Articles

Calculating the High Cost of Employee Turn-over

by Dr. M Marie Sanders

There are two ways to increase the "bottom line" profit of an organization:

Increase the income
Decrease the cost of doing business

The latter may be easier to achieve than the former ... without sacrificing product or service quality. Consider the high cost of losing talented workers. These costs include direct costs such as attracting, hiring and training replacements and indirect costs such as lost business, loss of productivity and low morale.

Some sources estimate turnover costs 30-50% of the annual salary of entry-level employees, 150% of middle level employees, and up to 400% for specialized, high level employees!

The Society for Human Resource Management (SHRM) estimates that it costs $3,500 to replace one $8 per hour employee when all costs -- recruiting, hiring, interviewing, training, reduced productivity, etc., are considered. This estimate ($3,500) is the lowest among the top nationally respected companies, many of which estimate the cost to be more than twice that amount for an entry-level employee. An often used non-specific approach to calculate employee turnover cost is from 30% to 400% of an employee's annual salary. Some sources estimate turnover costs 30-50% of the annual salary of entry-level employees, 150% of middle level employees, and up to 400% for specialized, high level employees!

To see how this might be accurate, consider these costs:

Direct Costs

Direct turnover costs are those that result from actions to exit employees who are leaving and then hire and train their replacements. These costs are typically easier to measure than the indirect costs.

Separation Costs

HR exit interviewer salary and overhead costs
Post-employment administrative costs to prepare exit documents
Separation pay -- if any
Unemployment rate increase

Replacement Costs

Pre-employment administrative costs
New hire administrative costs
Pre-employment advertising and attraction costs
HR employment resume screening
HR employment interviewer salary and overhead costs
Assessment, background and screening checks
Staff meeting costs as a result of the replacement requirement
Travel costs

Training Costs

Informational materials, training manuals and technology requirements
Salary and benefits during training (non-productive)
Salary and benefits during first year of service (less productive)
Trainer's salary and benefits

Indirect Costs

Indirect turnover costs, while more difficult to measure, are no less important or real than direct costs. Examples of indirect costs are:

Lost Productivity and Sales

Loss of productivity from other employees filing in for vacant position
Loss of productivity from supervisors
Overtime wages for other employees filing in for vacant position
Temporary/contract employee costs
Production or sales interruption costs- missed deadlines or shipments
Loss of organizational knowledge
Lower morale due to overwork

Lost Customers

Client issues due to turnover
Customer Dissatisfaction - loss of client relationships
Chain reaction turnover

While HR needs to be a key partner in reducing turnover cost, this is a strategic issue requiring top management's attention and actions, in addition to HR's efforts, to resolve it. The goal is to retain valued performers while replacing poor ones.

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Tips for Reducing Employee Turnover

Know the Job You're Hiring For:

Thoroughly investigate the position you are hiring for. Advertise for that job. Employers tend to be vague in the descriptions of the job they are hiring for using phrases like -- "other duties as assigned" -- in advertising job descriptions. If you don't know what the position will require at least 80-90% of the time, avoid advertising and hiring for that position until you do. Doing so will greatly increase the likelihood of hiring the right (well qualified) person the first time.

Match your organization's profile with your target hiring group:

What can your organization offer? Is career advancement available? If so, target young career oriented individuals. If not, consider hiring older employees who are less concerned with advancement.

Understand Employee Motivation:

Retaining staff requires learning what's important to your employees. Look to the external motivators like recognition and rewards. Remember the internal motivators of purpose and passion.

Determine the Cause of the Turnover as Well as the Cost:

Often, the true cause of employee turnover usually won't be found in a typical exit interview. Departing employees find it less confrontational to provide the usual response of leaving for more pay or a better job. Search for a deeper reason. Was it a lack of support? Was the pay structure unreasonable? Take the time to get to the bottom of the turnover.

These tips to reduce turnover are a good start to understanding your employee loss issue. Don't forget to be critical and always look inward. You may be the source of the turnover. Make certain your management style is the way you would want to be managed. High turnover can be a signal your business is in trouble.