Cost of Turnover: How to Calculate and Reduce the Metric
Each time you share your organization’s relationships and intellectual property with a new person, you invest resources into developing that employee as a valuable part of your larger whole. This process is not entirely quantifiable.
Yet people move freely in the jobs market today, which puts the cost of turnover on every recruiter and hiring manager’s mind. BLS data shows that the number of people quitting actually increased in the year between July 2015 and July 2016. The quits rate is an indicator of people’s willingness to leave their jobs either because there are more high-paying jobs available or because more people are dissatisfied at work—or both. Recent improvement in the jobs market enables even more movement, because job seekers—especially skilled ones—have the upper hand.
It’s important that we understand how to calculate the cost of turnover as well as how to reduce it. Let’s look first at a few formulas that estimate these costs.
Calculating Cost of Turnover
The Society for Human Resource Management (SHRM) bases their cost-of-turnover worksheet on one developed by the U.S. Department of Labor. Their formula includes both hard and soft costs.
Hard costs include the more easily calculated money and person-hours that are poured into:
- pre-separation – things done while the departing employee is still with the company, such as exit interviews
- vacancy – things done because work must go on, such as paying overtime and added shifts, hiring a temp agency, and developing marketing materials to attract new hires
- selection – things done to choose the best replacement, such as resume screening, checking references, interviewing, testing, paying referral bonuses
- sign-on – orientation and training person-hours and costs devoted to developing the new hire
Soft costs include the harder-to-estimate lost productivity and morale during the transition:
- pre-separation – a departing employee is usually estimated to work at 50–75% of potential, while co-workers and supervisors may also lose productivity and spend time discussing and planning necessary changes
- vacancy – co-workers and supervisors feel the strain of increased workload, an empty position does not generate income, and recruiting staff and supervisors spend time filling in and preparing to fill the vacancy
- selection and sign-on – lost productivity as co-workers and supervisors choose, orient, and train a person, as well as deal with errors and slowdowns due to the new person’s inexperience
After calculating and estimating these costs, the complex formulas for cost of turnover can reveal not only what you lose for each departing employee, but also what you bleed over the years with your average turnover. An excel spreadsheet or an online calculator can help. SHRM has a number of spreadsheets available in its Tools & Samples section, in addition to the worksheet outlined above. If those are too detailed for your needs, take a look at a simpler one:
- Bonusly provides a less complex formula by filling in some of the variables for you with generic (researched) numbers
- The Nonprofit Leadership Alliance provides a turnover calculator
Of course, there are additional concerns that may be impossible to add in: What’s the effect on the corporate brand and employer brand when turnover is high? What are the opportunity costs when too many employees are new at once?
Benchmark Data on Cost of Turnover
Averaged across a variety of studies and income levels, the average cost of replacing an employee is about one-fifth of that employee’s salary. (Note that most of those studies focus on hard costs and do not incorporate soft costs.)
This ratio can vary quite a bit, from 16% of the salary of a lower-level worker, to 20% for a mid-range manager, to 213% for a C-level position. Benchmark your own turnover rate to guide you as you take action to reduce it. That way, you won’t guess whether your strategies are working—you’ll know.
How to Reduce the Cost of Turnover
How do you keep the cost of turnover at more of a drip and less of a hemorrhage? This is a multifaceted challenge. Improving this effort starts with recruiting and extends to employee satisfaction and retention.
Recruiters should work to find higher quality candidates who show evidence of being less likely to quit. This begins by improving communication and relationships between recruiters and hiring managers. Improved relationships lead to better job descriptions with, for instance, more concrete details, which encourage job-seekers to more accurately self-select (and allow recruiters to efficiently weed out poor matches).
Recruiters must also effectively promote your employer brand (the perception job seekers have about you as an employer, rather than as a provider of services or goods) in order to attract good candidates for any position.
Long-Term Strategies for Retention
Reducing turnover goes beyond hiring the right person for each job. Retaining employees can become a bigger focus at several levels of your organization. The happier employees are—the more comfortable they are with their benefits, compensation, flexibility, opportunities for advancement, professional development, work-life balance, co-worker interaction, and so on—the less likely they are to leave.
A lot of employee preferences have changed over the past decade, and lots of companies need to make changes to reduce the costs of losing talent. Conduct exit interviews and elicit systematic, high-quality feedback from employees to target the changes you make to improve employee happiness and job satisfaction. Find out what they’re looking for (and what their deal-breakers are).
Because we know that some people are going to leave, no matter what, investing in efficient recruiting, along with boosting retention and morale, can only help lower costs overall. You will be more cost-effective and faster at filling any open position. Better communication between your recruiters and your hiring managers will improve the fit of each new hire, while honest dialogue about preferences for the work environment will help maintain employees’ focus and productivity in your organization.
To learn more about recruiting metrics, and the role of analytics in helping talent acquisition leaders make better decisions, read our whitepaper, Analytics in Talent Acquisition: The Hype, the Reality, and the Future.