Do you know what it costs when you make a bad hire? Do you know what it costs if one of your star employees leaves you to work for a competitor? If not you need to compute your Cost of Employee Turnover.
There are two types of employee turnover- avoidable turnover, and unavoidable turnover. Examples of unavoidable turnover are if an employee leaves to follow a spouse who has been relocated, decides to leave the workforce to return to school full-time, develops an incapacitating disease, or dies.
When it comes to unavoidable turnover, the company does not have a reasonable chance of reversing the employee’s decision. Of course, there is very little that a company can do about unavoidable turnover except to bite the bullet, but by becoming an employer of choice, the business can eliminate much of the cost associated with turnover.
Cost to Replace an Employee.
Here are what a few experts say it cost to replace an employee.
The Saratoga Institute estimates that turnover costs range from one to two times the person annual salary, plus their cost of benefits.
Development Dimensions International (DDI) estimates turnover costs to be approximately $78,000 to replace an employee that earns $46,000 per year or approximately 170% of annual pay
Kwasha Lipton reports that turnover costs can range from 150% to 175% of an employee’s annual pay.
Traditional tracking methods significantly underestimate the total cost of turnover. Based on the evidence, most organizations can safely estimate their turnover costs as modest 150% of annual salary and benefits.
To be more specific, if an employee that earns $50,000 per year leaves, the cost to the business is about $75,000. So it stands to reason that reducing turnover would be one of the best methods of maintaining a company’s level of service and quality, while keeping costs low and simultaneously building the type of organization that attracts and retains employees. It should be a no-brainer. Unfortunately, until turnover costs are tracked and the actual costs are proved to management, it is unlikely that a business will make the changes necessary to improve recruiting and retention in an organization.
Recognizing the True Cost of Turnover
When attempting to assess the true cost of employee turnover, there are direct costs that are easy to apply a dollar value to. Then there are activities done by other departments like HR and Payroll, which are sunk costs but whose to-do lists are increased as a result of dealing with replacing the employee and represent more indirect costs.
When it comes to employee turnover, there are:
Direct costs
Indirect costs
Negative effects
There are also three transitional time periods
Notice Period
Vacancy Period
Hiring and Orientation Period
Each transitional period will experience activities that involve direct and indirect costs.
Direct Costs of Employee Turnover
When an employee leaves, there are many direct expenses that represent money that is leaving the company to pay for the cost of employee turnover.
The following is a list of direct costs of employee turnover:
Notice Period – Direct
Last paycheck for employee
Paying out accrued vacation
Separation pay
Increased Federal and State unemployment tax
Continuing benefits costs (COBRA admin)
Vacancy Period – Direct
Advertising and recruiting fees
Interview expenses (meals, mileage, etc.)
Criminal, credit and reference checks
Temporary or contract employees
Medical exams for a candidate
Drug testing for candidate
Hire and Orientation Period – Direct
Sign-on bonuses
Relocation costs
Formal onboard training
Indirect Cost of Employee Turnover
When an employee leaves, the workload of many in-house employees is affected which have indirect costs to the business. Many of these costs represent the less-visible costs of employee turnover, since they often represent a fixed or sunk cost to the business. Nonetheless, these indirect costs may mean that the business has to cover overtime for existing employees, lost opportunity costs as some employees have to deal with transition-related issues as opposed to their primary job duties, or that the business has to increase its staffing levels to deal with the additional workloads caused by constant turn over.
The following is a list of less-visible indirect costs of employee turnover:
Notice Period – Indirect
Admin time to process benefits and separation
Contracting unemployment office
Calculating changes in unemployment taxes
Notifying payrolling service and other departments of employee’s departure
Conducting an exit interview
Vacancy Period – Indirect
Lost productivity of existing employees
Lost productivity of peers, supervisors, and subordinates
Conducting transition meetings
Overtime for employees to cover departing employees’ duties.
Creating or updating job descriptions
Posting openings on various job boards
Selecting recruiters
Screening resumes
Scheduling interviews
Conducting interviews (Several levels of interviews)
In addition to direct and indirect costs, there are some additional negative effects on the organization due to employee turnover that are harder to quantify, but can have a profound effect on the business.
The following is a list of additional negative effects that your company may encounter as a result of employee turnover:
Product roll-out delays
Low employee morale
Loss to the business’s reputations
Loss of organizational knowledge
Missed project deadlines
Loss of client relationships
Aggravated clients
Disruption among internal departments
Chain reaction causing additional turnovers
Delayed achievement of department and organizational goals
Internal vs External Hiring
Any time an existing position is refilled by a person from outside your company, the process exacts all possible direct and indirect costs. However, hiring from within allows for some cost reduction in both direct and indirect costs due to the fact that candidates are already familiar with the organization and the omission of several direct expenses, such as recruiting costs and sign-on bonuses.
How much will it cost you to replace a key employee?
