The Cost of High Employee Turnover
Employee turnover is usually expressed as a ratio and is usually calculated for a company on a yearly basis, so it would be the number of employees who left during the entire year divided by the total number of employees at the beginning of the year. If a company has 100 employees and two of them leave, the turnover rate is two divided by 100, or 2%. That's pretty a pretty low turnover rate. If a company of five loses two employees, that's a 40% turnover rate (2/5) and that's a pretty high turnover rate.
You can also calculate the turnover rate for any smaller unit of the company in the same manner. If two accountants left from a staff of eight, the accounting turnover rate would be 25%. If three salespeople left out of a team of 15 the sales turnover rate would be 20%. And if those two departments were the entire company, the company turnover rate would be five left divided by 23 total employees or roughly 22%.
Employee Turnover Cost
Employee turnover cost is usually defined as the cost to hire a replacement employee and train that replacement. Often the training costs only count those to get the new employee productive, but they should include all the costs of getting the new employee to the same level of productivity as the employee who left.
These costs include both direct costs like the fee paid to a recruiter to find candidates for you, as well as indirect costs like the business you lost because you didn't have the capacity to handle it all while you were short-staffed. Generally, the higher your turnover rate, the higher both your direct and indirect costs will be. And as the turnover rate increases, the costs will increase faster.
There are direct and indirect costs associated with hiring a replacement for an employee who has left. If several employees have left, there may be some small savings in certain categories from economies of scale, but that is a small part of the total cost. Hiring costs include:
- Recruiting Costs
- Fees paid to outside recruiters
- Advertising costs if you have to place an ad for a specific position or even for the company itself when recruiting for several positions
- Interview costs
- Travel costs to candidates to visit the company for interviews
- Travel costs for your staff to go to a recruiting fair to source candidates
- Time for your Human Resources (HR) staff and hiring department staff to interview candidates
- Post-interview costs
- Time to check references and credentials from candidates who pass the screenings
- Pre-employment skills testing you may need or want to administer
- Pre-employment screenings for drugs, etc.
- Employment costs
- Signing bonuses, if paid
- Relocation expenses for the prospective employee and their family
Training costs include both direct and indirect costs, just like hiring costs. After you have incurred all the hiring costs discussed above, you have additional costs to train the new employee. Even when you hire highly qualified, very experienced new employees there are always training costs. If nothing else, they have to be trained in the way your company does things. And these training costs continue to add up until the employee is trained to the same level of productivity for the former employee they replaced.
Training costs include:
- Time for people to train them. This would include training them in the company's practices as well as the duties of their individual job.
- Training materials. These will have to be prepared or, if they exist, reviewed and updated.
- Benefit enrollment. HR has to explain the benefits to the new employees and give them the enrollment forms to fill out or help them fill them out.
- Accommodation costs. These include any special equipment or supplies the individual may need, either from personal preference (like a specific type of chair) or to accommodate special physical or mental needs.
- Administrative processing. In addition to the time for HR to process the new employee, Accounting will need to get them onto the payroll. The Information Technology (IT) department will need to issue computer equipment and get them into the email system, set up their username and password, etc.
Opportunity costs are the costs of opportunities you couldn't take advantage of—the cost of business lost because you didn't have the people resources to do all the work while you were shorthanded. This might mean incoming calls not answered before the caller hung up, sales calls not placed to prospective customers, or trade show appearances canceled because no one was available. These costs can be hard to measure, but they are real.
And finally, don't overlook the cost of reduced morale from other workers having to cover the workload of the employee left from the time the employee starts slowing down because they know they are leaving until the time the replacement is hired, trained, and up to speed.
Employee turnover carries a high cost and the higher the employee turnover rate the higher the cost. Smart companies work hard to measure employee satisfaction and act to minimize turnover. It is cheaper to keep your current employees motivated and productive than it is to find, hire, and train new ones.