The High Cost of Employee Turnover

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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It's impossible to be all things to all people. No matter how great your company is, it's likely that some of your employees will eventually move on to other opportunities. That may be costing you more than you realize, once you consider both the direct and indirect costs. Investing a little more into hiring and retaining the right people can pay out big in the long run.

Just how much employee turnovers cost varies widely by industry and job type. Studies by American Management Association and others report a range between 25% and 250% of annual salary per exiting employee. Entry-level, unskilled positions are at the lower end of the cost range, while executive, managerial and sales positions are at the higher end. According to the U.S. Bureau of Labor Statistics, the average non-farm monthly turnover rate is 3.3%.

Let's put this in perspective. Using the median personal income of full-time workers of approximately $32,000 per year, and assuming a 100% of salary as turnover cost, for a company with 100 employees, that's an annual cost of $1.3 million. And much of it you'll never notice, because you don't just write a check for it — it appears in the form of lost productivity and other less immediately obvious factors.

A web search will turn up several online turnover cost calculators, but if you want to get an accurate picture, it's best to set up your own spreadsheet that incorporates all of the factors relevant to your business.

Calculate Profit Per Day (PPD)

For each affected position — the vacated position, HR staff, managers, etc. — calculate an approximate cost per day for lost productivity. For sales staff, start with the individual sales quota less the cost of sales; for non-sales staff, calculate with the gross income (revenue less cost of sales) per employee. Then subtract the employee's salary and benefits and divide as needed to calculate the daily profitability per employee. You'll need to tweak it intelligently according to the person's position — clearly the CEO has greater potential impact on the company's profits than an entry-level unskilled worker. You'll end up with a number for each affected employee that will give you an approximation of the value of their lost productivity

Exit Costs

1. Human Resources
There's potentially a lot of paperwork when an employee leaves. Calculate the cost of your HR staff's time to conduct an exit interview (and the time of the exiting employee), stop payroll, change benefit enrollments, COBRA health insurance notification, and any other administrative activities.

2. Managerial Handoff
Calculate the cost of the manager who will conduct their own exit interview, review the exiting employee's work-in-progress, and determine how to cover that work until a replacement is hired.

3. Involuntary Termination
If the employee was terminated involuntarily, calculate the costs of any severance package, benefits continuation and unemployment insurance premiums, if eligible.

4. Lost Customers and Contacts
Non-compete agreements are extremely difficult to enforce in practice. Particularly if the employee is in a sales or customer service position, consider the potential cost of customers the employee may be taking with them to their new position. For any position, consider the value of the contacts they have developed (of course, a new person may bring in their own contacts that offset this).

5. Lost Knowledge
During their time at your company, the exiting employee may have developed specialized knowledge and skills about your business. You may have even invested in training for them. (Note: You should only count training costs on either the exiting employee or the new employee, not both.)

Absence Costs

1. Coverage
The exiting employee's essential responsibilities are going to be taken up by other employees, which means that some portion of their own current workload will typically be given up and their productivity reduced. Or, you may have increased overtime costs to cover the work. Be sure to include the additional management costs to re-delegate the work.

2. Direct Productivity Loss
The rest of the tasks performed by the exiting employee simply won't be done in their absence. Estimate that portion and multiply it by their PPD.

3. Disruption
While it may be difficult to put an exact number on this, an exiting employee may be disruptive to essential business processes in a way that goes beyond simple coverage issues. What's the cost if a customer gets upset because something didn't get handed off properly? Also, consider the effect on the morale of other employees when a respected peer leaves.

Recruitment Costs

1. Advertisements
Where and how will you advertise the available position? Classified ads and internet job postings typically cost several hundred dollars per listing. Employee referral costs typically run from a few hundred to $2,000 or more. External recruiter fees can run as high as 1/3 of the salary for the position.

2. Internal Recruitment
Calculate the time cost for the internal recruiter to understand the position requirements, develop a sourcing strategy, review resumes, prepare for and conduct interviews, conduct reference checks, make the offer to the selected candidate, and notify unsuccessful candidates.

3. Hiring Manager
Calculate the cost for the hiring manager(s) and other key stakeholders to review resumes, conduct interviews and make their selection.

4. Internal Candidates
Calculate the lost productivity for any internal candidates who may apply for the position.

5. Screening
Calculate the costs of drug screens, background checks, skills assessment, personality profile testing, and any other tasks (especially outsourced ones) used to screen candidates.

Onboarding Costs

1. Onboarding
Calculate the cost of both the new employee and HR staff for orientation and onboarding paperwork, including business cards, ID badge, credit card, mobile phone and so on. Also consider the costs for IT staff to set up user accounts, telephone access, etc.

2. Training
Calculate the cost of both structured training (including materials) and the time of managers and key coworkers to train the new employee to the point of 100% productivity.

3. Productivity Ramp-up
Depending on the position, it may take anywhere from a few days to a few months for the new employee to be at 100% productivity. For a simple calculation, take the number of days to 100% productivity and divide it in half. Multiply that by the PPD for this position.

Once you look at just how widespread the impact of employee turnover is, it's easy to see how associated costs and productivity losses could run as high as 200% or more. Once you've done your own calculations, it may give you some food for thought: Relative to the cost of the churn, investing in simple things that make your company a more comfortable and rewarding place to work could yield big dividends, even if they're hidden.

This is a guest post by Scott "Social Media" Allen, a 25-year veteran technology entrepreneur, executive and consultant.