Do you know what it costs when you make a bad hire? Do you know what it costs if one of your star employees leaves you to work for a competitor? If not you need to compute your Cost of Employee Turnover.
According to the Corporate Leadership Council report on Workforce Turnover and Firm Performance, only 16% of U.S. companies track their turnover costs. This is a shame, since many businesses are leaking money and don’t even know it.
There are two types of employee turnover- avoidable turnover, and unavoidable turnover. Examples of unavoidable turnover are if an employee leaves to follow a spouse who has been relocated, decides to leave the workforce to return to school full-time, develops an incapacitating disease, or dies.
When it comes to unavoidable turnover, the company does not have a reasonable chance of reversing the employee’s decision. Of course, there is very little that a company can do about unavoidable turnover except to bite the bullet, but by becoming an employer of choice, the business can eliminate much of the cost associated with turnover.
Cost to Replace an Employee.
Here are what a few experts say it cost to replace an employee.
- The Saratoga Institute estimates that turnover costs range from one to two times the person annual salary, plus their cost of benefits.
- Development Dimensions International (DDI) estimates turnover costs to be approximately $78,000 to replace an employee that earns $46,000 per year or approximately 170% of annual pay
- Kwasha Lipton reports that turnover costs can range from 150% to 175% of an employee’s annual pay.
Traditional tracking methods significantly underestimate the total cost of turnover. Based on the evidence, most organizations can safely estimate their turnover costs as modest 150% of annual salary and benefits.
To be more specific, if an employee that earns $50,000 per year leaves, the cost to the business is about $75,000. So it stands to reason that reducing turnover would be one of the best methods of maintaining a company’s level of service and quality, while keeping costs low and simultaneously building the type of organization that attracts and retains employees. It should be a no-brainer. Unfortunately, until turnover costs are tracked and the actual costs are proved to management, it is unlikely that a business will make the changes necessary to improve recruiting and retention in an organization.
Recognizing the True Cost of Turnover
When attempting to assess the true cost of employee turnover, there are direct costs that are easy to apply a dollar value to. Then there are activities done by other departments like HR and Payroll, which are sunk costs but whose to-do lists are increased as a result of dealing with replacing the employee and represent more indirect costs.
When it comes to employee turnover, there are:
- Direct costs
- Indirect costs
- Negative effects
There are also three transitional time periods
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- Notice Period
- Vacancy Period
- Hiring and Orientation Period
Each transitional period will experience activities that involve direct and indirect costs.
Direct Costs of Employee Turnover
When an employee leaves, there are many direct expenses that represent money that is leaving the company to pay for the cost of employee turnover.
The following is a list of direct costs of employee turnover:
Notice Period – Direct
- Last paycheck for employee
- Paying out accrued vacation
- Separation pay
- Increased Federal and State unemployment tax
- Continuing benefits costs (COBRA admin)
Vacancy Period – Direct
- Advertising and recruiting fees
- Interview expenses (meals, mileage, etc.)
- Criminal, credit and reference checks
- Temporary or contract employees
- Medical exams for a candidate
- Drug testing for candidate
Hire and Orientation Period – Direct
- Sign-on bonuses
- Relocation costs
- Formal onboard training
Indirect Cost of Employee Turnover
When an employee leaves, the workload of many in-house employees is affected which have indirect costs to the business. Many of these costs represent the less-visible costs of employee turnover, since they often represent a fixed or sunk cost to the business. Nonetheless, these indirect costs may mean that the business has to cover overtime for existing employees, lost opportunity costs as some employees have to deal with transition-related issues as opposed to their primary job duties, or that the business has to increase its staffing levels to deal with the additional workloads caused by constant turn over.
The following is a list of less-visible indirect costs of employee turnover:
Notice Period – Indirect
- Admin time to process benefits and separation
- Contracting unemployment office
- Calculating changes in unemployment taxes
- Notifying payrolling service and other departments of employee’s departure
- Conducting an exit interview
Vacancy Period – Indirect
- Lost productivity of existing employees
- Lost productivity of peers, supervisors, and subordinates
- Conducting transition meetings
- Overtime for employees to cover departing employees’ duties.
- Creating or updating job descriptions
- Posting openings on various job boards
- Selecting recruiters
- Screening resumes
- Scheduling interviews
- Conducting interviews (Several levels of interviews)
- Creating and scoring job assessments
Hire and Orientation Period – Indirect
- Coordinating meetings with the hiring manager
- Setting up and conducting new hire orientations
- Informal onboard training
- One on one with new team members
Negative Effects of Turnover
In addition to direct and indirect costs, there are some additional negative effects on the organization due to employee turnover that are harder to quantify, but can have a profound effect on the business.
The following is a list of additional negative effects that your company may encounter as a result of employee turnover:
- Product roll-out delays
- Low employee morale
- Loss to the business’s reputations
- Loss of organizational knowledge
- Missed project deadlines
- Loss of client relationships
- Aggravated clients
- Disruption among internal departments
- Chain reaction causing additional turnovers
- Delayed achievement of department and organizational goals
Internal vs External Hiring
Any time an existing position is refilled by a person from outside your company, the process exacts all possible direct and indirect costs. However, hiring from within allows for some cost reduction in both direct and indirect costs due to the fact that candidates are already familiar with the organization and the omission of several direct expenses, such as recruiting costs and sign-on bonuses.
How much will it cost you to replace a key employee?
