Unfortunately, managers are often unaware of the high costs that employee turnover can have on their organisation. Yet traditionally, management training programmes have ignored this important issue. If more managers were aware of the true cost and impact that employee turnover can have on an organisation, a well thought-out management training program designed to retain employees will easily pay for itself in a very short period of time.
But how can the cost of employee turnover be calculated? Employee turnover costs are not just those associated with engaging external suppliers for services such as advertising or recruiting temporary staff. There are also the costs of time and or lost productivity incurred when a position is vacant, or when a new employee is learning their role. The following is not meant to be a definitive list of all the costs involved when replacing an employee but serves as an example that can be included in management training programmes. The costs associated with employee turnover include the following:
- The cost of training the organisation has invested in the leaver (which will need to be undertaken by their replacement).
- The additional cost of the person(s) who fills in while the position is vacant. This can be either the cost of a temporary or the cost of existing employees performing the vacant job as well as their own, and may include overtime costs.
- The cost of lost productivity while the position is vacant.An estimate of this can be made by using 50% of the person’s compensation and benefits cost for each week the position is vacant if there are people performing the work.If the position is completely vacant use 100% of the employees compensation and benefits.
- The cost of externally advertising the job.
- Recruitment agency costs (these can be as high as 20-30% of annual compensation).
- Costs of internal or external assessments, psychometrics and interviewing (the cost of all candidates should be included).
- Costs associated with any external medicals, checks and other references, especially if these tasks are outsourced (again the cost of all candidates should be included).
- Costs associated with the time taken for a new employee to become ‘fully productive’.This may only take a few months but can take up to several years depending on their role. To estimate these costs, use an increasing scale based on annual salary.For example an employee may only contribute at a 50% productivity level for the first 6 months.The cost is therefore 50% of full salary during that time period.
- If the leaver is in sales, calculate the cost of loosing customers that the employee takes with them.In addition, divide the leavers sales budget into weekly amounts and multiply that amount for each week the territory is vacant.
The above provides an example of how the cost of employee turnover can be calculated. It has been assumed that the employee chooses to leave on their own accord and that costs such as severance pay or legal expenses have not been incurred.
Research has shown that these costs can easily reach 150% of the employee’s annual compensation figure, and can be significantly higher (+ 200%) for senior management positions.
To put this into perspective, let’s assume the average salary in an organisation is £20,000 per year. Taking the cost of turnover at 150% of salary, the average cost of replacing an employee is around £30,000. For a SME organisation employing 250 people with a 10% annual rate of turnover, the cost of turnover could be as high as £750,000 per year. For a large organisation employing over 1000 people, this cost would be £3 million!
As can be seen the costs and impact associated with an employee who leaves the company can be quite significant. This is not to say that all turnover should be eliminated, as organisations need ‘fresh blood’ from time to time. However, given the high cost and impact on running a business, it is somewhat surprising that many management training programmes do not include the issue of employee turnover, as a well thought-out management training program designed to retain employees will easily pay for itself in a very short period of time.