Cost of Employee Turnover – Part 1

Many of us have a vague sense that there are things we must do. We must eat our vegetables, floss, and make payroll. Then we have a sense that there are things we ought to do. We ought to invest for retirement, volunteer with a community service organization, or learn a language. Into which category do we place “hang onto my employees better?” It might be the former, once you find out in this blog how much employee turnover costs.

Employee Turnover Rates

Many factors contribute to employee turnover. These include inadequate compensation, lack of employee engagement, poor job fit, etc. I will not address them here, but I will show you how to figure out the turnover rate regardless of the factors that caused it. With this figure, you can monitor your organization's employee turnover relative to that of other organizations in your area or in your industry. That will let you know where you stand with applicants and employees, and from that you can know if it is worth your money to boost retention. You should continually monitor this rate so you can make informed choices in the future.

Are You Smarter Than a 10th Grader?

Attention all non-math majors: These calculations are easy. Even I can do them. First, I’m going to take a cue from the Washington high school graduation test. I will explain the mathematical computations verbally to get you thinking in concepts before we insert numbers.

Monthly turnover is the number of employee separations in one month divided by the average number of active employees at the worksite during the same period. We’ll say we have one site of operations.

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We can make some additional calculations based on those two inputs, which will tell us more about our workforce. Let’s save those additional calculations for later, in part two of this blog. These basics come first.

The words you just read look like this when we start to write them as a math formula: 
   
 
Now to pull numbers into our formula for monthly turnover:
   
 
Annual employee turnover is calculated by adding up the monthly turnover for a 12-month period. Makes sense, right? Okay, the next step follows.

Using the same example, if four employees leave each month, a yearly total of 48 leave. Plugging those numbers into the formula:

 
Now we’re:

• Done with math.
• Going to see what this calculation means for your organization.
• Going to use this information to show the cost of employee turnover for your organization.

What This Calculation Means for Your Organization’s Employee Turnover Costs

There are many sources of information on average annual turnover by industry. For instance, the Society for Human Resource Management publishes this information. Much of the content on their site is free. Check it out. This and other sources will show you if employee turnover in your organization is in-line with averages. I am not aware of sources that give local averages. If any readers know that information, please comment to this blog and let us know.

An idea for gathering local information is to ask trusted business owners in the same area as that in which you are located. Market conditions for your area could be quite different and you may find that annual turnover in your area for the kind of jobs your employees do is much lower or much higher than published averages.

If your annual employee turnover rate is lower than what you determine from asking around and checking sources is an accurate average, you may be justified in thinking that you run a good organization, one in which employees stay at a higher rate than can be expected. Another conclusion may be that you pay higher than other organizations in your area where they might also go to work. To check out that possibility, talk to our hosts at PayScale.com (and tell them how much you like my blog posts.)

This blog is really about the cost of employee turnover to your organization, but we needed to show first how turnover is calculated. Now that we’ve done that, the information on costs will make a whole lot more sense.

The Costs of Employee Turnover for Your Organization

The Society for Human Resource Management recently reported that it costs an average of $7,123 to hire an employee.  Using the previous example of an organization that lost 48 employees per year, turnover cost there simply for hiring expense is $341,000. Will that pay for some of the steps you have been thinking about implementing to increase employee retention? I bet it will. Especially if they steps that can be implemented at no- or low-cost. Past blogs by myself and other bloggers at PayScale.com  have given some examples of these. See the list below. Now you can see that it is worthwhile to reread them.

Sources of Employee Turnover Costs

There are four primary areas of tangible turnover costs:

• Separation processing costs
• Replacement hiring costs
• Costs to train new hires
• Costs of lost productivity

Secondary tangible costs include:

• Coaching meetings to correct an employees performance before he or she ultimately leaves
• Cost of time spent documenting poor performance

Intangible costs include low morale. Low morale may be fanned into flame by a disgruntled employee before he or she leaves, but by then the fire may have begun to consume other employees who remain. And the cycle continues …

Now we’re:

• Able to see why it is worthwhile to take the time to hold exit interviews. The employee may state why they are leaving. For instance, if employees leave for reasons you can group together, such as lack of career advancement opportunities, you might start to think the expense of developing a career ladder will be worthwhile.
• Able to make well-informed choices of steps we might take to hire in a well-thought-out and methodical way, to reduce the likelihood and expense of turnover later.

In part two, I will show you variables that can affect your turnover and affect how you choose to interpret your results from these calculations. I will also provide an example of concrete costs of employee turnover, and how to adjust them to your region.

Note: Even though I have worked with employment laws for over 20 years, I am not a lawyer. Nothing in this blog should be taken as legal advice or interpretation of laws.

Regards,

Joe Gross
HR & Policy Solutions, PLLC

Do you have any salary range topics you would like to see covered here on Compensation Today? Write us a comptoday@payscale.com.

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