The employee turnover costs are pervasive and are often staggering. The phenomenon coined the Revolving Door Syndrome is an inevitable part of business and can ultimately seriously impact a company’s bottom line. The problems associated are common among organizations and has reluctantly become accepted as a necessary evil in the business world. At a time when the economy stresses running ‘lean and mean’ industries, there is an expectation of high performance and less tolerance from poor performers.
According to a survey conducted by the Society for Human Resource Management and CareerJournal.com, 83 percent of employees and 56 percent of HR professionals believe it is likely that voluntary turnover will rise with the improving economy. Therefore, a significant percentage of the demand for new employees is a response to replacing workers who have left the company.
Evidence suggests that turnover is attributed to dissatisfaction with factors such as relationships with management, job content, faulty or inadequate hiring practices, and compensation. While other issues may influence an individual’s decision to leave, such as the competitive conditions of the local job market, management still has direct control over many of the important motivators of employee turnover. Replacing employees will cost time, energy and lost productivity, and without precise costing, such expenditures in human capital often are less scrutinized.
The obvious activities of establishing search and screen procedures, training and implementing exit interviews all cost money. Companies tend to understand and record costs such as wages, benefits and utilities, but the costs of employee turnover often are unmeasured. Alternatively, when turnover rates and costs are measured, managers become equipped with resources to enable simple and effective problem analysis and decision-making.
The Costs of Turnover
A Deloitte survey conducted in the US found that it takes up to six months to get new employees working reasonably proficiently, 18 months until they are integrated into the culture of an organization and 24 months before they really know the strategy and the business they have joined. The nature and expenses of specific aspects of employee turnover will vary by industry and will be higher for high-complexity jobs. In smaller firms, the significance of turnover is less a matter of disbursements than it is a matter of lost productivity. For example turning over one employee of C-Level upper management can cost on average 3 to 5 times the annual wages and benefits. The savings associated with reducing turnover will be substantial and directly increase profits independent of sales volume.
There are a variety of estimates about the cost of turnover and its effects. Direct expenses for instance, can vary from 46 percent of annual pay for frontline employees to 176 percent for IT professionals and 241 percent for middle managers, according to Washington-based Corporate Leadership Council. At Info-Tech, a London, Ont., based consulting firm, turnover costs are marked at 30 to 50 per cent of salary. At the uppermost level, it is 100 per cent of the salary, according to senior research analyst Jennifer Perrier-Knox. Citing that replacing a senior-level person such as a chief information officer might take half a year to fill, she asserts there is a massive productivity impact during that time, and the interview process can involve HR and line executives.
An obvious cost to track is the amount of time spent preparing and conducting exit interviews and administrative activities. Multiplying the wage rates by the amount of time spent by individuals involved in each of these activities, generates a fairly accurate estimate of pre-departure costs.
Paying employees what is believed to be standard for the particular industry may initially keep costs down but in the long-term will likely increase turnover rates. Finding excellent employees and compensating them accordingly will pay off in terms of higher productivity and lower turnover. It is also essential to find and retain quality employees and have regard to their background. For instance, doing little to identify and screen applicants with histories of negative behaviour only leads to higher turnover and perpetuates those behaviours. This can also lead to greater risks of negligent hiring claims and negative publicity. Individuals who lack the knowledge, ability, or drive to complete their assigned tasks tend to fail, regardless of the amount of training offered.
Table 1 compares the costs of replacing a $100,000-a-year Vice President with a $10-per-hour customer service representative. High turnover results show the cost of staffing the small department equal to recruiting one Vice President.
Orientation and Training Costs- Training new employees’ distracts from refining the skills of existing workers, and often results in erratic production flow. Calculating the costs of orientation must consider the new employee’s salary, the cost of departmental and individual training, training delivery and materials, and the cost of supervisory times spent in assigning tasks and reviewing output.
High turnover rates cause staffing capacity problems and stretch existing staff to meet demands. This causes customer service gaps and the potential loss of market share and reputation. The loss of key persons on the delivery of a critical project also impacts the cost.
The learning curve is often underestimated. As new employees learn the job, policies and practices, they are not fully productive. Upon completion of training, the employee is contributing at a 25% productivity level for the first 2 – 4 weeks. The cost therefore is 75% of the new employees’ full salary during that time period. During weeks 5 – 12, 50% productivity level is contributed, at a cost of 50% of full salary. Also accountable are the additional costs of mistakes the new employee makes during the training period.
These indirect costs, while harder to quantify, can be substantial and be as much as 80% of the costs of turnover. Other intangibles are also difficult to quantify, such as the impact on the company’s reputation, customer satisfaction and sales and development opportunities, said George Hesketh, manager of business analytics at talent management firm Taleo.
Few organizations consider the lost investment in terms of training, knowledge and skills development when employees walk out the door, said David Sissons, Toronto-based vice-president of HR consulting firm Hay Group. Additionally, severance pay also factors a part of employee turnover costs. This is especially true with highly skilled employees and senior-level management.
These include the increases directly caused by turnover, such as overtime and training pay, increased unemployment insurance rates, advertising, recruiting agency fees, pre-job training, cost of orientation, and accounting and payroll expenses. For large companies, these tangible costs also include additional staff to process the volume of applicants.
With the current state of the economy, companies are compelled to consistently review and enhance their level of efficiency. In a slow economy, it is critical that employers closely manage their expenses. Although front-line staff has experienced an increased turnover rate in the last year, the leading ways to reduce turnover can be applied to all employees. It requires a commitment to more careful hiring processes, to ensure the right people are doing the right jobs.
According to executives at ClearRock, an outplacement and executive coaching firm, raising employees’ pay and benefits is the fifth most popular tactic and companies are trying to reduce turnover first through non-monetary methods because there is usually only a short-term payoff from employees after they receive raises, bonuses and better benefits. Employers can also control turnover by conducting better orientation, leading to better retention and exit interviews which can give insight into problems and better training programs.
Turnover should not always be considered a negative organizational experience. When poor performers are laid off or leave voluntarily, turnover can produce beneficial results by furthering the attainment of a functional goal. This creates opportunities for hiring better performers, therefore likely leading to increased productivity or performance, and eventually to the enhancement of the organization’s financial standing.