Understanding the Costs of Employee Turnover

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Can anyone in your company give you a figure for TOTAL expenditures last year in replacing employees? You might be surprised to find that you are spending more on turnover than on retaining the employees you have.

OVERVIEW [top]When considering the costs of doing business, many executives automatically think of equipment, warehousing, raw materials and advertising expenses. If a piece of machinery breaks down, management could easily figure out its replacement cost. However, few employers consider the enormous costs of losing their skilled and knowledgeable employees. According to a survey by New York-based William M. Mercer Inc., 45% of companies report turnover costs of more than $10,000 per employee. One-fifth of respondents peg those costs at more than $30,000 for each lost worker. Naturally, any company's goal would be to reduce those figures and hang on to its employees, particularly in today's tight job market. Once you add up those replacement costs, you may want to spend some of that money on preemptive techniques to keep good employees. Unfortunately, most companies are completely in the dark when it comes to calculating their turnover costs. In this Quick-Read you will find:
  • How to calculate the cost of replacing an employee.
SOLUTION [top] Depending on your company's size, age and corporate culture, you may or may not have a problem with turnover. Begin by looking at the number of people you lost over the past year and the reasons they gave for their resignation. (You are asking them why in a departure interview, aren't you?) Were there external factors such as a relocating spouse or the desire to move to a particular area of the country? Or did they simply accept jobs with other employers who were able to offer them more in the way of salary, benefits, work/life programs and flexible scheduling, like telecommuting or flex-time? If it's the latter, you may need to seriously consider some policy changes to avoid turnover costs. Surprisingly, the actual process of calculating turnover costs is not that difficult. True, it takes some time and input from various individuals throughout the organization, but once you've identified all the components needed to form the final figure, you will have a handy tool that truly impacts the bottom line.
    1. Add up the hard costs — those aspects of hiring to which you can easily assign a dollar amount. This includes newspaper ads, headhunter fees and the expenses involved with interviewing (airlines, hotels, meals, etc.), signing bonuses and other perks such as a moving allowance.
 
  • Tally the soft costs. This part will be more difficult: These are components of hiring that managers seldom consider, much less assign a dollar figure to.
 
    1. Calculate the time managers and team members spend finding, selecting and interviewing potential replacements for your lost employee. If four people each spend an hour interviewing a key candidate, that's four hours of compensation to factor into your equation. If they talk to five final candidates, that four hours jumps to 20 hours.
 
  • Estimate other personnel costs such as temporary help or overtime pay for others to do the missing employee's work, trainer and trainee time during the replacement's break-in period, and administrative time spent adding the new employee and removing the former employee from payroll, insurance and other rolls.
   
  • Include other costs such as work put on hold until the replacement is fully functional, and lost business/customers.
   
  • Make a best guess about the more difficult-to-estimate cost of the loss of other employees. When one employee leaves (particularly if he or she was well-liked), that often leads to other workers jumping ship. Estimate the number of workers likely to leave, based on past experience, and multiply that number by all the costs above.
  Once you add up all these expenses on paper, you will have a good idea of how much it costs your organization to replace a valued employee. Multiply that figure by the number of employees who leave within a year, and you will most likely be shocked at your company's annual turnover expenditures. REAL-LIFE EXAMPLE [top] Although retention experts agree that calculating the costs of employee turnover is valuable, surprisingly few companies actually do so. This is particularly true among smaller organizations where the day-to-day demands of running the business take priority, and few take the time to figure out how much it costs them to replace a lost employee. When attempts were made to find and interview an entrepreneur who has calculated turnover costs, countless phone calls and e-mails came back with the same answers: "Oh, we don't do that." or "I can't think of anyone who has actually done the calculation." Finally, one large corporation reported it had an accurate figure. (The names below were changed at the request of the company.) On a scale of 1-to-10, employee turnover ranks a 9 for Samuel Mack, national manager of Mack Welding Supply. In early 1999, Mack Welding decided the time had come to take a serious look at what turnover was costing the company. Over a six-month period, human resources staff added up all the direct and indirect costs of replacing a valued employee. Included with obvious cost factors like salary and benefits were some often-forgotten expenses, such as those related to training. The company estimated its initial training costs were approximately $24,000. Mack Welding's total turnover costs averaged $200,000 for each salesperson and $170,000 for a customer service, clerical or administrative worker. Rather than present those figures to senior management as a justification for spending money to retain people, Mack Welding gave its employees a 62-question survey, asking them why people leave the company and what it could be doing better. In addition, the company has been using these calculations to demonstrate its dedication to employees. "We're saying 'when you join our company, here's the kind of investment we make in you,'" says Mack. "I like to use a little reverse psychology, saying 'we put all this time and effort in you. Now let's have some payback.'" DO IT [top]
    1. Analyze the amount of turnover at your company over the last year.
 
  • Determine the cost of that turnover. What is the cost of replacing that employee — the soft costs as well as the hard costs? Don't forget to include the time spent interviewing, the costs of advertising and headhunting, and the business you have lost as a direct result of that employee's resignation.
   
  • Start uncovering the reasons why turnover is occurring. Consult with everyone who has had any direct contact with departing employees. Talk to team members, managers, and human resources personnel. Ask what impact that employee's depart ure caused and how others are picking up the slack.
   
  • Finally, use this information when considering programs or benefits designed to curb employee turnover. For example, if you are spending $1 million per year to replace employees, the extra administrative costs of a telecommuting plan might look like a good investment.
  RESOURCES [top] Books Getting Employees to Fall in Love With Your Company, by Jim Harris, (AMACOM, 1996). Harris provides extensive lists of ideas that have helped companies build employee enthusiasm. Keeping Your Valuable Employees: Retention Strategies for Your Organization's Most Important Resource, by Suzanne Dibble, (Wiley, 1999). Chapter 4, "As We Go Forward," provides a sample worksheet for computing turnover costs. Smart Staffing, by Wayne Outlaw (Upstart/Dearborn, 1998). Chapter 19: "Reviewing Why They Leave and the Costs Left Behind," itemizes more costs than this Quick-Read Solution, and provides a sample worksheet. Audio Interview with Sharon Jordan-Evans, co-author of Love 'Em or Lose 'Em: Getting Good People to Stay (Berrett Koehler, 1999) and president, The Jordan Evans Group, Woodland Hills, Calif. (818) 347-6565. Internet Sites How Much Does Your Employee Turnover Cost? by William H. Pinkovitz, Joseph Moskal and Gary Green. University of Wisconsin Extension, 1997. The High Cost of a Turnover, by Will and Suzi Helmlinger. Your Hire Authority, 1997. Decreasing the Staggering Costs of Turnover in Your Organization, by Joan Brannick. Brannick HR Connections, 1999. Article Contributors Writer: Julie Cook
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