The Real Costs Of Employee Turnover

Employee turnover is unavoidable. It is a fact of business life as are its associated costs. Or are they? The costs of employee turnover can be staggering, ranging anywhere from 1/2 to 5 times an employee's annual wages dependant upon his or her position. It is neither possible, nor desirable to completely eliminate turnover from your organization. Some of the costs associated with employee turnover are unavoidable and must be expected to occur in the normal course of business. BUT NOT ALL THE COSTS!!! You can do something about these turnover costs…

Before you can start to combat the costs of employee turnover, you must be aware of what these cost are and what they entail. There of course are some obvious costs that come quickly to mind, but there are also numerous other costs that you may have never considered that can have a serious impact on your bottom line.

The Hard Costs:
Turning over one employee can cost around ½ of a low skilled hourly workers annual wages plus benefits, while losing a member of C-Level upper management can cost 3 to 5 times his or her annual wages and benefits.

Consider this: if your firm has a turnover rate of 25% (about the national average) and employs 40 employees each earning $25,000 annually, your costs of turning over 10 of these employees over the course of a year will be at least $125,000! What could you do with an additional $100,000+ in resources?

Severance pay can also be a huge part of employee turnover costs. This is especially true with highly skilled employees and high-level management. These are wages on which you will never see any return on you investment!

The costs of recruitment: Each time an employee is lost the hiring and selection cycle must start again. These costs can be significant: advertising costs to announce your job opening to the masses, cost of recruitment agencies, background checks, reference checks, drug testing, cost of overtime pay, temporary help and much more.

Hiring costs: Once you’ve made a hiring decision, the costs of turnover don’t stop, but rather continue. Sign on bonuses, relocation costs, and any increases in salary level necessary to attract new talent all add up quickly. The time spent by HR managers to orientate and train the new employee can also be costly and unnecessary. These are all tangible costs that could be avoided with a better employee retention.

Other Costs: Some Food for Thought
There are clearly a number of turnover costs that can be easily quantifiable, but these costs often times are just the tip of the iceberg. There are numerous turnover costs that will never appear on any balance sheet or income statement that can have a serious impact on your firm’s bottom line.

First of all consider the affects on productivity that are caused by turnover. It takes on average 8 weeks to recruit and hire a new employee. During this time production can seriously falter. Other employees have to pick up the slack in production, often taking on tasks and responsibilities they are unfamiliar with or untrained in. This can drain team morale and further hurt production. The negative affect on production caused by turnover doesn’t stop when a new employee is hired. There is always a learning curve associated with any job; for some it can be short and insignificant, while for many others it can be a considerable period of time. During this time it takes a new employee to “get up to speed” with the rest of the team, production will never be as good as it could be.

There can also be a significant loss in business due to employee turnover. Many employees enjoy a loyal following of customers with whom they share a real connection. The father of a close friend of mine is a great example. As a parts dealer for an automotive service center he worked with many customer on a regular basis and formed a real bond with these customers. They trusted him and knew they he would do whatever possible to help them. When this individual left that position and went to a competing service center, so did almost all of his loyal customers. Little did the firm know that the customers were loyal to the employee, not the company - and they paid dearly when they were unable to keep him on board.

Another serious cost to companies when they loose employees is the loss of organizational knowledge. Many employees are able to become experts in the field they work in and when they leave, so does that knowledge. These employees are no longer available to share this knowledge and mentor junior members in the company. Once again these costs are near impossible to quantify, but there is sure to be an affect on the bottom line.

What You Can Do About It

The stakes are clearly high when it comes to retaining good employees within your organization. Undoubtedly some industries are more susceptible to experience higher turnover than others. Turnover in the Accommodation and Food Service and Leisure and Hospitality industries average over 50% annually. If you compete in these industries, or any other industry susceptible to high turnover rates, you know and expect that turnover is going to be a challenge, but it doesn’t need to cripple your company’s ability to be successful.

A Harvard University study reports that 80% of employee turnover can be attributed to mistakes made during the hiring process. The implications of this are huge: up to 80% of your turnover can be blamed on hiring mistakes. The problem lies in the employee selection process. Simply put the wrong people are being hired for the wrong jobs.

A Michigan State University indicates that traditional hiring techniques – résumé reviews, interviews, and reference checks only provide a 14% likelihood of a successful job hire. ONLY 14% !!! Your odds of winning a hand at Blackjack are significantly better at around 40%. If you rely only on traditional hiring practices you are truly gambling with the future success of your organization.

The Michigan State University study does offer hope in regards to these horrendous odds of hiring the right employee. The effective utilization of powerful personality assessments are shown to increase the likelihood of a successful job hire to 75%!!!. The power of these assessments is staggering and provides a powerful insight into the values, behaviors, and attributes the job candidate possesses. This information can than be compared against a Benchmark established for the job position and an informed hiring decision can now be made. The results are incredible.