Containing the costs of turnover

If employers can shave hundreds of thousands of dollars off recruitment and hiring costs, why not try a new approach?
By Roberta Chinsky Matuson
|Canadian HR Reporter|Last Updated: 03/20/2017
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Like waistlines all across America, employee turnover is expanding at an alarming rate. Yet companies are still following the same regimen, hoping to control their expanding costs.

Is your company’s recruitment budget bulging because employee turnover costs are out of control? How much are you wasting on satisfying short-term needs? If you knew you could shave hundreds of thousands of dollars off recruitment and hiring costs, would you be willing to try out a new approach?

The cost of turnover

The time has come to take a closer look at what’s causing the expansion of recruiting budgets. While companies know replacing an employee costs considerable time, energy and lost productivity, few can put a dollar figure on the actual cost. A lack of hard data means investments in retention and recruitment programs are placed on the back burner.

Cost-of-turnover estimates for a single position range from 30 per cent of the yearly salary for hourly employees, according to Cornell University in Ithaca, N.Y., to 150 per cent, as estimated by PricewaterhouseCoopers’ Saratoga Institute in Santa Clara, Calif.

The McQuaig Institute in Toronto puts this into terms that most of us can relate to. A fast-food restaurant must sell 7,613 children’s combo meals at $2.50 each to recoup the cost of losing just one crew member. To recoup the cost of losing just one sales clerk, a clothing store must sell almost 3,000 pairs of khakis at $35. How many products or services must an employer sell to make up for one employee?

These examples represent the cost of turnover, which encompasses replacement costs, training costs, separation costs and lost productivity. And while positions at a company may be considerably more sophisticated than those found in fast-food restaurants or retail organizations, even an approximate number is better than no number at all.

Calculating the cost of turnover

Calculating the cost of turnover is simpler than you think. Begin by looking at everyone who has left the organization this year. To capture a full year’s worth of information, consider capturing the data for those who left the company the previous year as well. The business costs and impact of employee turnover can be grouped into four major categories: costs due to a person leaving, hiring costs, training costs and lost productivity costs.

Costs due to a person leaving: Once an employee has announced his resignation, he has begun to transition out of the company. While working out his notice period, his full attention is no longer on the business. Others in the organization are picking up his slack, which prohibits them from giving full attention to their own jobs.

In addition, consider the following costs:

• employees who must fill in for the person who leaves before a replacement is found

• the addition of temporary help or the use of consultants to fill in while the position is being re-staffed

• the cost of a manager or other executive having an exit interview with the employee to determine what work remains, how to do the work and why he is leaving

• the cost of training the company has invested in this departing employee

• the cost of lost knowledge, skills and contacts of the departing employee

• the cost of lost customers the departing employee is taking with him (or who leave because service is negatively impacted)

• the increased cost of unemployment insurance.

Hiring costs: An employer might be lucky and find a candidate on a free website, but most likely it will need to post and advertise elsewhere.

Consider the following hiring costs:

• the cost of advertising, Internet posting, employment agencies, search firms and employee referral awards

• the increase in starting pay as salaries have risen since an employee was last hired, bringing everyone else in the department up to market rates

• the time spent screening resumés, arranging interviews, conducting interviews (by both HR and upper management), checking references and notifying candidates who were not awarded the job

• the use of assessment testing, background checks, drug screening (usually done on more than one candidate) and time spent interpreting and discussing results

• the time spent assembling and processing all the new-hire paperwork, explaining employee benefit programs and entering the necessary data to ensure the employee receives a paycheque.

Training costs: It would be nice if employees were able to integrate into organizations without any training, but usually this is not the case. Things are done differently at every organization so an employer must factor in the following costs:

• new employee orientation or onboarding

• specific training for the person to do his job, such as computer training, product knowledge, company systems

• the time spent by others to train this person and money spent on outside training to ensure she is able to do her job.

Loss of productivity costs: Because new employees do not enter an organization completely trained, it will take time before they are fully productive.

During this time of lost productivity, the person’s manager is also spending more time directing, reviewing work and possibly fixing mistakes. Errors will be made that are not caught right away and will cost money to correct down the line, as with a customer who receives an incorrect price or an incorrect shipment due to the new employee’s lack of experience.

Factor in the following productivity costs:

• loss of goodwill as you scramble to preserve relationships with valued customers or clients

• employee morale plummeting as overworked employees assume responsibility while the new hired is being trained.

So, how do you measure up? Are you in better shape than you thought? Or is it time for an intervention?

Given the high costs involved and the impact on productivity and customer retention, a well-thought-out retention program can easily pay for itself over and over again.

Employee turnover is a lot like eating dark chocolate — in moderation, both are fine and can even be healthy. In excess, both can have serious ramifications.

Roberta Chinsky Matuson is president of Matuson Consulting in Brookline, Mass., which helps organizations achieve dramatic growth and market leadership through the maximization of talent. She’s the author of  four books including The Magnetic Leader. For more information, sign up to receive her newsletter at www.matusonconsulting.com or follow her on Twitter at @Matuson.

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