Metrics

The Cost ofEmployee Turnover

THE COST OF EMPLOYEE TURNOVER

And the Value of Employee Retention & Loyalty

According to most studies, the cost of employee turnover typically ranges from 50-150% of annual salary—and can be higher for strategic positions, when a position remains vacant for an extended period, or in the face of large opportunity costs.

Why is turnover so expensive?

Different organizations, positions, and labour markets determine which of the following costs apply in any particular case, and to what extent. Nevertheless, the following list outlines where most of the costs usually come from.

  • Poor performance: low or decreased productivity before someone quits or is fired.
  • Drain on other employees: during this period, other employees must cover for the employee whose productivity has dropped: picking up the slack, correcting errors…
  • Team performance: a poor performer contributes less to team goals, and poor performance by one person often reduces team morale which also has a negative effect on team productivity.
  • Vacant position: once the employee leaves, other employees must cover for them until a new person is hired, pulling them away from their duties; important work can be left undone.
  • Loss of intellectual capital: the cost of losing the talent, experience, knowledge, and relationships that an employee takes with him/her when he/she leave.
  • Recruiting & hiring: it takes time and money to recruit, screen, interview, and hire the new employees.
  • New employee orientation: setting up new employees on payroll, showing them around, introducing them to key contacts, assigning tools / equipment / supplies…
  • On-the-job training: time and energy from the supervisor and possibly other team members to train, coach, and mentor new employees. In general, before the new employee is fully productive, many people may be chipping in, helping out, covering, correcting errors, etc.
  • Ramp-up & opportunity cost: low productivity and missed opportunities while the new employee learns his or her job. Depending on the complexity of the job, this can take weeks or months.
  • Loss of reputation/brand: loss of a key player can be embarrassing to the organization, negatively impacting reputation and brand.

Consider this:

The longer an employee performs poorly before he/she is moved or let go, the higher the costs of that non-performance.

The more talented the employee was, the more difficult the employee will be to replace, and the longer it will take the new hire to achieve the same high level of productivity.

The cost of turnover is even greater in a tight labour market. This issue may become critical with the upcoming massive retirement of the baby boomers. At that time, it will be very difficult to recruit, and good companies may even lose some loyal talent to firms that are woefully unprepared and desperate. This makes it all the more important for organizations to develop talent internally and continually improve their retention efforts and practices.

Mornell’s Rule of Thumb

If you make a mistake in hiring, and you recognize and rectify the mistake within six months, the cost of replacing that employee is two and one-half times the person’s annual salary. Put another way, the wrong person earning $50,000 will cost your company $125,000. The wrong executive making $100,000 will cost you a quarter of a million dollars if you rectify the mistake within six months. And this economic estimate doesn’t even consider the emotional costs. Who among us hasn’t driven home or lain awake at night having imaginary conversations with a troubled employee or difficult colleague?

Mornell asked 100 clients these three questions:

  1. What was your worst hire?
  2. How long did the situation take to resolve?
  3. How much did the mistake cost?

You can ask yourself these questions too. The responses to his survey suggested that the actual costs of turnover were much higher: Time to resolve the situation: median: 1 year; average: 1.5 years. How much the mistake cost: median: $300,000; average: $1,087,863.

Something else to consider: research reported in the Service Profit Chain shows a correlation between employee satisfaction and customer satisfaction, and between employee tenure and customer loyalty. This makes perfect sense, of course: grumpy employees make for poor service and dissatisfied customers; and longer term employees can build stronger relationships with customers, and develop much greater understanding of the nuances of your customers’ changing needs.

How much is your talent worth?

Copyright © 2013 Advanture Consulting, all rights reserved.

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Advanture helps organizations align culture with strategy, bring core values to life, and improve leadership practices for enhanced business performance. Performance by design!

Joel Shapiro, Ph.D.
Advanture Consulting
Tel: (866) 860-4880
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