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 realize. In the worst-case scenarios, the loss of a single individual can put a major project at risk, 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 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 centers, 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 opportunities
- Lost productivity until the 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 calculate 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 generalized) 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, 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 lifetime 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 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 be 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
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 realize. In the worst-case scenarios, the loss of a single individual can put a major project at risk, 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 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 centers, 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 opportunities
- Lost productivity until the 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 calculate 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 generalized) 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, 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 lifetime 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 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 be 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