The Cost of Employee Turnover

The Cost of Employee Turnover

Finding the right employees are important. We all know this. It is however a serious cost driver, if we can’t keep them long enough to rip the benefits. Out of control voluntary turnover (churn) has a negative impact on employee morale, productivity, and company revenue.

Recruiting and training requires staff time and money and will ruin any company both financially and culturally if the “hole in the bottom” is left unattended to.

How do you calculate employee turnover?

Let’s begin by defining the most important metrics when it comes to employee turnover. As illustrated below they are all quite easy to calculate, and important indicators of the health of the human capital.

To get more up to date data, you might want to operate with monthly figures instead of yearly. If the size of your organization is not big enough, a good alternative is to use rolling 12 month figures (R12), which you will be able to report on monthly basis (see below) and hence be able to be more real-time and proactive.

Besides being as real-time as possible about your data, you may also want to differentiate your turnover figures in two groups: voluntary and involuntary. Further segmentation based on organizational units, regions, groups of employees (e.g. high/low performers and leaders/non-leaders) or whatever makes sense in your company is also adviced. This will give you an even more detailed story and create the basis for conducting your root course analysis where it “hurts” the most. Not segmentating create the risk of just averaging problems out. The formula is quite simple as illustrated below:

The employee turnover amongst the newest hires within the first year is a very easy way to asses if your recruitment efforts are on the right track. It doesn’t tell you if you are recruiting the right people, only if they stay or not, so be careful when interpreting on these data.

Is employee turnover something we should avoid at all cost?

Having a level of churn close to zero is both unachievable (people eventually retire) but it is also undesirable. Like living organisms, companies need to renew themselves. New employees are the most efficient organizational developmental tool and can help a company keep the edge and keep the innovative momentum (as long as you don’t just hire a new warm body).

So is there a magic number which is just right?

The number in itself is not really important, and will vary depending on your business and the strategy. So you need to arrive at your own number – and more importantly investigate into the development, the root causes and implement counteractions. Churn figures varies greatly if we consider countries, age-groups and businesses. According to the Bureau of Labor Statistics, turnover is highest in industries such as trade and utilities, construction, retail, customer service, hospitality, and service. Comparing your numbers within your industry may tell you a story about your attractiveness as an employer.

What is the cost of employee turnover?

Studies of the cost of employee turnover are not surprisingly all over the board. Replacing a highly skilled specialist of whom only 3-5 people exist in the world (for a remote location, let’s say Antarctica), may be excessively more expensive compared to the cost of replacing an entry level position, in a region where the supply and demand situation is in favor of the company.

The costs of replacing an employee varies based on the individual person, function, company, industry, region, country, demographic situation, economic conditions, etc. The list goes on, and its element are generally divided into two categories.

Category 1 - direct replacement costs:

  • Separation costs such as exit interviews, severance pay, and higher unemployment taxes
  • The cost to temporarily cover an employee’s duties such as overtime for other staff or temporary staffing
  • Replacement costs such as advertising, search and agency fees, screening applicants, including physicals or drug testing, interviewing and selecting candidates, background verification, employment testing, hiring bonuses, and applicant travel and relocation costs
  • Training costs such as orientation, classroom training, certifications, on-the-job training, uniforms, and informational literature.

Category 2 - Indirect costs:

  • Lost productivity for the departing employee who may spend their last days on the job writing exit memos or with reduced morale
  • Lost productivity due to the need to hire temporary employees
  • Coping with a vacancy or giving additional work to other employees
  • Costs incurred as the new employee learns his or her job, including reduced quality, errors, and waste
  • Reduced morale
  • Lost clients and lost institutional knowledge

A recent US CAP survey (primarily considering the direct replacement costs) states that turnover costs seem to vary by wage and role of employee as follows:.

  • 16% of annual salary for high-turnover, low-paying positions
  • 20% of annual salary for mid-range positions
  • Up to 213% of annual salary for highly educated executive positions.

Considering the fact that headhunter cost is classified as a direct replacement cost and many of these quote their price as a percentage of the employee’s total yearly benefit package, this conclusion seems very fair. In Denmark headhunter costs varies in the range of 8 – 40% based on the total compensation of the new employee. The levels however is subject for debate as most research papers only consider category 1 in their estimations. Direct costs may be easy to measure, indirect cost by their very nature may be hidden and difficult to ascertain.

Some studies (such as SHMR) predict that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. Another survey study (including indirect cost elements), found the following averages:

  • 30-50% of annual salary for high-turnover, low-paying positions
  • 150% of annual salary for mid-range positions
  • Up to 400% of annual salary for highly educated executive positions.

The real cost of turnover is as indicated typically underestimated due to the many intangible, and often untracked, costs associated with employee turnover. Local industry benchmarks may be a good indicator, but to arrive at the real number, a more structured approach is needed, including making assumptions and gathering / calculating costs. Please find a link here to a edited version of a list of churn cost published by Mr. William G. Bliss. If you click on the link above, you can open it as a spreadsheet and use as your a "churn-calculator". Just enter your figures on the right side.

Getting specific about facts and costs will create a basis for making a rational decision of which HR projects to pursue. Also this will be a valuable driver for getting funding or approval if investments are needed.

It is typically well worth the time, money and effort to take churn seriously - track it and fight it!

So how do we fix the problems?

Next step is NOT to implement a standard set of HR fixes. There is no one size fits all. No magic pill to take for all organizations, although common problems do exists and inspiration from standards makes good sense if it can cure your disease.

Other functional areas tackle the same kind of problems, using the path of continues improvement. It makes absolutely good sense to use the LEAN toolbox in HR. In the LEAN toolbox you can find inspiration and methods to find root causes and develop countermeasures, to improve the company health and profits. If you are curious, you can find a number of great articles about LEAN and root cause counter measures online. You will not only be able to solve your problems. You will also learn to speak a language that the rest of your organization may already speak, and hence become a more valued member of the organization.

One of the more straight forward root cause indicators when addressing employee turnover would be to simply ask the employees leaving (in a structured way), getting to the root causes. Exit interviews are however an "art" and it is debatable whether or not it returns a truthful answer, which can be used when developing counter measures.

In closure it is important to stress that potential churn countermeasures need to be balanced with other HR initiatives and their potential economic benefit for the organization. Maybe churn is not the biggest issue. But unless you measure it and calculate it you will never know.

Conclusion

I have reserved a very limited space for the “fix the problems” part. The reason for this is two-fold . First there is no quick fix, so adding a generic fix may have no effect at all - or even create an even bigger problem. Secondly the fundamental problem in many HR dapartments may be its lack of structure and data when deciding what HR initiatives to follow. All too often the prioritization is done based on hunches, gut feel or even personal desire or interest. So with this article I hope to point to the fact that HR needs to follow the same principles as other organizational units and that employee turnover as a important cost-driver, can be a good way to start doing this, and most likely is easy picking in terms of cost savings.

However the only way to know is to measure it and find out. Good luck!

Considering the list of cost elements in churn, I'm very interested in your comments regarding how you calculate or estimate churn cost and to what degree or what role this play (if any) in the HR strategy of your company!

Naomi B.

Account Executive - Quadient transforms business communications focusing on: Mail Related Solutions, Digital Transformation, & Customer Experience

9y

While there is no quick fix to the issue, I work for a leading at provider of technologies and services to those in the food industry. Many of our customers have reported they have reduced employee turnover by properly training and engaging employees. This is merely one benefit of investing in the best training technologies available. "According to the U.S. Department of Labor, it costs one-third of a new hire’s annual salary to replace him or her. For an $8/hour employee, the costs would total over $5,000." The average cost to train and retain employees is significantly lower. Implementing a corporate strategy to address retention is something we will certainly be seeing more of as organizations struggle to meet financial objectives. The challenge is to quantify an employee’s knowledge, experience, engagement, and productivity compared to newer employees. http://www.workforceinstitute.org/wp-content/uploads/2008/02/Intro-to-book07.pdf

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