How Much Does Employee Turnover Really Cost?
By: Will Helmlinger
Calculate the real and hidden costs of employee turnover to better understand how it impacts your business's bottom line.
Management identifies nearly every expense related to running its company. Yet, ask executives or hiring managers how much turnover is actually costing their company, and their silence speaks volumes.
One major company discovered their costs to replace individuals in one job category was alarmingly high. They calculated the cost to replace one Customer Service Representative earning $18,000 annually was nearly $58,000! Applying the same figure across the company would have resulted in millions of dollars of turnover costs annually. Translation: lost profits and dividends to the stakeholders.
The longer you wait to make these calculations -- or don't calculate your costs completely and accurately -- money will continue to walk out your front door.
Some companies use very simple methods to calculate the costs. It's not uncommon to hear "I estimate it runs about 2-3 times the person's annual salary." Or, "Turnover costs me the price of an ad in the newspaper." How accurate are these comments? A highly respected human resources organization calculated the cost to hire an exempt-level employee was approximately $7,000 and a non-exempt hire to be $3,000. Undoubtedly, the multinational company mentioned above would strongly disagree with the HR organization's estimates!
So where does the truth lie? The truth is discovered only when you calculate exactly what your costs are. Start by using the template provided below. The words and phrases provided are generic. You can modify the words or add categories that fit your company.
How can you discover your costs?
Examine your financial statements, look at individual budgets, and ask key employees. Some categories such as "Salary of Management or "Administrative Time" may need to be estimated. But don't simply skip a category because you don't have hard numbers.
Begin the calculations with your visible and hard costs.
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A. Visible Costs of Turnover
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Cost of Recruiters- Internal/External
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$ 0
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Advertising/Job Posting Expenses
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$ 0
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Time Spent Reviewing Applications/Resumes
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(management and support staff)
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$ 0
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Pre-employment Medical Examinations
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$ 0
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Salary of Management for Time Spent
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Interviewing
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$ 0
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Administrative Time and Expenses
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$ 0
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Software Costs Related to Recruitment Process
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$ 0
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Cost for Drug Testing
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$ 0
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Investment in Personality Tests
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$ 0
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Skills Tests
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$ 0
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Investment in Integrity Testing
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$ 0
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Cost for Background Investigation
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$ 0
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Cost for Criminal Background Check
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$ 0
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Cost to Conduct Reference Checks
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$ 0
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Credit Checks
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$ 0
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Driving History Verification
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$ 0
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Candidate/Employee Travel Expenses
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$ 0
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Relocation Expenses
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$ 0
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Misc. Expenses
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$ 0
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(Add Your Own Category)
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$ 0
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Subtotal A
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$ 0
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Now that you've tallied the Visible Costs of Turnover, it's critical that you go deeper into the equation. Examine your hidden -- or soft -- costs, as these numbers may be very telling. As one client discovered, it cost them at least $70,000 a year in lost customer revenue because of employee turnover! Again, you may have to use estimates, and in the future, track these areas carefully to obtain detailed "hard" numbers.
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B. Hidden or Indirect Costs of Turnover
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Estimated COBRA, Bonding, misc. costs
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$ 0
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Increased Workers' Compensation Expenses
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$ 0
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Increased Unemployment Insurance Charges
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$ 0
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Increased Employee Benefit Expenses
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$ 0
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Estimated Training Costs
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$ 0
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Estimated Productivity Loss during Training
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$ 0
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Salary for other Employee/s Training New Employee
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(duplication of work during training)
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$ 0
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Lost Sales
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$ 0
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Lost Customers
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$ 0
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EEO/Legal Expenses
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$ 0
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Outsourcing Costs
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$ 0
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Use of "temp" Employees
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$ 0
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(Add Your Own Category)
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$ 0
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Subtotal B
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$ 0
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Add Subtotals A & B = Total Expense
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$ 0
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Now that you have all expenses calculated, it's time to extrapolate these numbers and examine the company-wide impact. Assume that you've calculated the cost of losing one person to be $9,000. You know your turnover rate is 30% annually, and that you have 50 employees. Below is the impact to your stakeholders.
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1. Enter total # of Employees in Your Company
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50
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2. Determine the number of employees who left during the previous 12 months
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15
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3. Divide 15 into 50, which gives you the % of turnover
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30%
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4. Insert Your Replacement Costs (from the total expenses listed above)
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$ 9,000
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5. Multiply #2 and #4 to Calculate Your Real Turnover Expenses
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$ 135,000
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The money spent are non-recoverable, and it impacts your bottom line. If you were to reduce turnover by 20% or even 10%, how much more money would you make? And how could the money be better spent?
"Now, what should I do?" Begin by examining each cost center to determine where you can make improvements. You may need to address your hiring process or make changes in your recruitment methodologies. You may discover areas where you can cut expenses.
You may wish to examine your employee development/orientation processes. All too often, a poor on-boarding process (new employee orientation) and lack of employee development/training leads directly to continued or increased turnover.
Finally, you may need to review whether you have the right managers/leaders in your company. As some companies have discovered, newly hired talent won't stay long where there is poor management or leadership.
The bottom line: Determine your costs; manage your expenses; and reduce turnover to increase your profitability!
