From "Col" : Cost Of Employee Turnover

This article provides estimates of turnover costs for various groups of employees, and details the various factors that influence the total turnover figure.

Employee turnover is far more expensive than most people realise.

In the worst case scenarios the loss of a single individual can put at risk a major project, with implications for the long term viability of the company.

Many firms are underestimating the total cost of employee turnover by simply considering the more visible costs, such as the cost of finding a replacement, while ignoring many of the negative consequences of turnover and their associated costs.

Calculating The Cost Of Turnover

There are two types of costs of involved in employee turnover: visible costs and invisible costs.

Visible costs:

Exit costs

Recruitment costs

Induction/orientation costs

Training costs

Looking at some of these in more detail: Recruitment costs include the cost of advertising, the cost of the interview process including any psychometric testing and assessment centres, candidate travel costs, golden handshakes and relocation costs where applicable.

Invisible or hidden costs:

Management time

Disruption to fellow employees

Damage to morale

Missed business oppportunities

Lost productivity until new employee is up to speed

Damage to business relationships

Loss of knowledge, skills and expertise

Impact on reputation

Disruption to social and communication networks

Some of these hidden costs are more difficult to calculate and may need to be estimated using expert studies.

If attempting to calculating the total cost of turnover yourself, you will need to speak to a variety of relevant people. These will normally include the recruitment manager, training manager, customer relations manager and departmental manager. It may also be appropriate to speak to customers and clients to get a sense of their perspective.



Other Factors


There are several other factors that will affect the cost of turnover. These include the duration of employment, whether the departure was voluntary or involuntary, the time taken to find a replacement, and the time it takes to become fully productive in the role.

For example, an employee that leaves on their first day will cost far less than the loss of a fully productive employee who had established strong relationships with clients.

A role that requires a great deal of firm specific knowledge is likely to have a much higher cost of turnover than a similar role that can be performed with transferable (or generalised) knowledge alone.

The Importance Of The Total Cost

Firms need information on which to be able to make decisions. Where the cost of employee turnover has been underestimated, the firm is likely to underestimate the size of the problem and in turn, to fail to put in place the optimal solution.

There have been several notable examples where firms have folded, having neglected to pay attention to high employee turnover. How much this was due to underestimating the true costs of turnover is unclear, but a more accurate figure might have given them a warning of the dangers ahead.

So failing to establish a fair reflection of the actual cost of turnover may damage the business in the long run.

Estimates Of The Cost Of Turnover

There have been a number of studies done into the cost of employee turnover for various different groups of employees.

Turnover costs tend to be expressed as a percentage of salary.

Non-skilled 30 - 50%

Service/production 40 - 70%

Skilled 60 - 85%

Clerical/administrative 50 - 80%

Professional 75 - 125%*

Technical 80 - 125%

Specialists 100 - 250%

Supervisors 70 - 140%

Managers 70 - 150%*

* figures can exceed this range

Check the availability of replacements before arriving at your final estimate.

The loss of a highly productive employee will always cost more than the loss of an average performer in an equivalent role.

In areas such as customer service it is relatively easy to see how turnover can have a negative impact on customers, putting at risk the life time value of the customer to the firm.

Any employees in client facing roles should have a premium added to cover damage to business relationships.

An Example

Suppose we want to estimate the cost of turnover for two categories of administrative staff using available research based figures.

Category 1: Moderate standard, easy to find replacements.

Category 2: Good performers, more difficult to find replacements

Our research based range is 50 - 80% of salary

If we examine the list of invisible costs, considering each factor to see if it is relevant in this instance, we might reasonably assume that the loss of Category 2 employees would be more disruptive to fellow employees and that their replacements might take longer to become as productive. There may also be a degree of loss of important knowledge to consider.

In particular instances some of the other factors might be relevant but viewed as a category they would tend not to apply.

So overall we might consider it reasonable to place Category 1 employees near the bottom of the scale, and Category 2 employees near to the top.

Our final estimates

Category 1: 50%

Category 2: 75%

It must be noted that these are only rough estimates but even so they will be of value when decisions have to made later on, determining priorities and assessing possible returns on investments for those retention strategies under consideration.

References:

Development Dimensions International

Competing For Talent - Nancy Ahlrichs

The HR Scorecard - Becker, Huselid & Ulrich

Managing Employee Retention - Phillips & Connell

© Colin Brown 2004
6th December 2004 From United Kingdom, London

Dear Collegues,
Very quickly I would like to acknowledge the contribution of Collin Brown on this topic.
However just to re-cap some of the costs of Employee Turnover would include but not limited to the following:
Cost of Administering Resignation
Recruitment Costs
Selection Costs
Cost of Covering during the Vacancy Period, especsially if relief officer has to come from a branch of the Company
Administration of the Recruitment and Selection Process-tests etal
Induction Training for the new employee/s
Cost of Training-relevant seminars-fast-track courses etal
Cost of Employment itself-official car +driver, the package depending on the status
Legal or Cost of Litigation-this comes to mind depending on the nature of exist by erstwhile Employee to be replaced
Above many of these costs consists of Management or Administrative staff time but direct costs can also be substantial where advertisements, agencies, or assessment centre are used in the recruitment process.
Thanks
30th December 2004 From Nigeria, Lagos
Here are the items that employers put into the "Business Costs and Impacts of Turnover" Excel workbook aka "The Bliss-Gately Tool" for calculating the cost to replace an employee. The list is derived from Bill Bliss' article, "Cost of Turnover."

Job Title

Hourly rate for vacant position

Hourly rate for person who fills in

Hourly rate for the vacant position's supervisor

Hourly rate for the vacant position's manager

Hourly rate for the vacant position's director

Hourly rate for the Internal Recruiter

Hourly rate for Internal Recruiter's Assistant

Hourly rate for hiring department's staff

Hourly rate for orientation personnel

Hourly rate for training personnel

Number of weeks the person fills-in

Lost productivity of fill in person ( 0.00 to 1.00 )

Cost of a formal exit interview

Hrs by mgr. to understand what work remains.

Hrs by mgr. to conduct separate exit interview.

Cost of training ee by company personnel

Cost of training ee by ext. programs...inst.

Licenses...certifications paid for by the company

Depart. Prod. lost because the person is leaving.

Cost of depart. staff discussing reactions….

No. of weeks departing ee has lower perf.

Departing employees' lower perf. (0.0 to 1.0 )

No. of ees who go with departing employee

Average cost of losing these departing ees

Dollar cost of disrupting the team

Cost of severance package

Cost of benefits provided to employee

Value of lost knowledge, skills and contacts

Years of service

Annual premium (0 to 1.0 )

Increased unemployment insurance premiums

Cost of time spent to prepare for unemp. hearing

Cost of third party to process unemp. claim

Cost of lost customers

Cost to retain the customers that want to leave

Number of weeks the position stays vacant

Advertising (classifieds and display ads)

Agency fee (@ 20 - 30% of annual compensation)

Employee referral …

Internet posting (e.g., $300 - $500 per listing.)

Number of Internet postings

Sign-on bonus

Relocation package

Internal recruiter's time (min. of 30 to 100+ hrs...)

Recruiter's assistant's time (a minimum of 20 hours)

Supervisor's hours

Manager's hours

Director's hours

All Other staff hours

Admin. cost/resume (handling/processing/respndng)

Average number of resumes processed

Hours spent interviewing internal candidates

Hours by internal candidates in interviewing

Drug screen

Educational verification

Criminal background checks

Other reference checks

Number per position filled…

Skills test

Abilities test

Aptitude test

Attitude test

Values test

Behavior tests

Number of applicants tested per position filled

Job Fit Assessment…

Hours new employee spends in orientation

Hours spent by orientation personnel

Orientation materials

Department training development and delivery

Hours in training by new employee

Hours of training (design and delivery)

Training materials

Computer costs

Other equipment costs

Hours by supervisor

Weeks at a 75% lost rate (Use 2 , 3 or 4 )

Weeks at 50% loss rate (Use 1 to 8 )

Weeks at 25% loss rate (Use 1 to 8 )

Hours by supervisor (over a 5 month period)

Total hours of coworkers (over a 5 month period)

Cost of mistakes by new ee…

Cost of lost management time (opportunity costs)

Non-completion or delivery of a critical project...

Manager's lost productivity (hrs) by losing key staffer

Director's lost productivity (hrs) by losing key staffer

To put the person on the payroll

To secure computer and security passwords

Identification and business cards

Internal and external publicity announcements

Tel. hookups and establishing email accounts

Establishing credit card accounts

Leasing equipment (...cell phones, automobiles, etc.)

Hours Manager needs to develop trust, etc.

Company Revenue (budgeted)

Number of sales people

Weeks in budget

Weeks at a 25% Productivity Rate (1, 2 , 3, 4 or more)

Weeks at a 50% Productivity Rate (Use 1 to 8 or more)

Weeks at a 75% Productivity Rate (Use 1 to 8 or more)

Number of employees

Weeks position is vacant

Profits as a percent of sales

Losing a person in a key or critical job.

Competitors seeker more employees or customers.

Competitor may learn business secrets and ideas.

"We don't care" so they and look for new supplier.

"We are going down hill…"

The following is the data used for Dr. John Sullivan's recommended method for evaluating each manager's turnover rate. If a manager loses foog employees that is bad, if the manager loses bad employees that is good. Similar turnover rates may not mean the same thing.

Type 1 - Top Performer Weighting Factor

Type 2 - Average Performer Weighting Factor

Type 3 - Bottom Performer Weighting Factor

Performance Appraisal Rating for Type 1

Performance Appraisal Rating for Type 2

Performance Appraisal Rating for Type 3

Number of Type 1 employees that left

Number of Type 2 employees that left

Number of Type 3 employees that left

Percent of salary to cover benefits)
26th March 2005 From United States, Chelsea
Dear Bob,
It would great if you can cite a live example for calculating a turnover cost for a software engineer. There are several articles and boards which states and mentions the method to calculate, the problem lies in a live implementation of the equation.
21st May 2005
Hello Pramod:
>It would great if you can cite a live example for
calculating a turnover cost for a software engineer.<
The cost to replace an employee at one employer will be different from the cost to replace one employee at another employer. Employers need to calculate their own cost to replace and do so for each employee.
> There are several articles and boards which states and mentions the method to calculate, the problem lies in a live implementation of the equation.<
The list I presented above comes from our "Business Cost and Impacts of Turnover" Excel workbook which we sell. If you want a free workbook to estimate the cost of replacing employees, visit my free download web page at http://tinyurl.com/dvlta and download "Free Download No. 4: Cost of Turnover Workbook".
21st May 2005 From United States, Chelsea
It seems Brown article is infatuated with liability POV.
But still what's good way to reduce these head overs on companies to hurt them minimum ?
At least first common procedures can be generalized across Industry Standard like P-CMM are common place in IT and may carry the experience baggage in resume categorily and cost can be shared and companies have quantity data as well to add to their balance sheet.
22nd May 2005 From India, Delhi
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