What Does Employee Turnover Cost You?

The True Cost of Turnover

Many organizations either do not try to calculate the cost of employee turnover or, if they do, they find that it is not a simple calculation, especially since these costs don't appear as a line item in their financial statements. However, this doesn’t change the fact that turnover in an organization’s workforce has true costs, whether you try to estimate those costs or not.

That’s why we’ve created this simple guide – to help HR managers get their arms around the idea of turnover costs and what they might represent to their organizations. Having this information could help spur development of a meaningful employee retention strategy!

The Different Types of Employee Turnover: Involuntary and Voluntary

The initial step in estimating turnover costs is to work out your organization’s rate of turnover. Usually, this is measured on an annual basis and, in most organizations, is then divided between involuntary and voluntary exits, as follows:

Involuntary turnover represents the employees who are let go by the organization, whether for just cause or because of a RIF (reduction in force). Employees who are terminated for cause contribute to turnover costs because they often have to be replaced.

Voluntary turnover measures how many employees leave by choice, which can be due to many different factors.

The Different Types of Voluntary Turnover: Non-Preventable and Preventable

Based on our experience conducting exit surveys among employees for a wide range of clients, we believe that there is a very important distinction to make within your voluntary turnover:

“Non-preventable Turnover:” Non-preventable exits occur when employees leave for reasons that are outside of the organization’s control. They may leave because they need to take care of other family members, or because they are experiencing health problems or because they or their spouses are moving out of the area.

“Preventable Turnover:” In strong contrast to non-preventable departures, preventable turnover occurs when employees leave because of difficulties they are facing with their jobs or in their work environment. Our exit surveys show that the key motivators of preventable turnover include (i) overall job dissatisfaction, (ii) unfulfilled job expectations, (iii) challenges with performance expectations, (iv) limits within their work situation, (v) problems fitting into their roles or working with their colleagues, (vi) extremely high job stress, (vii) lack of acknowledge for their contributions and, most importantly, (viii) little or no opportunities for career advancement.

How to Calculate Your Annual Turnover

To calculate your turnover, you need to answer the following questions:

How many employees left your organization in the past year? Of those departures, how many left for voluntarily and how many left involuntarily? Once you have those numbers, you’ll need your average staffing level for the past year. You can get this by adding the total number of employees you had at the start of the year to the total number of employees you had at the end of the year and divide by two.

Now you can calculate your turnover – which is normally shown as a percentage -- in three different ways:

• Your total annual turnover = (Number of employees who left/average staff level) x 100
   
• Your voluntary annual turnover = (Number of employees who left voluntarily/average staffing) x 100
   
• Your involuntary annual turnover = (Number of employees who left involuntarily/average staffing) x 100

How to Calculate Your Annual Turnover Costs

The simplest place to start is to remember that turnover costs fall into four distinct categories, as follows:

• The costs associated with terminating employees,
   
• The costs associated with replacing employees,
   
• The value of the lost revenue while new employees are found (which may not apply to every type of employee), and
   
• The costs associated with hiring and onboarding new employees.

It’s important to remember that, within each of these categories, employee turnover can have both direct and indirect costs, so this guide is designed to help you think about each of these. Let’s start by looking at each of these categories in detail.

The Costs Associated with Terminating Employees

These costs cover everything linked directly to an employee’s exit. The tangible costs to consider here include:

• The administrative costs involved with processing a separation, including cancelling the employee’s payroll, benefit deductions and enrollments, managing any COBRA requirements and filling out the internal forms necessary to complete the process,
   
• The cost, if any, of paying unemployment insurance premiums,
   
• The cost of any severance or separation pay to the employee,
   
• The cost of accrued vacation time, and
   
• Any retirement plan contributions that your organization needs to make on behalf of the departing employee.

The intangible expenses (which do not necessarily have a direct dollar value) that fall within this category include:

• Any payroll costs relating to filling the vacant position, such as hiring a temp to do the work or having existing employees cover the work in addition to their own jobs, particularly if that leads to overtime costs,
   
• The added pressure on a supervisor who has to identify what work is not being done and must decide how that work should be done until a replacement is found,
   
• The total expense incurred to train the departing employees, including the costs of any internal courses, external training, any investment made in their academic education and the costs of certification or professional licenses required for their position, and
   
• The loss of institutional knowledge, contacts and skill sets that the exiting employee is taking with them.

The Costs Associated with Replacing Employees

Within this category are the expenses your organization covers to seek out new candidates, to review their experience and credentials, to interview all possible candidates and then to select the most appropriate choice. As with all of the other categories, you need to consider what you spend both directly and indirectly to replace employees, including:

• All expenses for attracting candidates, whether this involves advertising, posting or promoting the position (or any combination of these),
   
• The expense of using internal and/or external recruiters, including briefing them on the position’s requirements and then having them design and implement a strategy for finding experienced candidates, review the backgrounds and qualifications of all candidates, prepare for the candidate interviews, conduct all interviews, assess each of the candidates, complete reference checks, send the employment offers and to notify all unsuccessful candidates,
   
• The internal time required to define the job requirements, to review the backgrounds and experience of prospective recruits, to conduct interviews with them, to discuss their assessments of all candidates and to select a finalist,
   
• Any travel costs incurred to bring candidates in for interviews and any money spent for recruiters to visit candidates or recruiting events,
   
• The administrative costs to handle, process and respond to the resumes/CVs,
   
• Any direct expenses to screen candidates, whether for drug testing, background investigations or reference checks,
   
• The costs for conducting pre-employment tests to determine a candidate’s abilities, values, aptitude, experience, etc., and
   
• Signing bonuses and/or relocation or moving costs spent to get the successful candidate in place to start their new job.

The Costs Associated with Lost Revenue

For some positions, a job vacancy can mean an actual loss of revenue to the organization. Sales is one likely source of lost revenue but this can also apply to other positions, such as physicians and specialists in a medical or dental practice or a loss of billable hours in a law firm and even hairdressers if a station is left vacant!

The Costs Associated with Hiring and Onboarding New Employees

For this category of expense, you need to consider the costs associated with bringing on new employees. These costs will include:

• The administrative expenses incurred to introduce a new employee, such as adding that employee to your payroll system, creating security clearance and producing ID cards, announcing their arrival (especially if you use any public forums), establishing their office/workstation, email account and phone arrangements and leasing or purchasing any new equipment they need to work effectively,
• The internal time required to introduce the new employee to your organization, including both the employee’s time and the time required of whoever is responsible for their onboarding – keep in mind that onboarding can often be divided between a general orientation to the organization and a more specific orientation to the job the new employee will be handling, and
   
• The costs to prepare the necessary orientation materials and supplies as well as the training materials required for that particular position.

Within this category, you should also account for the cost of “lost productivity,” since new employees can rarely perform at the same level of more experience employees. One way of estimating this cost is to assume that a new employee will reach a productivity level of only about 10% in their first week, then 25% for their next 3 weeks, 50% for the following 8 weeks and then 75% for the 8 weeks after that. With these estimates at hand, all you need to do is to apply the difference in that employee’s payroll expenses over the same period to calculate their lost productivity. You should also try to put a value on the lost productivity of the new employee’s coworkers and supervisor because of the time they will need to spend on bringing the new employee “up to speed.”

Adding It All Up

Once you start the process of estimating and adding these expenses up, you’ll quickly see that the financial impact of employees leaving can be very high. Although we're not suggesting that all employee turnover should be prevented, our goal here is to get organizations to recognize that they can benefit from (i) recognizing what factors are leading to “preventable” exits so that (ii) they can implement a smart and effective program to prevent other employees from leaving for similar reasons. In fact, a well-executed strategy of employee retention can easily and quickly pay for itself by preventing even just a few valuable employees from leaving their jobs. Calculate it for your own organization here.

An important step in the process of creating a retention program is to use the InsightEXIT system to get a real handle on both your preventable and non-preventable turnover. With its easy-to-use management portal and real-time reporting capabilities, the InsightEXIT system can give you the information you need to increase retention and cut down on your turnover costs. You can learn more by visiting www.insightexit.com, by calling 866-802-8095 ext. 705 or by emailing info@insightlink.com.