Clients and HR leaders frequently ask me how to calculate the cost of employee turnover. The cost of turnover is a critical measure to determine how effectively the workforce is aligned to the organization’s mission, values, and culture and the relevance of very practical labor force concerns such as pay and benefits–and these hybrid working.
Companies that understand the impact of the cost of this measure try hard to keep turnover at or below industry and regional averages. The various measures of the cost of turnover allow for fast and precise interventions to motivate, attract, and retain employees. This article identifies the cost of turnover, its categories, how to track it, and how to use this information to understand the causes of turnover and drive human capital investment to improve profitable growth. Turnover and the cost of turnover are as crucial to HR as generating free cash flow is to Finance.
Turnover and the cost of turnover will meet the US Security and Exchange Commissions new requirement for human capital measure disclosures for publicly traded companies.
There are two measures here: turnover and the cost of turnover. Understanding the cost of turnover is the end goal. Company leaders are often surprised that the cost of turnover for non-exempt staff can be 20 percent of salary per year. And for engineers as much as 50 percent of salary per year and executives 200 percent. Many organizations learn that reducing the cost of turnover, especially among their highest skilled or most valuable employees, significantly drives profitable growth.
Calculating turnover is simply taking the total number of employees who left the company over a 12-month period divided by the average size of the workforce for that period. I recommend calculating total turnover as well as tracking voluntary and involuntary turnover. Involuntary turnover is the turnover from layoffs and termination for cause. Voluntary turnover is the turnover from employee decisions to leave the company.
It is always essential to understand why employees have decided to leave the company. The best way is to have a neutral human resource professional confidentially ask them why they are leaving and record the categories of reasons for leaving that can be tracked over time. Turnover reasons can be any of the following:
- Work team issues
- Work culture
- Hybrid or remote work issues
- Safety or health issues (including Covid-19)
- Lack of career advancement
- Too far to drive to work
- Work hours
- Family issues (spouse relocated or having a baby and so on)
I also recommend that mid-sized and larger organizations track turnover by department, such as research and development, sales, marketing, manufacturing, customer service, and so on. It is important to also track turnover on a rolling 12-month basis that can acted upon during the calendar year. Your company’s payroll or human capital management platform should provide you the data required to calculate turnover and its cost, provided you gather the reasons employees leave.
Cost of Turnover
With the turnover measure in place, companies can then begin to measure the cost of turnover. Calculating the cost starts with measuring the impact of covering the resigning employee’s workload and the cost of replacing that person. Let’s look at these costs.
- Cost of overtime for having other employees perform this work.
- Cost of replacing this employee. These recruiting costs are far-reaching. They include:
- Costs of attracting new employees with job postings and job ads
- Screening and interviewing time (by recruiters, supervisors, and the interviewing team)
- Travel for interviewing costs (for executive positions)
- Cost of training (easy to measure and includes the training cost and the time in the training) and coaching the new employee, which is time spent by coaches with the new employee.
- Novice errors — measured by the productivity difference of new hires and those who are “fully productive” in two weeks to six months depending on the role.
Use the Cost of Turnover to Identify Significant Issues and Drive Human Capital Investment
Companies that capture these costs are usually amazed by the size of them. I often tell CEOs that if they don’t understand the cost and reasons for turnover, they are shoveling money out the backdoor. In my book, Hack Recruiting, I remind everyone that recruiting new talent is more expensive than retaining the current talent.
Human resources leaders can use knowledge of these costs strategically to invest in technology or improved pay and benefits to improve the employer brand and reduce turnover. For example, I used the cost of turnover to justify moving Medtronic’s San Francisco Area business units off of the national pay scale to a regional pay scale. On average, the San Francisco Area paid workers eight percent more than the national average and as much as 21 percent more for some engineering and clinical research job families.
“I often tell CEOs that if they don’t understand the cost and reasons for turnover, they are shoveling money out the backdoor” — Victor Assad
At that time, Medtronic’s finance and corporate leaders opposed this change because of the cost. The San Francisco business units’ executives supported the move because they understood the cost of turnover. I was able to show that the cost of pay increases to match the regional pay market was less than the cost of turnover. If they could not stop turnover (which was higher than industry and regional averages), they would not be able to attain their business’ growth strategies which were dependent on bringing new, game-changing innovative products to the market. By making this change, they were able to start thinking like economists (how do I overcome obstacles to achieve growth) instead of like accountants (how do I limit costs). With the local executives’ support, the regional pay scale was approved. Its approval allowed us to stop the excessive turnover, save costs, and improved recruiting leading to accelerated innovation and profitable growth.
I also tracked and presented turnover data by the department to show which departments (and job families) drove most of the turnover. Many times, the problem was the leadership style of certain specific leaders. Highlighting this issue enabled targeted coaching of leaders or replacing these leaders who were incapable of changing.
While many companies depend on employee engagement surveys to give them useful information, these surveys can be shaded by employee fears of retaliation or biases. The turnover data isn’t biased, and you can use it to identify real costs to the business. The earliest indicator of an employee who is preparing to leave the company isn’t from a survey. It is when they upgrade their LinkedIn profile.
Every HR leader should know their turnover by department, its cause, and the cost of turnover. These leaders should use this data to drive important human capital decisions and investments, just like Finance leaders use cash flow and working capital to justify business investment and change.
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting, managing partner of InnovationOne, and Sales Advisor to MeBeBot. He works with companies to transform HR and recruiting, implement remote work, and develop extraordinary leaders, teams, and innovation cultures. He is the author of the highly acclaimed book, Hack Recruiting: the Best of Empirical Research, Method and Process, and Digitization. Subscribe to his weekly blogs at www.VictorHRConsultant.com.