, with both numbers and practical strategies.

The True Cost of Employee Turnover

As you map out how much to invest in retention, first understand the cost you’re avoiding by retaining talent.

Studies show that replacing an employee can cost 0.5x to 2x their annual salary, or even higher for senior roles.
In Australia, the average turnover rate is around 8% annually, some industries are significantly higher.
Direct hiring costs in Australia (recruitment, onboarding, training) can be between $10,000–$30,000 per hire, depending on role and industry.
Indirect or “hidden” costs often make up a significant portion of turnover cost including lost productivity, mistakes, slower ramp-up, and cultural disruption.

How Much Should You Invest in Retention?

There’s no one-size number. The right investment depends on your business size, roles, turnover risk, and cost of replacement. But the financial logic is clear: if turnover costs are at least 50% of salary (and sometimes up to 200%+), then spending a small fraction of salary per employee on retention can yield a strong ROI.

Rule of thumb approach:

For a role earning $100k, replacement cost might be $50k–$200k (depending on seniority).
If you invest even $5k–10k in retention measures (training, tools, incentives, time with the manager), and you prevent one departure, it will have already more than paid for itself.

So, set a retention investment budget as a percentage of salaries and adjust depending on risk, role criticality, and turnover history.

Key Investment Strategies

Here are concrete ways to allocate retention investment from a CFO’s lens.

1. Professional Development & Training

This may include courses, coaching, mentoring, job-rotation. Investing in an employee’s skillset makes them more valuable to you and less likely to leave.
Financial logic: it lengthens tenure (reducing replacement cost) and improves productivity (boosting output per employee).

2. Resources & Tools to Do the Job

Ensure employees have effective software, equipment, adequate budgets, and clear processes.
Financial logic: poor tooling reduces productivity and increases frustration which leads to higher turnover risk. Investment here stabilises output, reduces errors, and supports retention.

3. Goal-Setting and Career Paths

Work with each employee to set quarterly/annual goals, review progress, map career paths.
This investment is largely in your (or their manager’s) time, perhaps modest in dollars but high in impact.
Financial logic: greater clarity and progression reduce turnover risk, extend tenure, and sustain expertise in-house.

4. Your Time / Manager Time

Regular check-ins, one-on-one meetings, mentorship. Your time is the most leveraged resource.
Financial logic: investing 1 hour per month per employee to maintain engagement is inexpensive relative to $50k+ replacement cost.

5. Incentives & Rewards

Bonus programs, recognition awards, non-monetary perks (extra leave, flexible hours, team events).
Financial logic: these acts strengthen loyalty, improve morale, reduce hidden costs of disengagement (which often precede exit).

6. Wellbeing & Culture Investments

Offering remote/hybrid work, wellbeing support, strong culture. Many exits stem from dissatisfaction with management or work-life mismatch.
Financial logic: reducing turnover even by 1–2% in a 20-50 person firm could save tens of thousands of dollars each year.

Other Considerations & Risks

Target high-risk and high-value roles first: leadership, sales, key technical staff. These often cost the most to replace.
Track metrics: turnover rate, retention rate by role, cost per hire, ramp-up time for new hires. Measure improvement.
Watch for “false retention”: retaining someone without engagement may still cost you. Retention means engagement and performance.
Balance investment with fairness and scale: you don’t want retention spending to tilt into unfair perks for some or inflate costs unsustainably.
Link retention investments to business strategy: align development with the skills your business will need going forward (not just retention for retention’s sake).
Consider the cost of inaction: high turnover can hurt brand, client service, and business knowledge, all of which have financial consequences beyond replacement cost.

So how much should you spend on employee retention? Enough to materially reduce your turnover-risk for critical roles, and structured so the return on investment is clear.

Retention is a strategic financial investment. When done well, it preserves business knowledge, sustains performance, and removes costly cycles of hiring and ramping.

Sarah Petty