The High Cost of Employee Turnover

If you have been a regular reader of my artlcles, you've seen me say more than once that employee turnover is costly. You may even have seen the estimate that it costs at least half of an employee's annual earnings (benefits included) to replace that employee. I think it's time to show you where this estimate comes from. Then you can come up with your own figure.

Starting Assumptions

In order to do this exercise, we need to start with a few basic assumptions. The first is that you know how much certain things cost, both in money and time. The most important of these is the value of your own time to your business. I'm not talking about your salary here. What matters is how much you are worth to the business for every hour that you work. How much money do you bring into the business each year? Divide this by the number of hours you work and you'll have a number that's close enough for our purposes. By the way, this number is probably higher than you think.

I'm also assuming that you know how much it costs your company for the direct tasks of recruiting and hiring new employees. These include placing a classified ad, paying for drug tests and background checks, and any other services you use in making hiring decisions. You'll also have to estimate a learning curve time limit for this exercise in order to calculate some of the productivity costs.

Direct Costs

Let's begin with the easy stuff: the direct costs of replacing an employee. You may not incur all of these and you might run into other costs as well. If you ordinarily have other direct expenses when you hire someone new, list them and add in the amounts before you do your subtotal.

• Outplacement fees for the outgoing employee
• Newspaper classified ads
• Ads in trade papers or journals
• Internet job listings
• Talent search firm fees
• Personality and/or skills testing
• Medical and/or drug screening
• Background checks

The Cost of Your Time

You're a busy and valuable part of the company. Yet when you have to hire someone new, you invest a great deal of your own time. Let's consider how much that investment is worth. How many hours do you typically spend on these activities for each new hire? Then multiply this figure by the amount each hour of your time is worth to your company.

• Writing, placing, and checking on classified ads
• Reviewing applications
• Scheduling interviews
• Interviewing applicants
• Discussing applicants with others
• Communicating your hiring decision
• Orientation and training for the new hire
• Meeting with others to prepare the way for the new hire

Lost Productivity

We all know there's a learning curve for new employees and that there is some lost productivity as a result. But there's more. Let's look at some of the other factors that affect total productivity when you have to replace an employee.

• Trainer's lost productivity
• Reduction in productivity of the individual (difference between a veteran's productivity and the new hire's)
• Lost productivity due to added time for quality control checks
• Your lost productivity due to following up on the new hire's work
• Reduction in the new employee's work team's productivity

Hidden Costs

Finally, it's important to include these items in your calculation. What might the costs to your company be for these items?

• New employee's mistakes
• Lost sales and/or service opportunities
• Reduced morale among employees
• Unemployment benefits
• Lost customers due to higher rate of errors
• Reduction in referral business

As you can see, to calculate the true total cost of employee turnover is a large undertaking. Even if you estimate your costs based on the most easily calculated items in these lists, you can see that employee turnover is a very expensive problem.

What are the costs of turnover to your company in terms of:

• The direct tasks of recruiting and hiring
• Your time spent on recruiting, hiring, and training
• Lost productivity
• Other, hidden costs related to employee turnover

What are you doing to reduce this expense and improve your bottom line?

return to top