Cost Of Employee Turnover
This article provides estimates of turnover costs for various groups of employees, and details the various factors that influence the total turnover figure.
Employee turnover is far more expensive than most people realise.
In the worst case scenarios the loss of a single individual can put at risk a major project, with implications for the long term viability of the company.
Many firms are underestimating the total cost of employee turnover by simply considering the more visible costs, such as the cost of finding a replacement, while ignoring many of the negative consequences of turnover and their associated costs.
Calculating The Cost Of Turnover
There are two types of costs of involved in employee turnover: visible costs and invisible costs.
Visible costs:
Exit costs
Recruitment costs
Induction/orientation costs
Training costs
Looking at some of these in more detail: Recruitment costs include the cost of advertising, the cost of the interview process including any psychometric testing and assessment centres, candidate travel costs, golden handshakes and relocation costs where applicable.
Invisible or hidden costs:
Management time
Disruption to fellow employees
Damage to morale
Missed business oppportunities
Lost productivity until new employee is up to speed
Damage to business relationships
Loss of knowledge, skills and expertise
Impact on reputation
Disruption to social and communication networks
Some of these hidden costs are more difficult to calculate and may need to be estimated using expert studies.
If attempting to calculating the total cost of turnover yourself, you will need to speak to a variety of relevant people. These will normally include the recruitment manager, training manager, customer relations manager and departmental manager. It may also be appropriate to speak to customers and clients to get a sense of their perspective.
Other Factors
There are several other factors that will affect the cost of turnover. These include the duration of employment, whether the departure was voluntary or involuntary, the time taken to find a replacement, and the time it takes to become fully productive in the role.
For example, an employee that leaves on their first day will cost far less than the loss of a fully productive employee who had established strong relationships with clients.
A role that requires a great deal of firm specific knowledge is likely to have a much higher cost of turnover than a similar role that can be performed with transferable (or generalised) knowledge alone.
The Importance Of The Total Cost
Firms need information on which to be able to make decisions. Where the cost of employee turnover has been underestimated, the firm is likely to underestimate the size of the problem and in turn, to fail to put in place the optimal solution.
There have been several notable examples where firms have folded, having neglected to pay attention to high employee turnover. How much this was due to underestimating the true costs of turnover is unclear, but a more accurate figure might have given them a warning of the dangers ahead.
So failing to establish a fair reflection of the actual cost of turnover may damage the business in the long run.
Estimates Of The Cost Of Turnover
There have been a number of studies done into the cost of employee turnover for various different groups of employees.
Turnover costs tend to be expressed as a percentage of salary.
Non-skilled 30 - 50%
Service/production 40 - 70%
Skilled 60 - 85%
Clerical/administrative 50 - 80%
Professional 75 - 125%*
Technical 80 - 125%
Specialists 100 - 250%
Supervisors 70 - 140%
Managers 70 - 150%*
* figures can exceed this range
Check the availability of replacements before arriving at your final estimate.
The loss of a highly productive employee will always cost more than the loss of an average performer in an equivalent role.
In areas such as customer service it is relatively easy to see how turnover can have a negative impact on customers, putting at risk the life time value of the customer to the firm.
Any employees in client facing roles should have a premium added to cover damage to business relationships.
An Example
Suppose we want to estimate the cost of turnover for two categories of administrative staff using available research based figures.
Category 1: Moderate standard, easy to find replacements.
Category 2: Good performers, more difficult to find replacements
Our research based range is 50 - 80% of salary
If we examine the list of invisible costs, considering each factor to see if it is relevant in this instance, we might reasonably assume that the loss of Category 2 employees would be more disruptive to fellow employees and that their replacements might take longer to become as productive. There may also be a degree of loss of important knowledge to consider.
In particular instances some of the other factors might be relevant but viewed as a category they would tend not to apply.
So overall we might consider it reasonable to place Category 1 employees near the bottom of the scale, and Category 2 employees near to the top.
Our final estimates
Category 1: 50%
Category 2: 75%
It must be noted that these are only rough estimates but even so they will be of value when decisions have to made later on, determining priorities and assessing possible returns on investments for those retention strategies under consideration.
References:
Development Dimensions International
Competing For Talent - Nancy Ahlrichs
The HR Scorecard - Becker, Huselid & Ulrich
Managing Employee Retention - Phillips & Connell
© Colin Brown 2004
From United Kingdom, London
This article provides estimates of turnover costs for various groups of employees, and details the various factors that influence the total turnover figure.
Employee turnover is far more expensive than most people realise.
In the worst case scenarios the loss of a single individual can put at risk a major project, with implications for the long term viability of the company.
Many firms are underestimating the total cost of employee turnover by simply considering the more visible costs, such as the cost of finding a replacement, while ignoring many of the negative consequences of turnover and their associated costs.
Calculating The Cost Of Turnover
There are two types of costs of involved in employee turnover: visible costs and invisible costs.
Visible costs:
Exit costs
Recruitment costs
Induction/orientation costs
Training costs
Looking at some of these in more detail: Recruitment costs include the cost of advertising, the cost of the interview process including any psychometric testing and assessment centres, candidate travel costs, golden handshakes and relocation costs where applicable.
Invisible or hidden costs:
Management time
Disruption to fellow employees
Damage to morale
Missed business oppportunities
Lost productivity until new employee is up to speed
Damage to business relationships
Loss of knowledge, skills and expertise
Impact on reputation
Disruption to social and communication networks
Some of these hidden costs are more difficult to calculate and may need to be estimated using expert studies.
If attempting to calculating the total cost of turnover yourself, you will need to speak to a variety of relevant people. These will normally include the recruitment manager, training manager, customer relations manager and departmental manager. It may also be appropriate to speak to customers and clients to get a sense of their perspective.
Other Factors
There are several other factors that will affect the cost of turnover. These include the duration of employment, whether the departure was voluntary or involuntary, the time taken to find a replacement, and the time it takes to become fully productive in the role.
For example, an employee that leaves on their first day will cost far less than the loss of a fully productive employee who had established strong relationships with clients.
A role that requires a great deal of firm specific knowledge is likely to have a much higher cost of turnover than a similar role that can be performed with transferable (or generalised) knowledge alone.
The Importance Of The Total Cost
Firms need information on which to be able to make decisions. Where the cost of employee turnover has been underestimated, the firm is likely to underestimate the size of the problem and in turn, to fail to put in place the optimal solution.
There have been several notable examples where firms have folded, having neglected to pay attention to high employee turnover. How much this was due to underestimating the true costs of turnover is unclear, but a more accurate figure might have given them a warning of the dangers ahead.
So failing to establish a fair reflection of the actual cost of turnover may damage the business in the long run.
Estimates Of The Cost Of Turnover
There have been a number of studies done into the cost of employee turnover for various different groups of employees.
Turnover costs tend to be expressed as a percentage of salary.
Non-skilled 30 - 50%
Service/production 40 - 70%
Skilled 60 - 85%
Clerical/administrative 50 - 80%
Professional 75 - 125%*
Technical 80 - 125%
Specialists 100 - 250%
Supervisors 70 - 140%
Managers 70 - 150%*
* figures can exceed this range
Check the availability of replacements before arriving at your final estimate.
The loss of a highly productive employee will always cost more than the loss of an average performer in an equivalent role.
In areas such as customer service it is relatively easy to see how turnover can have a negative impact on customers, putting at risk the life time value of the customer to the firm.
Any employees in client facing roles should have a premium added to cover damage to business relationships.
An Example
Suppose we want to estimate the cost of turnover for two categories of administrative staff using available research based figures.
Category 1: Moderate standard, easy to find replacements.
Category 2: Good performers, more difficult to find replacements
Our research based range is 50 - 80% of salary
If we examine the list of invisible costs, considering each factor to see if it is relevant in this instance, we might reasonably assume that the loss of Category 2 employees would be more disruptive to fellow employees and that their replacements might take longer to become as productive. There may also be a degree of loss of important knowledge to consider.
In particular instances some of the other factors might be relevant but viewed as a category they would tend not to apply.
So overall we might consider it reasonable to place Category 1 employees near the bottom of the scale, and Category 2 employees near to the top.
Our final estimates
Category 1: 50%
Category 2: 75%
It must be noted that these are only rough estimates but even so they will be of value when decisions have to made later on, determining priorities and assessing possible returns on investments for those retention strategies under consideration.
References:
Development Dimensions International
Competing For Talent - Nancy Ahlrichs
The HR Scorecard - Becker, Huselid & Ulrich
Managing Employee Retention - Phillips & Connell
© Colin Brown 2004
From United Kingdom, London
Dear Collegues,
Very quickly I would like to acknowledge the contribution of Collin Brown on this topic.
However just to re-cap some of the costs of Employee Turnover would include but not limited to the following:
Cost of Administering Resignation
Recruitment Costs
Selection Costs
Cost of Covering during the Vacancy Period, especsially if relief officer has to come from a branch of the Company
Administration of the Recruitment and Selection Process-tests etal
Induction Training for the new employee/s
Cost of Training-relevant seminars-fast-track courses etal
Cost of Employment itself-official car +driver, the package depending on the status
Legal or Cost of Litigation-this comes to mind depending on the nature of exist by erstwhile Employee to be replaced
Above many of these costs consists of Management or Administrative staff time but direct costs can also be substantial where advertisements, agencies, or assessment centre are used in the recruitment process.
Thanks
From Nigeria, Lagos
6Very quickly I would like to acknowledge the contribution of Collin Brown on this topic.
However just to re-cap some of the costs of Employee Turnover would include but not limited to the following:
Cost of Administering Resignation
Recruitment Costs
Selection Costs
Cost of Covering during the Vacancy Period, especsially if relief officer has to come from a branch of the Company
Administration of the Recruitment and Selection Process-tests etal
Induction Training for the new employee/s
Cost of Training-relevant seminars-fast-track courses etal
Cost of Employment itself-official car +driver, the package depending on the status
Legal or Cost of Litigation-this comes to mind depending on the nature of exist by erstwhile Employee to be replaced
Above many of these costs consists of Management or Administrative staff time but direct costs can also be substantial where advertisements, agencies, or assessment centre are used in the recruitment process.
Thanks
From Nigeria, Lagos
Here are the items that employers put into the "Business Costs and Impacts of Turnover" Excel workbook aka "The Bliss-Gately Tool" for calculating the cost to replace an employee. The list is derived from Bill Bliss' article, "Cost of Turnover."
Job Title
Hourly rate for vacant position
Hourly rate for person who fills in
Hourly rate for the vacant position's supervisor
Hourly rate for the vacant position's manager
Hourly rate for the vacant position's director
Hourly rate for the Internal Recruiter
Hourly rate for Internal Recruiter's Assistant
Hourly rate for hiring department's staff
Hourly rate for orientation personnel
Hourly rate for training personnel
Number of weeks the person fills-in
Lost productivity of fill in person ( 0.00 to 1.00 )
Cost of a formal exit interview
Hrs by mgr. to understand what work remains.
Hrs by mgr. to conduct separate exit interview.
Cost of training ee by company personnel
Cost of training ee by ext. programs...inst.
Licenses...certifications paid for by the company
Depart. Prod. lost because the person is leaving.
Cost of depart. staff discussing reactions….
No. of weeks departing ee has lower perf.
Departing employees' lower perf. (0.0 to 1.0 )
No. of ees who go with departing employee
Average cost of losing these departing ees
Dollar cost of disrupting the team
Cost of severance package
Cost of benefits provided to employee
Value of lost knowledge, skills and contacts
Years of service
Annual premium (0 to 1.0 )
Increased unemployment insurance premiums
Cost of time spent to prepare for unemp. hearing
Cost of third party to process unemp. claim
Cost of lost customers
Cost to retain the customers that want to leave
Number of weeks the position stays vacant
Advertising (classifieds and display ads)
Agency fee (@ 20 - 30% of annual compensation)
Employee referral …
Internet posting (e.g., $300 - $500 per listing.)
Number of Internet postings
Sign-on bonus
Relocation package
Internal recruiter's time (min. of 30 to 100+ hrs...)
Recruiter's assistant's time (a minimum of 20 hours)
Supervisor's hours
Manager's hours
Director's hours
All Other staff hours
Admin. cost/resume (handling/processing/respndng)
Average number of resumes processed
Hours spent interviewing internal candidates
Hours by internal candidates in interviewing
Drug screen
Educational verification
Criminal background checks
Other reference checks
Number per position filled…
Skills test
Abilities test
Aptitude test
Attitude test
Values test
Behavior tests
Number of applicants tested per position filled
Job Fit Assessment…
Hours new employee spends in orientation
Hours spent by orientation personnel
Orientation materials
Department training development and delivery
Hours in training by new employee
Hours of training (design and delivery)
Training materials
Computer costs
Other equipment costs
Hours by supervisor
Weeks at a 75% lost rate (Use 2 , 3 or 4 )
Weeks at 50% loss rate (Use 1 to 8 )
Weeks at 25% loss rate (Use 1 to 8 )
Hours by supervisor (over a 5 month period)
Total hours of coworkers (over a 5 month period)
Cost of mistakes by new ee…
Cost of lost management time (opportunity costs)
Non-completion or delivery of a critical project...
Manager's lost productivity (hrs) by losing key staffer
Director's lost productivity (hrs) by losing key staffer
To put the person on the payroll
To secure computer and security passwords
Identification and business cards
Internal and external publicity announcements
Tel. hookups and establishing email accounts
Establishing credit card accounts
Leasing equipment (...cell phones, automobiles, etc.)
Hours Manager needs to develop trust, etc.
Company Revenue (budgeted)
Number of sales people
Weeks in budget
Weeks at a 25% Productivity Rate (1, 2 , 3, 4 or more)
Weeks at a 50% Productivity Rate (Use 1 to 8 or more)
Weeks at a 75% Productivity Rate (Use 1 to 8 or more)
Number of employees
Weeks position is vacant
Profits as a percent of sales
Losing a person in a key or critical job.
Competitors seeker more employees or customers.
Competitor may learn business secrets and ideas.
"We don't care" so they and look for new supplier.
"We are going down hill…"
The following is the data used for Dr. John Sullivan's recommended method for evaluating each manager's turnover rate. If a manager loses foog employees that is bad, if the manager loses bad employees that is good. Similar turnover rates may not mean the same thing.
Type 1 - Top Performer Weighting Factor
Type 2 - Average Performer Weighting Factor
Type 3 - Bottom Performer Weighting Factor
Performance Appraisal Rating for Type 1
Performance Appraisal Rating for Type 2
Performance Appraisal Rating for Type 3
Number of Type 1 employees that left
Number of Type 2 employees that left
Number of Type 3 employees that left
Percent of salary to cover benefits)
From United States, Chelsea
Job Title
Hourly rate for vacant position
Hourly rate for person who fills in
Hourly rate for the vacant position's supervisor
Hourly rate for the vacant position's manager
Hourly rate for the vacant position's director
Hourly rate for the Internal Recruiter
Hourly rate for Internal Recruiter's Assistant
Hourly rate for hiring department's staff
Hourly rate for orientation personnel
Hourly rate for training personnel
Number of weeks the person fills-in
Lost productivity of fill in person ( 0.00 to 1.00 )
Cost of a formal exit interview
Hrs by mgr. to understand what work remains.
Hrs by mgr. to conduct separate exit interview.
Cost of training ee by company personnel
Cost of training ee by ext. programs...inst.
Licenses...certifications paid for by the company
Depart. Prod. lost because the person is leaving.
Cost of depart. staff discussing reactions….
No. of weeks departing ee has lower perf.
Departing employees' lower perf. (0.0 to 1.0 )
No. of ees who go with departing employee
Average cost of losing these departing ees
Dollar cost of disrupting the team
Cost of severance package
Cost of benefits provided to employee
Value of lost knowledge, skills and contacts
Years of service
Annual premium (0 to 1.0 )
Increased unemployment insurance premiums
Cost of time spent to prepare for unemp. hearing
Cost of third party to process unemp. claim
Cost of lost customers
Cost to retain the customers that want to leave
Number of weeks the position stays vacant
Advertising (classifieds and display ads)
Agency fee (@ 20 - 30% of annual compensation)
Employee referral …
Internet posting (e.g., $300 - $500 per listing.)
Number of Internet postings
Sign-on bonus
Relocation package
Internal recruiter's time (min. of 30 to 100+ hrs...)
Recruiter's assistant's time (a minimum of 20 hours)
Supervisor's hours
Manager's hours
Director's hours
All Other staff hours
Admin. cost/resume (handling/processing/respndng)
Average number of resumes processed
Hours spent interviewing internal candidates
Hours by internal candidates in interviewing
Drug screen
Educational verification
Criminal background checks
Other reference checks
Number per position filled…
Skills test
Abilities test
Aptitude test
Attitude test
Values test
Behavior tests
Number of applicants tested per position filled
Job Fit Assessment…
Hours new employee spends in orientation
Hours spent by orientation personnel
Orientation materials
Department training development and delivery
Hours in training by new employee
Hours of training (design and delivery)
Training materials
Computer costs
Other equipment costs
Hours by supervisor
Weeks at a 75% lost rate (Use 2 , 3 or 4 )
Weeks at 50% loss rate (Use 1 to 8 )
Weeks at 25% loss rate (Use 1 to 8 )
Hours by supervisor (over a 5 month period)
Total hours of coworkers (over a 5 month period)
Cost of mistakes by new ee…
Cost of lost management time (opportunity costs)
Non-completion or delivery of a critical project...
Manager's lost productivity (hrs) by losing key staffer
Director's lost productivity (hrs) by losing key staffer
To put the person on the payroll
To secure computer and security passwords
Identification and business cards
Internal and external publicity announcements
Tel. hookups and establishing email accounts
Establishing credit card accounts
Leasing equipment (...cell phones, automobiles, etc.)
Hours Manager needs to develop trust, etc.
Company Revenue (budgeted)
Number of sales people
Weeks in budget
Weeks at a 25% Productivity Rate (1, 2 , 3, 4 or more)
Weeks at a 50% Productivity Rate (Use 1 to 8 or more)
Weeks at a 75% Productivity Rate (Use 1 to 8 or more)
Number of employees
Weeks position is vacant
Profits as a percent of sales
Losing a person in a key or critical job.
Competitors seeker more employees or customers.
Competitor may learn business secrets and ideas.
"We don't care" so they and look for new supplier.
"We are going down hill…"
The following is the data used for Dr. John Sullivan's recommended method for evaluating each manager's turnover rate. If a manager loses foog employees that is bad, if the manager loses bad employees that is good. Similar turnover rates may not mean the same thing.
Type 1 - Top Performer Weighting Factor
Type 2 - Average Performer Weighting Factor
Type 3 - Bottom Performer Weighting Factor
Performance Appraisal Rating for Type 1
Performance Appraisal Rating for Type 2
Performance Appraisal Rating for Type 3
Number of Type 1 employees that left
Number of Type 2 employees that left
Number of Type 3 employees that left
Percent of salary to cover benefits)
From United States, Chelsea
Hello Pramod:
>It would great if you can cite a live example for
calculating a turnover cost for a software engineer.<
The cost to replace an employee at one employer will be different from the cost to replace one employee at another employer. Employers need to calculate their own cost to replace and do so for each employee.
> There are several articles and boards which states and mentions the method to calculate, the problem lies in a live implementation of the equation.<
The list I presented above comes from our "Business Cost and Impacts of Turnover" Excel workbook which we sell. If you want a free workbook to estimate the cost of replacing employees, visit my free download web page at http://tinyurl.com/dvlta and download "Free Download No. 4: Cost of Turnover Workbook".
From United States, Chelsea
>It would great if you can cite a live example for
calculating a turnover cost for a software engineer.<
The cost to replace an employee at one employer will be different from the cost to replace one employee at another employer. Employers need to calculate their own cost to replace and do so for each employee.
> There are several articles and boards which states and mentions the method to calculate, the problem lies in a live implementation of the equation.<
The list I presented above comes from our "Business Cost and Impacts of Turnover" Excel workbook which we sell. If you want a free workbook to estimate the cost of replacing employees, visit my free download web page at http://tinyurl.com/dvlta and download "Free Download No. 4: Cost of Turnover Workbook".
From United States, Chelsea
It seems Brown article is infatuated with liability POV.
But still what's good way to reduce these head overs on companies to hurt them minimum ?
At least first common procedures can be generalized across Industry Standard like P-CMM are common place in IT and may carry the experience baggage in resume categorily and cost can be shared and companies have quantity data as well to add to their balance sheet.
From India, Delhi
But still what's good way to reduce these head overs on companies to hurt them minimum ?
At least first common procedures can be generalized across Industry Standard like P-CMM are common place in IT and may carry the experience baggage in resume categorily and cost can be shared and companies have quantity data as well to add to their balance sheet.
From India, Delhi
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