Cost per hire is frequently measured. Cost of retention is not. Most companies can probably locate an employee turnover number, and a few may even be able to assign that number by job level or by quartile (top performers, good performers, OK performers, & underachievers). But turnover is a neutral metric. By itself it has no financial significance. Cost, the consequence of turnover, does. It’s the penalty the company actually pays on its financial statements for people leaving.
Let’s look at an example: a mid-size company with these statistics. Caveat! This is a simplified example with many assumptions. CFOs would have heart failure if you used it without their input. We use it to make a simple but dramatic point, that if you cost out turnover properly, the corporate impact is much greater than cost per hire. This is important because of business’s law of large numbers:
The largest number gets the most attention!
Retention cost is one of staffing’s closet elephants. Because the calculations are detailed, it is often fudged. Worse yet, because it can make managers look bad, it is often buried. If you want the attention and respect of the C-suite, stake your claim to the largest numbers you can get your hands on.
The answers to three common concerns are relevant here:
Why are you writing off training for the departing worker? Wasn’t that training productive over his working life?
Hopefully yes, but think of it like money invested in a stock. Now the company doesn’t own that stock any longer. You invested to create an asset and that asset now has zero value, so you have to write it off and replace it with a new asset/employee.
We don’t suffer much productivity loss when people leave. We may slow down a bit, but everything still gets done.
Slowing down is productivity loss. And consider this: if you can lose people but your productivity remains about the same, then you’re overstaffed. Overstaffing also means lower productivity.
Knowledge cost is not really a cost.
Ask yourself whether your new employee hits the ground running on Day One, producing at 100%. Probably not. There’s almost always a learning curve with lower productivity at the beginning and higher productivity at the end. Knowledge cost represents that difference. Knowledge costs can, however, vary greatly. If your information systems are highly developed, your new employee may be able to access all his predecessor’s key information in short order. If on the other hand you’re losing baby boomer engineers with decades of accumulated knowledge, you may be looking at a year or more of reduced productivity while their replacements acquire that knowledge.
To scale these numbers to your organization, add or subtract zeros. If you happen to be turning over 16,000 employees a year, the number gets really interesting. And if you want to make them truly your own, do separate analyses for different departments and job levels. It’s not that difficult once you have a template built. Sales is an excellent target because the productivity differences between average and superior performers can be large; untended territories can suffer substantial fall-offs in business; and the ramp up time for new sales people can be substantial, often six months or more. Turnover costs for accomplished sales people can easily run to multiples of compensation.
In short, if you haven’t done this type of calculation before, a simplified version such as we’ve used here is a good place to start. Then show it to finance and get them to help you refine it. Naturally, if we can help, give us a call.
Related Reading from Staffing.org and other sources:
Managing Talent Retention
Employee Retention and Succession Programs Lead to Higher Retention, Increased ROI, Says AberdeenGroup
Cost of Employee Turnover
Employee Retention: What Employee Turnover Really Costs Your Company
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