Assessing the indirect costs of employee turnover

It’s no surprise that employee turnover involves a huge cost to any organization. But what is frightening is that the number may even be underestimated. Organizations routinely fail to include the “soft” costs of employees. Things like the value of relationships and the level of productivity compared to other employees could push the cost of losing a star performer even higher.

Putting people on the balance sheet: Can soft capital be measured?

“We need to put people on the balance sheet so that they have an accurate value [and] our turnover efforts can be properly measured. There’s a whole new strategic way of thinking how to put people on the balance sheet.” Karl Ahlrichs explained in a recent CER webinar. There are a lot of aspects of “soft capital” that can be measured. Human capital is one aspect. Then there are all of the organizational aspects, such as:

• Relationship capital and goodwill.
• Customer capital based on customer experience with the company.
• Process capital that happens when departments communicate well.
• Learning and development capital, including learning new skills and managing change well.

The problem is that these are difficult to measure. As such, CFOs often use a historical cost approach instead. This is because the assets of soft capital cannot be sold, so there is no independent check of their valuation. Any value assigned to them can be quite subjective. What results is that CFOs typically measure only the direct costs to the organization. Any measures of the value of the employee to the organization tend to get ignored.

Employee turnover costs: Replacement costs as a measure

Employee turnover is an aspect of soft capital. This is one that can be measured more objectively in many cases, yet still leaves many aspects out.

Using employee replacement cost is a great means of measuring the total cost or value of the employee. This measures the cost of replacing the employee rather than the historical cost of an employee. It is most appropriate in the context of dismissals and replacement staff. When measuring in this way, be sure to include costs like recruitment, selection, compensation, and training costs.

When using this measure, it’s also important to cost employee behaviors. The contribution of the individual to the overall efficiency of the organization should be measured. “We’re now looking at the contribution each employee makes and it’s not related to the size of the firm’s investment in its employee, but it’s how well that person works and what’s produced. There can be somebody who doesn’t cost very much who produces huge value.” Ahlrichs explained. It centers on the quantity, quality, and cost of the finished product.

By looking at the employee’s value more holistically, employers can get a more accurate measure of employee turnover costs.

The above information was excerpted from the webinar “Employee Turnover: Gain C-Suite Support, Reduce Costs, and Keep Your Organization Productive.” To register for a future webinar, visit CER webinars.

Karl Ahlrichs is a Senior Professional in Human Resources (SPHR). He is the owner of ExpertSpeaks, and is a consultant and business developer for Gregory & Appel. An expert on people issues that challenge modern organizations, Mr. Ahlrichs has significant experience as a management consultant in dozens of organizations from all industries.