A Competitive Employee Market Compels Companies to Manage High Turnover

Employee trends and costs of turnover.

There are several trends occurring within the employment scene that suggest companies need to pay better attention to turnover and retention issues. One trend is the growth of the economy. As a result, over the 1999 calendar year, Canada has continued to strongly increase its full employment statistics such that part time employment has fallen 3.1% since December 1998 (Stats Canada, Dec. 3/99). Indeed employment in the professional sectors has increased for the second consecutive month. This suggests that Legacy Bowes Group can continue to encounter challenges regarding the retention of current employees and stiff competition for new recruits.

A second trend that will impact employee recruitment and retention is that employees are presenting themselves with a dramatic increase formal educational levels. This means that satisfying a more talented and competitive workforce will become more complex and demanding.

A third trend indicates that while family units are getting smaller and more diverse, there is increased stress caused by the conflict of workplace and home issues. For instance, Statistics Canada in its recent report Balancing Work and Family, (1999), indicated that the single most significant reason for the increased rates of absenteeism recorded in recent years was the need to handle family responsibilities.

Finally, The Conference Board of Canada reports that 17% of employees who were offered promotions turned them down and that a further 25% refused transfers because of family related considerations.

The High Cost of Employee Turnover

Low unemployment, increasingly aggressive recruiting and a competitive compensation environment has made retaining our best people more and more difficult. But, while this sounds somewhat theoretical, it is important to note that employee turnover can significantly affect our overall financial performance. When we think of an employee from the same financial and strategic perspective as any capital investment and not just operating costs, the picture of potential turnover costs becomes clear.

Typically when an employee leaves, costs are created in three categories; these include separation costs for the departing employee, replacement costs and training costs. A rule of thumb in the human resource business is that turnover costs for a front line staff position can be conservatively estimated at three times the monthly salary. This does not include the lack of productivity costs and/or reduced or lost sales. The Saratoga Institute, an HR Consulting organization specializing in quantifying human resource activities suggests that the average internal cost of turnover for an exempt staff is a minimum of one year’s pay and benefits or a maximum of two years salary. Other research statistics indicate that total turnover costs (direct and indirect) can reach as high as 150% of an employee’s base salary. With this in mind, consider the following example.

A company of 700 employees has an average base salary of $40,000 and a turnover rate of 10%. At a cost of 150% per employee lost, they will spend at least $4,200,000 to replace those employees when costs such as training, lost productivity, new hire and recruitment costs are calculated.

Ad indicated earlier, turnover costs include both direct and indirect costs. While some costs will be difficult to estimate they are no less important. These costs will come from the following ten factors:

1. Exit Interview – The cost of the interview’s time for preparation and administration as well as the employee’s time. Cost is usually calculated at an hourly rate.
2. Administration Requirements – The activities related to the separation; time to ensure payroll records are updated, benefits are calculated, notifications are made and documents prepared. Costs can be calculated at an hourly rate.
3. Replacement Planning Costs – The activities undertaken to determine the best strategy for replacing the employee; this should include an evaluation of current and future needs and will take the time of several management staff. Costs can be calculated at an hourly rate.
4. Recruitment Costs – The activities undertaken to communicate the availability of this position as well as the costs related to receiving/acknowledging candidates. It would also include career advertisement costs that are dependent on where and how often you advertise. Sample costs can range from $1500 to $30,000+.
5. Candidate Selection Costs – Candidates must be screened, interviewed (sometimes more than once) and have references checked. Time spent includes interview preparation, scoring, and selecting and often exceeds several days of management time. Costs can be calculated at an hourly rate.
6. Testing Costs – Many companies are turning to assessment tests to fully round out knowledge of candidate skill sets. Costs depend on methodology but often include administration, scoring and interpretation. Costs would include a combination of an hourly professional rate plus instrumentation costs.
7. Orientation Costs – If a company has a formal orientation program, it can range from one day to two weeks. The employee is on salary while attending the program. Additional costs may arise from travel and or strategies such as job shadowing wherein a second mentor employee would work with the new hire. Costs would be calculated at an hourly rate in addition to costs related to the trainer preparation and materials.
8. General Training – Throughout the first year of employment, the new hire may be required to undertake additional training in a variety of areas. Costs are calculated both on an hourly basis as well as an assessment for tuition/trainer/material costs.
9. Outgoing Employee Productivity Costs –Typically, when an employee resigns, productivity declines during their final work period. As well, general team morale may be down as a result of the resignation and therefore group productivity can be down.
10. Incoming Employee Productivity Costs – Once again, the rule of thumb for HR professionals is that a new employee is typically not considered fully high performing for at least one year of employment. Costs are calculated on the annual wage.

Cost of Employee Turnover Calculation Formula

The cost of turnover includes both the directly visible as well as the hidden or indirect costs.
Sample One

The following formula was created by Will Helmlinger of the Resource Development Group, a US based consulting firm. The formula allows you to select a figure for what you believe the potential average cost of turnover.

Direct Costs

1. Determine the number of employees that have left the company during the past 12 months._________________

2. We estimate that the average cost of turnover is %________(select a % figure up to 100%) of yearly base salary, bonuses and commissions, employee benefits.

3. Annual wages $_______________X 150% of annual wages = $_________lost per employee.

4. Total Cost of turnover: Annual wages percentage (150%) X number of employees replaced = $__________________

Indirect Costs

1. How much did you invest in training and development for each employee during their employment with the company? $_____________________

2. What was the cost to you or your managers in giving these employees special attention due to training or under performance over the period of their employment? $__________________

3. How much business revenue was lost because each employee has left the company? $_____________________

4. How many customers/clients started relationships with competitors because of the employee who left. Multiply the number of customers by the lost estimated lost revenue. # customers____________X estimated revenue $_________________

5. What was the negative impact on other employees (i.e. other turnover, lost productivity, sick days, low morale?) $_______________

6. What were the costs of advertising and management time to recruit a new employee? $___________________

7. What were costs related to a temporary employee if any? $__________

8. What were the search firm costs if any? $________________

9. What were your total costs for interviewing and selecting a new employee? Include all management/staff time. $ _________________

10. How long did it take for a new employee to become fully functional?

A. Multiple the employee’s salary $ _______________x the number of months not fully functional # _______________

B. Multiply the percentage of time the manager spent training the new employee _________% X the manager’s annual salary $___________

C. Add A and B totals for $_____________

11. What additional costs were incurred for lost productivity? $_________

12. How many customers/clients did you lose because of this turnover? $___________

13. How did the competition take advantage of your turnover problem? Calculate additional lost staff. $________________, lost clients, $__________

14. Other costs? $_____________________

Calculate your direct visible costs with the hidden, indirect costs.

Sample Two

Apply a formula of 150% of annual salary per employee as the cost of turnover. This would include both direct and indirect costs. Therefore, determine the number of employees lost per year #_____________- X 150% of annual salary = $______________

Decreasing the Costs of Turnover in Your Organization

As you were able to determine through the use of either of the two formulas above, employee turnover can significantly affect the financial performance of your organization. Many factors contribute to employee turnover and a company must develop strategies to overcome them. Some of the most common strategies include:

1. Confirm the Impact - Examine the current impact of turnover on your organization. Identify the turnover rates for different jobs within the company and then compare them with other internal or external standards. This will help you to identify priority areas for addressing employee turnover.
2. Determine Causes for Employee Turnover – Use an outside consultant to apply a employee questionnaire or conduct focus groups to determine if there are any characteristics within the company that are contributing to the turnover problem. Determine the differences between successful and unsuccessful employees.
3. Review Your Recruitment Strategies – Do you confirm the roles, responsibilities, and tasks for the job and then determine the skills required to carry out these tasks? Do you determine how you will measure these skills? Did you market your position appropriately?
4. Review Your Selection Strategies – Did you use a behavioural approach to the interview process? Did you get concrete evidence that the candidate can do the job? Did you thoroughly check references?
5. Review the personal/organizational culture fit – Did you know that no matter how skilled a new employee is, organizational culture will win every time? So, did you check to see if there is a good fit between the candidate and your organizational values and culture?
6. Analyze Your Compensation Practices – Are you paying your employees well? Are you lagging, matching or leading the market? Have you ensured that there is internal equity between employees? Are there labour shortages in your industry? Are you maintaining a reputation as a fair employer?
7. Analyze Your Organizational Structure and Job Design – Are employees overworked and accomplishing less? Are your employees experiencing reduced job satisfaction? Is the work and information flow effectively creating high productivity?
8. Is Your Organization Family Friendly?– Do you offer flexibility as a strategic tool to enhance productivity and employee retention? Will flextime, compressed work week and/or telecommuting resolve short term employee issues? Is job or work sharing available?
9. Analyze Your Educational/Professional Development Strategies – Do you provide ongoing training and development for employees? Are the employees proficient in the tools that they use at work? Is your organization open to trying new things?
10. Become a Best Practice Employer to Attract New Employees – Do your policies and practices consider up-to-the-minute developments in human resource management? Use becoming a best practice employer to attract more skilled labour/professionals to your firm?

You can turn to the Legacy Bowes Group team to help solve your employee problems. Create a performance enhancing work environment - invest today, cut your costs tomorrow.

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