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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
departments and consultants, and you can see that the estimated
cost of turnover increases. Where 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 |
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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:
- 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.
- 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.
- 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.
Copyright, PeopleLink Consulting Inc., 2003.
All rights reserved.
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