The Cost of Employee Turnover

By O'Connell, Matthew; Kung, Mei-Chuan | Industrial Management, January/February 2007 | Go to article overview

The Cost of Employee Turnover


O'Connell, Matthew, Kung, Mei-Chuan, Industrial Management


EXECUTIVE SUMMARY

Employee turnover is costly. In addition to replacement fees, there are hidden costs such as productivity loss, workplace safety issues, and morale damage. An improved selection process that assesses candidates' turnover risk and motivational fit early in the hiring process helps reduce turnover that translates into organization profitability.

Employee turnover remains one of the most persistent and frustrating problems that organizations face. Whether it's involuntary, such as termination due to poor performance, or voluntary, such as resignations, turnover is extremely costly. According to a conservative estimate by the Bureau of Labor Statistics, the average cost to replace an employee is $13,996 (Figure 1).

As the economy grows and more jobs are created, voluntary turnover also increases. In the 12 months ending January 2005, 24 percent of workers voluntarily quit their jobs, which was a 13 percent increase over the previous year, according to the Employment Policy Foundation. These figures cannot be explained by voluntary retirements because on average, retirement rates across all private industries were only 2.7 percent in 2005 and 2.6 percent in 2004. Therefore, approximately 89 percent of voluntary turnover can be attributed to people leaving their current employer to find another job somewhere else.

Using these averages, a manufacturing organization with 1,000 employees would have lost 150 employees in 2005 with an estimated replacement cost of slightly more than $2 million.

Despite these figures, organizations tend to underestimate the cost of turnover. Perhaps it's because there isn't a line item in most profit and loss statements, nor is it typically adequately defined in the budget, and no one submits an invoice at the end of the month for turnover. Yet, collectively, turnover costs organizations billions of dollars a year.

Turnover costs

There are three main components associated with the cost of turnover:

* Staffing: In addition to the cost of recruiting and hiring the person initially, the organization must now spend a similar amount to hire the replacement.

* Vacancy: The period of time where that person isn't working in the company results in lost productivity and potentially lost business.

* Training: Employees aren't 100 percent productive from the moment they start. So it's necessary to invest time and resources for training, orientation, and development.

It's important to realize how much money is associated with these factors. And because there isn't much that can be done to reduce the costs associated with these factors dramatically, the most appropriate response is to reduce turnover itself.

Pure replacement cost estimates fail to cover the total impact of turnover on an organization. For instance, factors such as lower morale, errors made by overburdened workers, and the inefficiencies of both the departing and replacement employees are hard to quantify and need to be added into the total cost of turnover. High turnover can also spill over into other areas, such as safety. In the manufacturing industry, high turnover often results in employees without sufficient experience being used to train others. This may have an impact not only on the quality of work but also on accident rates due to insufficient training and experience. This inadequate training then snowballs, affecting all of those trained down the line.

Once you take all of these factors into consideration, the true cost of turnover is much larger than the simple replacement cost described earlier. The Saratoga Institute, for instance, estimates that when all of the direct and indirect costs are taken into consideration, the average cost of turnover is equal to one times the annual salary.

Measuring turnover and retention

Calculating turnover rates is straight-forward. However, looking at turnover by itself does not provide the most meaningful information. …

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