Growth and turnover are the two drivers of staffing. Over the past two years, as many companies have experienced little growth, turnover has become more consequential. Most companies accept the costliness of turnover on some level and try to keep their people contented and on board. But some turnover is inevitable even in the best-managed companies.
Few companies calculate the full cost of an employee leaving. Perhaps the data isn’t there, or people are too busy, or they don’t know where to begin. So instead, they substitute a cost-per-hire calculation and come up with a number around $2,000-$3,000 per non-exempt employee and maybe $12,000-$15,000 per exempt employee. Such numbers certainly make the penalty for poor retention an issue if you’re dealing with thousands of employees per year, yet only a relatively small one when measured against total corporate expenses.
But suppose that cost, properly calculated, was 10 or 15 times the cost per hire? What if it was 50% of salary for non-exempt workers, 100-150% of salary for middle managers, and 200-250% of salary for upper-level managers? In fact, these are the more accurate numbers. So stated bluntly, at 12% (roughly the average corporate turnover) the cost of turnover cannot be dismissed as a minor HR issue; it is indeed a major factor in corporate profitability.
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In a company of 10,000 people with 12% turnover costing 100% of a $50,000 average salary, the cost of turnover is $60M – yes, sixty million dollars. Float that kind of number by your CEOs and watch them straighten up!
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If you’ve never run these numbers for your company, they can be daunting, even scary. They may provoke serious pushback from defensive departmental executives who accuse staffing managers of making them look bad or of not understanding the hard realities of the world outside of HR. But truth is also power. We’ve spoken often of the law of large numbers in business: he who controls the largest number has the most clout. The true cost of turnover is one of the most powerful numbers staffing people can use to command the attention and respect of their organizations.
How is it calculated? Well, it takes a bit of work, but there are tools to help. One of these is a set of cascading spreadsheets into which you plug detailed costs. Calculators built into the spreadsheets do the number crunching and the results appear on the last sheet. Here are some cases taken from the experiences of Bill Gately, one of the authors of the Bliss-Gately tool.
A financial services firm was replacing 200 customer service reps a year with an average annual salary of $48,000. The calculations revealed that the full cost of that turnover was about $72,000 per employee, or $14.4 million per year. Upon learning this, the company revamped their hiring process to attract a different kind of candidate, thereby reducing turnover substantially.
At another company, an executive team calculated the replacement value of a particular key person at $50 million. After learning this, the CEO wrote him a bonus check for $6 million.
How is true replacement cost calculated? Here is a summary illustration. A detailed list of specific costs will be included in the 2010 edition of our annual Benchmark Report.
- Position: Financial Analyst
- Salary: $52,000, or $25 per hour
Departure Costs – not uncommonly 85% of salary ($45,000)
- Management time for exit interviews, updating client files and workflow, reasons for leaving, paperwork, etc.
- The cost of any past employee training
- The loss of knowledge, skills and contacts
- Possible increased unemployment insurance
- The cost of fill-in employees
- Lost productivity during the standard 2-3 week notice period
- Paid comp and vacation time due
- Possible lost customers and business
Hiring Costs – ranging from 7-20% of salary (let’s say 15% here, or $8,000)
- All the standard cost per hire items over the average 30-45 day recruitment period.
New Hire Training Costs – 13% of salary ($7,000)
- Onboarding orientation – 1 week
- Position-specific training (product & industry knowledge, day-to-day duties) – 2 weeks
- Informal mentoring – 12 weeks
New Hire Productivity Costs – 32% of base salary ($17,000)
- First 4 weeks – 25% productivity
- Next 4 weeks – 50% productivity
- Next 4 weeks – 75% productivity
These costs total $77,000, or 148% of base salary. The point here is not that every replacement costs this much, but that many knowledge-focused jobs do, and replacing some key employees with years of accumulated expertise, training and client relationships can cost much more.
During the current recession job switching has declined, but our research confirms that job “sniffing” (looking around) has increased among the currently employed. As the job market loosens and job sniffers gain confidence, turnover will increase. Now is the time to grasp the issue, cost out the implications and begin taking corrective action. The war for talent, never really over, is about to heat up again. Starting now, a well-conceived retention program will easily and quickly pay for itself.
In 2010, make your company the preferred place to work, keep your people on board and make sure that top management understands how much more money you’ve made them.
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