What would your waistline look like if every time you ordered a meal you added dessert? If you were like most people, it wouldn't be long before you needed to purchase larger clothes. Eventually you might reach the point where you realized the answer to your tight fitting jeans was in front of you all along.
Like waistlines all across America, employee turnover is expanding at an alarming rate. Yet companies are still following the same regiment, hoping to control their expanding costs. Is your company's recruitment budget bulging because your turnover costs are out of control? How much are you wasting on satisfying your short-term needs? If you knew you could shave your recruitment and hiring costs, would you be willing to try a new approach?
The Cost of Turnover
The time has come to take a closer look at what's causing the expansion of your recruiting budget. While companies know replacing an employee costs considerable time, energy and lost productivity, few can put a dollar figure on the actual cost. Lack of hard data means investments in retention and recruitment programs that get placed on the back burner.
Cost of turnover estimates for a single position range from 30 percent of the yearly salary for hourly employees (Cornell University) to 150 percent, as estimated by the Saratoga Institute. The McQuaig Institute puts this into terms that most of us can relate to. A fast food restaurant must sell 7,613 children's combo meals at $2.50 each to recoup the cost of losing just one crewmember. To recoup the cost of losing just one sales clerk, a clothing store must sell almost 3,000 pairs of khakis at $35. How many of your products or services must you sell to make up for one employee?
These examples represent the cost of turnover, which encompasses replacement costs, training costs, separation costs and lost productivity. You may be thinking that positions in your company are considerably more sophisticated than those found in fast food restaurants or retail organizations and that it's impossible to come up with a number. But even an approximate number is better than no number at all.
Calculating Your Cost of Turnover
If you feel overweight, you know how awful it can be to step on the scale after avoiding it for so long. You might be lucky and be in better shape than you think. Like losing weight, it can be painful to take that first step. But once you do, you will feel empowered knowing that you are one step closer to getting your organization back into shape.
Calculating your cost of turnover is simpler than you think. Begin by looking at everyone who has left your organization this year. If you want to capture a full year's worth of information, consider capturing the data for those who left the company the previous year as well. The business costs and impact of employee turnover can be grouped into four major categories: 1) costs due to a person leaving; 2) hiring costs; 3) training costs; and 4) lost productivity costs.
Costs Due to a Person Leaving
Once an employee has announced their resignation, they have begun to transition out of the company. While working out their notice period, their full attention is no longer on your business. Others in the organization are picking up their slack, which prohibits them from giving full attention to their own jobs.
In addition, consider the following costs:
- Employees who must fill in for the person who leaves before a replacement is found;
- The addition of temporary help or the use of consultants to fill in while the position is being re-staffed;
- The cost of a manager or other executive having an exit interview with the employee to determine what work remains, how to do the work, why he is leaving, etc.;
- The cost of training the company has invested in this departing employee; the cost of lost knowledge, skills and contacts of the departing employee;
- Cost of lost customers the departing employee is taking with him (or that leave because service is negatively impacted) and;
- The increased cost of unemployment insurance.
You might be lucky and find a candidate on a free website, but most likely you will need to post and advertise elsewhere.
Consider the following hiring costs:
- The cost of advertising, internet posting, employment agencies, search firms, employee referral awards;
- Increase in starting pay as salaries have risen since you last hired, bringing everyone else in the department up to market rates;
- Time spent screening resumes, arranging interviews, conducting interviews (by both HR and upper management), checking references and notifying candidates who were not awarded the job;
- The use of assessment testing, background checks, drug screening (usually done on more than one candidate) and time spent interpreting and discussing results;
- Time spent assembling and processing all the new hire paperwork, explaining your employee benefit programs and entering the necessary data to ensure the employee receives a paycheck.
It would be nice if employees were able to integrate into their organizations without any training, but usually this is not the case. Things are done differently in every organization so you must factor in the following costs:
- New employee orientation or onboarding;
- Specific training for the person to do his job, such as computer training, product knowledge, company systems;
- Time spent by others to train this person and money spent on outside training to ensure they are able to do their jobs.
Loss of Productivity Costs
Because new employees do not enter the organization completely trained, it will take time before they are fully productive.
Factor in the following productivity costs:
- During this time of lost productivity, the person's manager is also spending more time directing, reviewing work and possibly fixing mistakes. (Errors will be made that are not caught right away and will cost money to correct down the line such as with a customer who receives an incorrect price or an incorrect shipment due to the new employee's lack of experience);
- Add loss of goodwill as you scramble to preserve your relationship with your valued customer or client;
- Employee moral plummeting as overworked employees assume responsibility while the new hired is being trained.
Now that you've closely examined the costs associated with each person leaving you can then plug this information into a spreadsheet to determine the real cost of employee turnover in your organization. How do you measure up? Are you in better shape than you thought? Or is it time for an intervention?
Given the high costs involved and the impact on productivity and customer retention, a well thought-out retention program can easily pay for itself over and over again. Employee turnover is a lot like eating dark chocolate. In moderation, both are fine and can even be healthy. In excess, both can have serious ramifications. Are you still interested in ordering dessert?
© 2008 Human Resource Solutions. All rights reserved.
Roberta Chinsky Matuson is the President of Human Resource Solutions (www.yourhrexperts.com) and has been helping companies align their people assets with their business goals. She is considered an expert in generational workforce issues. Roberta publishes a monthly newsletter "HR Matters" http://www.yourhrexperts.com/hrjoin.cgi which is jammed with resources, articles and tips to help companies navigate through sticky and complicated HR workforce issues. Click here to read her new blog on Generation Integration http://generationintegration.typepad.com/matuson/. She can be reached at 413-582-1840 or Roberta@yourhrexperts.com.