Companies Need to Know the Dollar Cost of Employee Turnover

I would roll my eyes when I heard that a company should know the cost of employee turnover. Okay, I thought, for a particular business the cost is $14.3 million. What would anyone ever do with that figure?

An economist wants something a bit different: How much would the cost increase if turnover worsened by one percentage point a year? How much would the cost fall if turnover were improved by one percentage point? Now we have data for a profit-maximizing decision: how much is it worth spending to improve turnover?

Turnover is generally considered bad, but McDonalds has built a business on high employee turnover. They have optimized their systems to train employees to do a good job and then leave in less than a year.

High turnover is not the right decision for every company, though. Costco believes that its low employee turnover is a great benefit.

Whichever strategy a business pursues, it should always be looking for cheap ways to improve turnover. Take the local McDonalds, good at training workers. A person with six months on the job is still more productive than someone is the first month of work. If McDonald’s can get another month from its workers before they leave, then the productivity difference is huge.

Key to improving employee retention is knowing turnover costs. Before embarking on big programs, or even small programs, it’s worth knowing how much benefit will accrue. Those costs estimates need to be owned by operations managers and finance. Operations people will implement the changes in first-level supervision that will produce results. To motivate them, costs need to be something they have worked to understand rather than figures given to them by outsiders. Finance personnel need to believe the numbers and support spending money that will save even more money in turnover costs.

Employee turnover is not just an issue for the human resources department. Operating units feel the pain of turnover in productivity, product quality and customer service. But the calculations are difficult, so finance personnel are probably best qualified. I suggest a team incorporating people from HR, finance and operations. Where there are many other people employed, like maybe a sales department, someone familiar with those activities should contribute to the effort.

Human resources costs are the tip of the iceberg, so let’s look at them first. When an employee leaves, there’s an exit interview and processing of the termination, including data to be entered into the benefits system.

Then the open position may be advertised, resumes reviewed and interviews arranged. In conjunction with the hiring manager, HR may work up an offer. HR or a training department may conduct an orientation training, along with enrollment in benefits programs. So far, these costs can be estimated fairly easily, especially if one doesn’t expect an answer accurate to the penny.

The bigger part of the iceberg is outside of HR, in the work units where the new employee will land.

Before the new employee is hired, though, the open position will probably be covered by other employees, diverting them from their regular work or requiring overtime. Or activity is simply not done. If it’s a sales position, that’s a direct hit to the top line. Longer lead times on products could be costly as well. Thrown in a bit of stress to the employees near the vacant seat.

Once the new worker is hired, there will be on-the-job training. The manager will spend time guiding and supervising the new person. Co-workers will probably help by answering questions, lowering their own productivity. And the new worker’s productivity—both output and quality—will almost always be lower than that of experienced employees. Measuring these costs is difficult, but a clever analyst will come up with rough estimates. Don’t expect perfection, and don’t assign to the task a person who is overly precise—that’s just not possible.

Thinking about these costs—productivity, supervision of new workers, and maintaining quality—points to the importance of operations people in the assessment. The complexity of the analysis points to having a good finance analyst on the team.

Off-the-shelf estimates are available, which might set the cost of an entry-level position turning over at 50 percent of salary; mid-level at 125 percent of salary; and senior executive over 200 percent of salary. There are also calculators that you can find online to help you with the arithmetic, including the well-known Bliss-Gately spreadsheet.

However you estimate your own costs, it’s imperative that both operations and finance people come to own the estimate. They need to believe it is real. For the operations people, lower productivity and higher supervision costs are direct impacts on their performance. The finance people won’t cheap-shot employee retention efforts when they have seen the real dollars and cents costs of employee turnover.

By Bill Conerly