HR Budget Cuts May Weaken the Fight Against Turnover

Author: Victoria Kelleher

March 10, 2023

HR plays a key role in reducing turnover. From career development to DEIB, many HR initiatives are ultimately designed to maximize a company's chances of retaining top talent. Despite this, recent data indicates that employers who were hit by the highest turnover in 2022 are more likely to have cut their HR budgets for 2023.

A recent survey from Executive Networks found that most companies are facing a significant talent retention problem. For nearly a quarter of companies, this problem has been serious enough to be elevated beyond the CHRO-level, with the Board of Directors directly involved in the development of strategies to address it.

Although 83% of the 112 global CHROs polled in the study reported significant concerns about talent retention, the severity of the issue differed from company to company. About half of these respondents reported turnover rates below 12%, but the other half reported rates of 13% or higher, with some companies even facing rates as high as 20%.

Losing as many as 1 in 5 employees is cause for serious concern. Aside from the fact that the cost of replacing even just one employee is steep, losing too many workers can have a variety of consequences, from damaging a company's reputation to destabilizing its sense of community. Voluntary or involuntary, high turnover can damage morale among the employees left behind. Sometimes this even leads to a phenomenon called "turnover contagion," in which voluntary resignation begins to spiral out of control. Since losing control over turnover can have devastating consequences, it is no wonder that the Board of Directors often takes matters into their own hands if a company starts to have trouble retaining talent.

However, it can be tricky to design a strategy to address the problem. As high turnover begins to damage business performance, employers may feel compelled to offset costs by finding ways to trim the budget in a variety of departments. However, budgets cuts in the wrong places can backfire, potentially weakening the incentive for talented employees to stay and causing the problem to get worse.

Addressing the Financial Strain of Turnover

Due to the various consequences of turnover, organizations that had a worse-than-average turnover rate in 2022 very likely had some financial concerns to account for when planning for 2023. The impact of turnover on business performance puts pressure on business leaders to make difficult decisions, but these decisions can differ depending on the perspectives of those who sign-off on them.

If the decision is in the hands of a leader who recognizes the unsustainability of high turnover, they may react by restructuring or allocating more money toward the HR function. This allows for the enhancement of initiatives designed to entice workers to stay, which may stabilize the turnover problem and reduce the costs associated with it.

However, some leaders may instead react to a loss of revenue by looking for ways to reduce costs across the business. The HR function may be one of the first to be hit by these budget cuts, especially if a decision-maker perceives high turnover as a signal that investment in HR is not paying off.

When 2023 budget changes are compared, the CHRO of the Future research from Executive Networks shows an interesting trend in companies who fell above the median for turnover rate in 2022.

When compared with those below the median in turnover rate, companies with worse performance on this metric in 2022 have a flatter distribution in budget projections, with a higher percentage of these companies clustering toward extremes. For example, 14% of companies above the median 2022 turnover rate reported that their HR budget was set to decrease in 2023. Among companies below the median turnover rate, however, none reported intentions to decrease the HR budget.

Projected HR Budget Change by Turnover Rate

While only 15% of those below the median turnover rate reported no projected change in the HR budget for 2023, a frozen budget was reported by 32% of companies above the median. This was very different from organizations below the median, 85% of which reported that their HR budgets would increase to some degree. In comparison, only 54% of companies with higher turnover planned to increase their budget to some degree.

Takeaways

Most companies that performed better on turnover in 2022 appear to be investing more in the HR function for 2023. This may be a general indicator of stronger performance - companies with better outcomes on turnover may be performing better financially, and therefore see no need to cut budgets across the business.

However, the fact that nearly a third of these companies are increasing their HR budget by more than 10% suggests that successful outcomes in retention may be reinforcing investments in HR. Leaders at these companies may see the HR function as at least partly contributing to better-than-average outcomes and may think that more investment can increase performance even further.

In contrast, nearly half of companies with worse-than-average turnover are either freezing or actively decreasing their HR budget. This may be a broader signal of financial struggle, with leaders looking across the business to identify all potential places to cut costs. It may also indicate that lower-than-average performance is causing employers to overlook the value of the HR function.

At least some of these companies (22%) seem to be doubling down on their efforts by increasing the HR budget by more than 10%. This suggests an alternative approach, in which employers are reacting to underperformance by allocating more support to HR to improve turnover outcomes with better resources and practices.

The latter approach is likely the wisest. High turnover is often a symptom of broader issues in the employee experience that the HR function is uniquely positioned to address. Research shows that retention outcomes can be improved with various strategies and initiatives that fall under the jurisdiction of HR, but HR professionals can only design and implement these effectively with the support of company leaders.

Cutting the budget of HR restricts its ability to ensure that employees feel supported on every level, from mental health to career development, which ultimately makes retention more difficult. If HR does not have the resources to support these needs, more employees may choose to move to a new company that does. And, ultimately, a move that was intended to cut costs may accelerate the turnover problem that had such a costly impact in the first place.