Finding the right employees are important. We all know this. It is however a serious cost driver, if we can’t keep them long enough to reap the benefits. Out of control voluntary turnover (churn) has a negative impact on employee morale, productivity, and company revenue.
Recruiting and training requires staff time and money and will ruin any company both financially and culturally if the “hole in the bottom” is left unattended to.
What is the cost of employee turnover?
Studies of the cost of employee turnover are not surprisingly all over the board. Replacing a highly skilled specialist of whom only 3-5 people exist in the world (for a remote location, let’s say Antarctica), may be excessively more expensive compared to the cost of replacing an entry level position, in a region where the supply and demand situation is in favor of the company.
The costs of replacing an employee varies based on the individual person, function, company, industry, region, country, demographic situation, economic conditions, etc. The list goes on, and its element are generally divided into two categories.
Category 1 – direct replacement costs:
- Separation costs such as exit interviews, severance pay, and higher unemployment taxes
- The cost to temporarily cover an employee’s duties such as overtime for other staff or temporary staffing
- Replacement costs such as advertising, search and agency fees, screening applicants, including physicals or drug testing, interviewing and selecting candidates, background verification, employment testing, hiring bonuses, and applicant travel and relocation costs
- Training costs such as orientation, classroom training, certifications, on-the-job training, uniforms, and informational literature.
- Lost productivity for the departing employee who may spend their last days on the job writing exit memos or with reduced morale
- Lost productivity due to the need to hire temporary employees
- Coping with a vacancy or giving additional work to other employees
- Costs incurred as the new employee learns his or her job, including reduced quality, errors, and waste
- Reduced morale
- Lost clients and lost institutional knowledge
A recent US CAP survey (primarily considering the direct replacement costs) states that turnover costs seem to vary by wage and role of employee as follows:.
- 16% of annual salary for high-turnover, low-paying positions
- 20% of annual salary for mid-range positions
- Up to 213% of annual salary for highly educated executive positions.
Considering the fact that headhunter cost is classified as a direct replacement cost and many of these quote their price as a percentage of the employee’s total yearly benefit package, this conclusion seems very fair. In Denmark headhunter costs varies in the range of 8 – 40% based on the total compensation of the new employee. The levels however is subject for debate as most research papers only consider category 1 in their estimations. Direct costs may be easy to measure, indirect cost by their very nature may be hidden and difficult to ascertain.
Some studies (such as SHMR) predict that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. Another survey study (including indirect cost elements), found the following averages:
- 30-50% of annual salary for high-turnover, low-paying positions
- 150% of annual salary for mid-range positions
- Up to 400% of annual salary for highly educated executive positions.
Next step is NOT to implement a standard set of HR fixes. There is no one size fits all. No magic pill to take for all organizations, although common problems do exists and inspiration from standards makes good sense if it can cure your disease. Being aware of the common myths of turnover can help too. Here are 3 common myths about turnover.
3 Myths of Turnover:
Myth 1: Low Turnover Is Always Good
Low turnover has long been presented as proof of a great organization. The logic is pretty simple—a company must be doing something right if employees are content to remain working there.
Human motivation is complex. Employees stay at companies for all kinds of reasons, and those reasons may have nothing to do with gratitude for a great employer or a desire to perform well. Perhaps your employees:
- Are overpaid
- Are under-skilled
- Aren’t motivated to advance
- Believe the company benefits are too good to be replicated elsewhere
- Believe the economy is too unstable
- Know very well that no other employer would put up with their bad behavior
Myth 2: Turnover Is Always Bad
Turnover can be very disruptive to a business, and no doubt that’s why it has such a lousy reputation. Turnover has a dollar sign attached to it as well, in direct hiring costs (ads, recruiter fees, sign-on bonuses) as well as indirect costs (the time of the individuals involved in the hiring process, time spent acclimating the new employee, and lost productivity). For all these reasons and more, turnover must be avoided.
Sometimes change is desperately needed, and that means some heads have got to roll. Whether employees are fired, retire, or self-select out of the transformation to come, the point is that turnover can be a fantastic opportunity for employers to select, place, and develop employees (both incumbent and new) who are enthused about the company and the direction in which it’s heading. Some turnover is actually good for the company—especially in the case of overpaid, under-performing employees.
Myth 3: You Can’t Control Turnover
“At will” employees are free to resign when they please, with or without notice, and without regard to employer needs or wants. For this reason, some believe leadership can’t really control turnover and shouldn’t bother trying too much, either. This “que sera sera” view toward retention also serves the purpose of absolving leadership from any responsibility to manage turnover.
Employers can’t control turnover, at least not 100 percent. However, employers can create a workplace culture that encourage the best employees to stay and at the same time, encourages good turnover. It takes mindfulness and forethought, but great employers do it every day.