A Guide to Estimating Employee Turnover Cost for your Business
Updated: Apr 22, 2022
Employee turnover is one of the biggest challenges facing organizations. The voluntary turnover has increased by 88% in the last decade alone in the US. Average employee tenure has dropped to below 18 months. Each year, employers lose hundreds of billions of dollars in turnover costs globally and directly impacting their bottom line.
An organization's ability to retain its best and brightest employees can make or break its success in today’s competitive marketplace. In this post, we take a look at some of the factors that contribute to voluntary employee turnover cost and enable HR & Business leaders to assess voluntary turnover cost more accurately for their organization. Please note that our scope here is limited to voluntary turnovers only, which contribute to 70% of the overall turnover.
What is Employee Turnover?
Employee turnover cost is the share of your overall workforce who quit the organization and are replaced by new hires.
When we think of turnover cost, usually the cost in our mind is the cost associated with hiring a replacement. But think again, the cost of employee turnover starts accumulating even before the attrited employee formally drops their resignation.
Yes, that's right. While there could be several reasons for voluntary attrition, however, the most common phenomenon before an employee finally decides to put in their resignation is the disengagement with the work and organization.
Studies have shown that productivity loss to businesses due to employee disengagement amounts to several hundreds of billion dollars each year.
Let us carefully examine all the major components of the cost associated with employee turnover in the chronological sequence of events.
Disengagement period before the resignation
Three of the most common reasons why employees leave an organization are concerns regarding Career development, Work-life Balance and Manager Behavior. However, whatever the reason for deciding to quit may be, more than 75% of the turnovers are predictable (& often preventable). The clear signs could be disengagement towards an individual's role which directly impacts their productivity. When employees are disengaged, they are not emotionally committed to their job and tend to do the minimum work required to keep the job. They might be investing their bandwidth in other aspects like looking out for external opportunities, preparing themselves for newer roles etc.
Once the employee has finally decided to resign and the organization's retention efforts (if at all made) don’t yield any change in the decision, the notice period officially starts. This is a short period kept in employment usually to allow transition of knowledge and work for business continuity. During this period, the departing employee is supposed to document their work, and knowledge and hand it over to their peers to take on their responsibility. This time also allows organizations to find a replacement for the role, had they not planned for any bench strength to backfill in case of an unprecedented exit.
During the notice period, the parting employee does bare minimum work and mostly focuses on knowledge transfers, rather than actively contributing to business results. Hence, during this period business productivity takes a significant hit and should be rightfully accounted for in the turnover cost.
Vacancy Period due to delay in backfilling
Although there are clear signs of foreseeing a resignation in 3 out of 4 exit cases, organizations often don’t assess or measure it and plan for backfill appropriately. There is usually a delay in getting the right replacement, more so for senior employees, where finding the right talent takes time. The vacancy period usually involves existing peers to backfill for the interim. However, there is inevitably a productivity loss till the time you replace the position with a new dedicated hire.
This is a segment of turnover which typically gets the most attention. Yet, there are many scopes of errors if not thought through appropriately. One of the considerations to make here is the channel being used for replacement hiring and measuring the entire cost of that channel. For instance, if the replacement hiring is aided by a vendor partner, we should consider the hiring commission fee (typically 1 month of employee salary) into account. If the replacement is via an internal employee referral channel, then the referral bonus payout should be considered. An organization typically leverages multiple channels of hiring at the same time. Hence, it is important to calculate the hiring mix and cost of each hiring channel to assess true replacement hiring cost. Also, don’t forget to account for the relocation cost, the legal cost involved in the offer letter and employment verification checks etc.
New Hire Onboarding & Training
Once you have been successfully able to hire a replacement and they join the organization, congratulations your task is half done. But wait, why only half? Now is the time for you to conduct employee onboarding and train new hires for the required skills and expertise required for the job. While ideally there should be a formal training program to ensure quick onboarding, some organizations might just rely on line managers or other team members to train new hires. In all scenarios, you are investing resources of your organization in training and hence should account for their cost.
Time to gain full productivity
Employees become proficient at their roles & responsibilities as they tenure in the organization. The basic skills for conducting the job are something which an employee might already have from experience and you refine them further during initial training. However, it takes a few weeks for the newly joined employee to reach the productivity level of their predecessor. This is a cost that is often ignored but can contribute significantly to the lost productivity cost for the organization.
Congratulations! You must be serious about the accuracy of your turnover cost if you have read this far.
At this point, we have covered all the key components involved in the turnover cost calculation. It now requires a simple addition of all the individual component costs. Once you calculate each component, you might be surprised how much the components which you might have ignored earlier contribution to the total cost.
It doesn’t have to be a tedious manual process. If you are an expert in worksheets, you might be able to develop a sophisticated calculation which allows for plug and play with the data. But even that might pose difficulties depending on the complexity that comes with company scale.