subject: Do You Know What Employee Turnover Really Costs You? [print this page] There are probably few things in business operations as frustrating as employee turn-over. It's both a disruption and an expense. Not only is it frustrating, it's also very costly, and the costs occur in the form of both hard and soft dollars. Some are evident as line-item expenses; however, the ones with the greatest negative impact are typically the soft costs.
The problem is compounded when your company experiences a high turn-over rate or when you experience multiple, simultaneous resignations.
The Real Costs
Consider the following checklist of the real costs of turn-over and replacement:
Exit costs: Figure the cost of the exit interview, payroll and benefit cessation; COBRA notification and administration; severance and benefit extensions for qualified employees.
Productivity loss: Minimum of 50% of the position's compensation (100% if remaining employees do not perform the tasks). Additionally, determine who will cover critical tasks and at what cost to the accuracy of his or her own performance. Calculate the cost of missed deadlines.
Training and Development: Figure the cost of the employee's initial training as well as any subsequent career-advancement training and licenses or certifications he or she earned.
Lost knowledge: While loss of institutional knowledge is very difficult to quantify, the suggested formula is: 50% of the departing employee's annual salary for one year and for every year of service, increase it by 10%.
Lost sales: What is the value of your lost customers and sales due to the employee's departure?
Recruitment Costs: Advertisements can typically range from $200 to $5000, and recruitment agency fees are 20% to 30% of the starting salary.
Candidate Review: Figure either the actual invoices of the recruitment agency or a range of 30 to 100 hours per position for internal review. Calculate the cost of drug screenings as well as educational and background checks for viable candidates. Add the cost of pre-employment and aptitude testing.
New Hire Training: Include hours spent in orientation and departmental training (both of the new employee and the trainer), cost of training materials and the appropriate percentage of management and supervisory time.
Learning Curve: New employees take time to be fully productive. Use these figures: During weeks 2 4, new employees are only 25% productive; therefore, calculate 75% of their salaries as cost. In weeks 5-12, 50% productive, so 50% of compensation is cost. During weeks 13-20, new employees are 75% productive, so 25% of their salaries must be absorbed as cost.
Total: As a quick point of reference, you can calculate the cost of a lost employee at a minimum of 150% of base salary. Figure the cost at 200% to 250% percent for those in managerial and sales positions.
Keep in mind that the replacement cost cannot be measured by base salary alone. Benefits and taxes must be calculated and added to the total cost of employment. In New York, a $50,000 salary immediately becomes $56,500. Training costs are less tangible but exist in both time spent and knowledge imparted. Who's doing your training? How well do they really know the product and the best practices of using it?
The loss of institutional knowledge associated with employee turn-over is difficult to quantify and the formula above is a "best guess." Its real value only surfaces when mistakes are made and inefficiencies become the normal course of business. By that time, your bottom line is suffering as well as your ability to service both internal and external clients. While you can control physical assets a departing employee may leave with, you cannot control or retain what's in his or her head when they walk out the door. At Smith & Allen Consulting, Inc., we've seen many executives fail to grasp this important concept.
Do You Know What Employee Turnover Really Costs You?
