This article discusses an issue that can have a dramatic impact on any business -- the cost of turnover.
Businesses spend great sums of money each year bringing employees onto their payrolls. Recruitment and employment costs, compensation including signing bonuses in some cases, benefits, mandated insurances, training, equipment, tools, furniture, supplies and other resources -- all add up pretty quickly. But when an employee quits or leaves for whatever reason, and particularly after being trained and having developed expertise, customer knowledge and proficiencies, a completely different set of mostly hidden costs kick in and now the price tag to replace that individual will range from 150 to 250
percent of base salary.
Given these facts why don't all companies take actions to minimize turnover costs? Often it is because as real as these costs are they are indirect and therefore not neatly highlighted on the profit and loss statement. As a result managers frequently quantify just the cash costs associated with replacing employees. They totally miss the costs of time, disruption in the
work place, lost productivity, account erosion and opportunities lost.
New Jersey management consultant Bill Bliss (Bliss & Associates) has quantified these frequently uncalculated costs and their impact is nothing short of staggering. For instance:
* Costs related to the person leaving (whatever the reason for departure) includes such areas as lost productivity; the costs of managers and other employees having to temporarily handle the work; training costs down the drain not to mention lost knowledge and customer rapport -- possibly even lost customers because of loyalties or decreased service levels. It is
estimated that these assigned costs can be as much as 85 percent of the employee's base salary.
* Hiring costs not only include recruitment ads, employee referral awards
and job postings but also interview time, employment process costs for background
checks, reference checking and re-contacting non-selected participants in
the process. In summary you can anticipate a cost equivalent to 15 percent
of base salary, which can extend to 38 percent if a recruiting or staffing
firm is contracted.
* The cost of training covers new employee orientation and explanations of company benefits, policies, as well as job specific training -- computer, product, industry knowledge and day-to-day duty requirements. It may be true that much of this is informal, on-the-job work, but it takes the time of those experienced enough to do the training (who must be more knowledgeable and therefore whose time is of greater value to the business).
In all -- chalk up another 13 percent of base salary as a cost estimate.
* Productivity lost with new hires isn't always taken into consideration either, which is the same reality for even internally promoted employees. But the fact is neither is 100 percent productive on the first day and it takes time for them to ramp up to make a full contribution. (It takes approximately six months for a mid-level manager to reach the breakeven point of contributing.) During this time there is more supervisory time required
developing, continuing to train and checking results. All of this said, expect "lost productivity time" to cost 32 percent of the employee's base salary.
The reality is that in a company with an average employee salary of $60,000 the turnover cost (or cost to replace one individual) will easily be $90,000 to $150,000. In a mid-sized company of 1,000 employees experiencing a turnover rate of 10 percent the annual cost would be as much as $9-15 million. That could be $9-15 million in profits -- if it were not for the turnover. Or $9-15 million spent on new equipment or invested in R&D or
marketing or some other critical part of the business. At this rate the company would have to do almost everything faster, better, more profitably just to stay even. How many additional widgets would have to be sold to replace that $9-15 million and break even?
This is why successful companies work hard to discover root causes of turnover and then invest money to correct the problems causing unwarranted losses, and in doing so actually save money. They invest in effective hiring practices from the beginning to ensure they find and hire the right people and then train and develop them to increase their value and satisfaction in their jobs. They ensure that new hires are quickly acclimated to the business
so that they become more productive and are successful more quickly. They design competitive compensation programs and practices and assign employees strong supervisors, challenging work, stretch responsibilities and developmental assignments. They manage performance by defining roles, responsibilities and expectations. They solicit regular feedback through employee surveys and report openly on actions taken as a result of that feedback. They promote clear, two-way open communications to ensure employees
feel heard and valued. And finally they track the results of their efforts to reduce turnover and put in place continuous improvement loops all to avoid paying the loaded costs of losing their talent.
In our experience, we find that some companies see these actions as extreme, while others have independent practices and programs that aren't necessarily working well together in concert. But successful companies understand how all of these areas must be addressed in total and be supported at the highest levels. When integrated as part of the business strategy these actions can contribute substantial cost savings in terms of increased efficiencies,
retention and reduced risk, while generating positive bottom line influences such as greater productivity, higher levels of quality and customer service, innovation and employee satisfaction. That leads to business success the competition cannot touch.
