The high cost of turnover

Many employers underestimate the cost of employee turnover. Researchers have estimated the cost of employee turnover to total anywhere from 30% to 150% of an employee’s annual compensation.

Employee turnover occurs when employees involuntarily or voluntarily leave an organization.  Involuntary turnover occurs when employees are terminated, while voluntary turnover occurs when employees choose to leave organizations.

These percentages vary depending on what is included in the estimate.  In all cases of turnover, there is a need to hire, orient and train a new employee.  Factor in the time for involving management, HR staff and consultants, and you can see that the estimated cost of turnover increases.  When the employee who has left is a senior or long term employee, the cost is higher, due to the loss of knowledge, skills and contacts.  The table below provides examples of the types of direct and indirect costs associated with turnover.

Table: Sample Turnover Costs

Direct Costs of Turnover Indirect Costs of Turnover
Severance costs Manager’s time to interview candidates
Recruitment fees HR expert’s time to advise management
Cost of temporary replacement workers Senior management’s time to recruit and train new employees
Cost of advertising the vacant position Lost knowledge, skills and contacts
Cost of screening and pre-employment tests Lost productivity
Cost of orienting and training the new employee Lost sales for employees who take customers with them

If a company with 100 employees experiences turnover of 10% annually, assuming an average salary of $40,000, the company could add from $120,000 to $600,000 back to the bottom line by decreasing turnover.  How many company owners you know would not be interested in improving their bottom line with such numbers?  While some turnover is related to issues over which employers do not have control (such as a spouse being transferred), employers can do a lot to reduce the cost of turnover.

Employers can focus on some human resources strategies to increase retention and decrease turnover.  Some suggestions:

  1. Implement recruitment practices that ensure a good fit
    Many employers, in our experience, could do a better job of recruiting the right individuals to fill company positions.  A good recruiting process involves up-front planning to determine the scope of the position, and then casting a wide net to find the right fit.  Although such a process can be more time-consuming and costly up-front, it can save money in the long run.
  2. Implement fair employment policies and procedures
    Some employers do not spend adequate time to develop, communicate and circulate company policies and procedures.   As these companies grow, the lack of policies and procedures can result in inconsistent treatment of employees.  We have seen companies lose good employees due to a perception of inconsistent or unfair treatment.
  3. Implement fair compensation practices
    Many employers do not check market compensation rates regularly to ensure that they are paying their employees fair market compensation.  Far-sighted employers understand that improving retention can often save more dollars than increasing a valued employee’s salary.

These are just a few ways for employers to improve their HR practices to retain employees and allow them to contribute their skills for the long term.  Many successful companies, such as Starbucks and Southwest Airlines, have focused on retention, with great financial results.