Often the HR presentation to C-suit related to employee attrition fails to call for action. What explains this situation?
Even though employee turnover is not a new topic, it has drawn the attention of management researchers and practitioners for decades as both costly and disruptive to the functioning of most organizations. But many organizations either do not seek to calculate the cost of employee turnover or, if they do, they don’t have a standardized methodology.
The absence of costs associated with the turnover of employees makes it difficult for HR in their interactions with the finance department in their request for new funds to support new initiatives since the latter has to evaluate any investment based on the potential ROI.
Nevertheless, this doesn’t change the fact that turnover has a real cost.
Unfortunately, these costs don’t appear as a specific line item in the Profit and Loss Statement. They are embedded in the operating expenses of multiple branches of an organization like Business, IT, with the HR branch.
A collaborative approach is key to success; HR and Finance teams need to work together to ensure the success of this initiative.
Literature Review and case study
According to the Center for American Progress in their article entitled “There Are Significant Business Costs to Replacing Employees.” Their key findings after reviewing 30 case studies published between 1992 and 2007 provided estimates on the cost of turnover, demonstrates that for positions earning in the range of $75k and less businesses spent about one-fifth of an employee’s annual salary to replace a worker.
In the other study, Moody 2000, the total cost associated with employee turnover is estimated to range from 100-300% of a departing employee’s annual salary (Moody, 2000), because an employee turnover represents a significant loss of intellectual property to an organization.
And more and more, case studies from organizations that have used analytics to improve retention, now are available.
For example, Experian (Revenue: US$4.861 billion (2019))/ Number of employees 16,464 (2019)) was facing levels of turnover that were 3-4% higher than what they wanted it to be. The insights from the people analytics team, combined with good management practices, reportedly resulted in a drop in attrition of 2-3% over the past 18 months with an estimated saving of $8M to $10M.
Because the average turnover cost can vary dramatically depending on job complexity, the organization’s realities, i.e. industry, labour market. Therefore, if you are using high-level figures from the literature or case studies, it will be hard to sell because you will not have substantial evidence to support your numbers. That is why it is essential to calculate your organization’s specific cost of turnover.
In the next section, I will discuss the elements that you should include in your calculation, taking into consideration the challenges associated with the availability of data from both Finance and HR. The main objective is to ensure that you include the critical components in your cost calculation.
Turnover-Cost categories
We can identify three major cost categories that contribute to the total cost of replacing an employee, i.e.,
Recruitment and selection. These expenses are typically represented as an annual total. Therefore, it is necessary to know how much is spent on an individual basis (i.e., yearly expenditures divided by the total number of hires).
Recruitment. All the direct costs related to promotional materials, advertising, and recruiting sources, written position announcements, reviewing resumes, and similar activities. Recruiting costs fluctuates considerably by positions, as it may take more time and effort to create a pool depending on the position.
Selection. Since this process involves several steps, it includes all costs associated with Managerial and HR interviews, background and reference checks, medical exams (if applicable) as well as travel expenses, and it includes substantial hard and soft costs. A weak applicant pool can drive up selection costs. The quality of the candidates in the pool will affect the overall recruiting and selection expenses.
Orientation and training. The primary costs associated with orientation and training comprise the time of those who are involved.
Many firms conduct extensive onboarding programs to orient new employees to the company, their department, and their job, and this initial training may last as little as a few days to several months—also, the more complex the task required from the position, the greater the need for training.
Productivity loss. Lost productivity accounts for the largest percentage of the total costs, up to 70 percent in some cases, but it is also perhaps the most difficult to assess and monitor. Turnover disturbs productivity in two possible ways, beginning with the loss of productivity due to vacancy, in the form of lost revenues or sales.
Second, there is a learning curve for all jobs, which often is longer than many practitioners acknowledge.
Excel template. How to get it
We created an Excel template both in French and English that will guide you in your quest to quantify the turnover cost.
This template includes all the elements under the categories described above with formulas. You can also edit the spreadsheet to cover any expenses that are relevant to your organization.
You can get this template by filling out the form in the link below. Upon receiving your information, we will send you the template to the email address provided.
If you have any questions, fill free to reach us, and we will be more than happy to help you with this critical topic.
The form’s link: https://forms.gle/wJnnZqfPjYAQJgnn8
