Bad Turnover Is More Costly than Most C-Suites Realize

Turnover Makes Us happy

When the people leaving the organization are exactly those you wished would leave, you can applaud turnover. Unfortunately, that’s not likely to happen. The employees you wish would leave usually hang on doggedly. (Who else would want them?)

And of course, some degree of turnover is to be expected and is, in fact, desirable, because it opens the way for new workers and deserved promotions for experienced employees.

On the other hand, high turnover of high performers and high potentials is a serious problem. And on top of it, there’s just the simple cost of turnover, which is often underestimated or ignored. Depending on the level of the employee, turnover costs can run anywhere from 50 percent to 200 percent of an employee’s annual pay.

Direct Costs

How much does employee flight cost? It’s not that hard to calculate, and the total may attract the attention of management—your ticket to a bigger budget for retention. Direct costs for turnover include:

• Separation costs. These include severance, increased unemployment insurance premiums, and the costs incurred for exit interviews and administrative functions related to termination (e.g., generating final paycheck and terminating payroll, providing COBRA notices, completing exit forms, collecting materials, security).
• Vacancy costs. These include the net cost of increased overtime or use of temporary employees, who are rarely as productive as the employees they replace.
• Exit interview. This includes the cost in time of an exit interview, including the time spent by HR personnel.
• Managerial time. Time spent by the employee’s manager who will need time to review the departing employee’s workload and manage the distribution of the work until a replacement is found.
• Replacement costs. These include advertising, agency fees, online posting fees, and other costs of attracting applicants; time spent by the HR department and the hiring manager in reviewing resumes; making decisions regarding whom to interview, interviewing applicants, travel and lodging for applicants, testing applicants, drug screenings, moving expenses, and administrative expenses of new employees.
• Training costs. These include expenses invested in the departing employee during his or her tenure. It also includes expenses required to bring the new worker up to speed. These costs may include time required for management, co-workers, and HR staff to help the new employee, orientation, classroom time or on-the-job time for training, and costs associated with pay and benefits until the employee is completely productive.

Don’t Forget Indirect Costs

In addition to the direct costs of turnover, there are many indirect costs, including the following:

• Loss of experience and skill. When an experienced employee leaves, the employee takes his or her training, skill, inventiveness, and productivity that has been gained through years on the job. Moreover, there is almost always some negative impact on other employees, and on productivity, when a good worker leaves for what is seen as a “better opportunity.” It makes other good workers wonder what might be out there for them as well. If the departing employee is a manager, there may be a drop in employee morale and a decrease in productivity as employees adjust to a successor’s new leadership style.
• Special attention. New employees, even exceptional ones, need special attention; they have many questions, and need lots of help. Also, if a new employee arrives from another city or state it often takes time for the employee and his or her family members to acclimate to a new location, and often the worker is distracted until the family is comfortable and settled.
• Customer or client loss. In some cases, customer loyalty is to the person they dealt with, the salesperson, trainer, accountant, attorney, or mechanic. Often, when that person leaves, so does the customer.
• Moving costs. These costs include any relocation expenses paid for the previous employee’s move to the employer’s location as well as any expenses paid for the new worker to move as well.

In tomorrow’s Advisor, turnover rates, what to do to retain, plus the announcement of a timely August 28 webinar,“Rewards and Recognition: How to Retain and Motivate Your Best Employees.”