Turnover is the rate at which employees leave a company or workforce and are replaced. What few companies do is associate this with any cost. Employee turnover is one of the largest costs which can negatively affect the output, profit margin and efficiency of a corporation. It is also one of the least researched and monitored cost within many of today’s top companies. Even a small reduction in turnover can realize substantial cost savings in the long-term.
According to Adriana Costello of the London School of Economics, “it is estimated that the cost of employee turnover can range from 40-400% of an employee’s annual salary”
Let’s take a look at some of the “Hard” and “Soft” costs associated:
“Hard” Costs of Turnover
- Administration costs for leavers: exit interviews, payroll changes, etc.
- Covering a vacancy with temp-workers or overtime
- Recruitment and selection costs: advertising the vacancy, reviewing applications, conducting interviews, etc.
- On-boarding new hires: induction, training, etc.
- Severance pay
“Soft” Costs of Turnover
- Lost expertise
- Missed deadlines and disruptions to workflow
- Increased absenteeism due to stress
- Decreased productivity or customer service
- Reduced morale, which may cause remaining employees to express a desire to leave the organization
Putting a price on some of these may be hard to calculate, but to get a basic cost analysis that may help, we refer below to a calculation described by The Jouta Performance Group – a Vancouver based company specializing in outsourced human resource (HR) services, strategy and support.
For example, when an employee earning $40,000 leaves an organization, the lost knowledge that walks out the door with them, coupled with the cost of hiring and training someone new and waiting for them to get up to speed can cost a company conservatively $27,000.
How to calculate the cost of turnover
a) Direct and indirect costs of losing an employee (conservative)
- Lost brain trust, knowledge of your business (three months’ wages) = $10,000
- Reduced productivity prior to last day (operating at 50% for three months) = $5,000
b) Direct and indirect cost of hiring an employee (conservative)
- Job posting, resume screening, interviews, testing, meetings = $2,000
- Training costs: coaching, reduced productivity (three months’ wages) = $10,000
Total cost = A + B
$15,000 + $12,000
= $27,000 per employee that needs to be replaced
PLUS: Are there any other missed costs that should be included for your organization?
In today’s competitive economy, attracting and retaining top talent is the cornerstone to long-term success. If a company can evaluate their costs and create a targeted plan for reducing turnover by a mere five percent, this can equate not only to substantial cost savings but inadvertently to increased employee morale and company profitability.