The cost of turnover
The cost of turnover
?Employee turnover is disruptive and expensive. It is at times necessary when a reduction in force or a bad fit needs to be addressed, but when it is initiated by the employee for reasons that could have been curbed by the employer, it wastes time and resources, reduces profitability and negatively impacts other employees. This article runs long but it provides a number of references that are necessary to impress on the reader the gravity of this topic. If this resonates with you or if you are in a position to address employee turnover I recommend you explore the links provided.
Measuring turnover
?An organization’s turnover is measured as the percentage of employees in their workforce that leave during a defined time period. Organizations and industries typically track turnover monthly and for their full fiscal or calendar year. All turnover is costly and disruptive, but when the rate exceeds what is considered normal for the organization or industry, that is the focus of this article.
Here is a simple formula for employee turnover rate:
?When a position is vacated the work does not get done unless it is shifted to others. The cost of work not getting done may be the easiest to measure, such as production volume declines and sequential work that impacts other people who are now idle until the prior work is completed. This expands from a single position that is non-productive to many compounding the impact. The most significant example of the impact of one person on the organization would be the assembly line model. The organization can factor in the productivity costs and weigh that against the time they believe it will take to fill the role to approximate this component of the true cost of turnover. Having knowledge of the hiring metrics such as the timeframe to fill headcount, attrition rate and candidate quality will be necessary to gauge the time required for a replacement to be onboarded and productive. In the interim the organization can shift people, cross train, slow production, hire contractors or come up with a myriad of other stopgap measures.
Work shifting
?Work that is shifted to others increases their burden requiring overtime, a dilution of their collective assignments, reprioritization or a decline in the quality of the work provided. A good example of this is a help desk team that experiences turnover. The calls continue to come in, the wait-times increase, customer satisfaction declines as does the quality of the customer experience when they are being serviced. Those tasked with the extra work may experience fatigue, resentment, a sense of being overwhelmed and unappreciated. They may also look for an exit out of the conditions that have become more than they can accommodate.
Peers are watching
?Peer inspired turnover, how the rest of the employees respond to the handling of turnover by the organization, cannot be understated. If the job market is strong and external offers exceed the efforts to retain an employee, this alone could motivate others to exit the organization. Employees may even be recruited by those leaving if they are competent in their role and had a good relationship with their coworkers. Not much data is available in this space but from my observations it is worthy of sizing and mitigation. I worked for an employer for more than five years. Their compensation approach was to hire a person in and barring any promotion, the employee, even a star performer, could expect to retire out at the hiring pay. Even with the competitive demand to pay more for new hires, the person with five years in the same role would see no increase. In fact I learned that a few had been salary stagnant for as much as ten years and were responsible to onboard their new peers who were receiving more than a 50 percent larger base salary while having less experience. And don’t assume these senior level team members were underperforming. I can assure you they were both competent and highly productive. People do pay attention to peer treatment.
Cost categories and impact
?Finding and hiring the right people for the open position is highly dependent on the experience and knowledge required. Hourly workers may be easily replaced and trained to the required level of productivity. Even for a low skilled role the average cost to replace a person is in the range of $1,500. This is on top of the productivity losses already experienced and it covers the efforts to screen, interview, onboard and train. Research suggests that the cost to replace a technical position ranges from one to 1.5 times the position’s annual salary and for senior level positions the cost to replace may be several times their annual salary. Another article written by Karlyn Borysenko (What was Management Really Thinking? The High Cost of Employee Turnover) included the following costs as a portion of annual salary to replace an employee:
Christina Merhar wrote an article titled Employee retention: The real cost of losing an employee where she addressed how businesses thrive when employee happiness is prevalent. In her research Merhar cited voluntary turnover increased 88% from 2010 to 2019 indicating the issue not only remains, but should be considered unmanaged by organizations across America. She referenced data from a Cap Study that provided lower replacement costs than Karen Borysenko's findings noted earlier, but the were still sufficiently high and it calls for organizations to address the root cause of their voluntary turnover. Merhar provided the following cost categories as a baseline for estimating turnover.
The Cap Study is well worth the read even if it is dated, as it represents data from more than 30 case studies on employee turnover . The key message authors Heather Boushey and Sarah Jane Glynn deliver is maintaining a stable workforce not only makes good business sense but it can be a significant cost savings opportunity for the business.
Replacement lead time
?As for time it takes to replace an employee the Society of Human Resource Management’s (SHRM) Human Capital Benchmarking Survey from 2016 states the average time to replace an employee is 42 days and Glassdoor states it can run as long as 52 days. A strong economy increases the time it takes to hire a person and it also elevates the compensation package necessary. These durations represent the average for all hiring positions and does not reflect the additional time required to find and hire the highly skilled technical professionals.
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Down in the details
?Organizations that are not sized to support internal recruiting capabilities or those seeking to fill specialty roles may rely on the use of third party recruiting agencies that typically command 15 to 25 percent of the base hiring salary to find a suitable candidate. Organizations that have the size and need to hire frequently will at a minimum need to have on staff at least one HR manager at an annual cost of $91K to 120K/year. See The True Cost of Hiring an Employee in 2021 for more on the full range of costs including participation in career events, job board ad placements, background checks, drug screening, work eligibility verifications, pre-hire assessments, interim use of contractors, employee referral programs, onboarding and training, internal organization’s career page on the website, overhead costs such as taxes and benefits, sign-on bonuses, etc.
61% of turnover is voluntary
?One quote from the 2021 article that is important to state here is “An average company loses anywhere between 1% and 2.5% of their total revenue on the time it takes to bring a new hire up to speed.” Considering the staggering costs, it leaves the average person to question why a company would allow an employee to resign without addressing the reasons for their leaving. In 2018 the annual separation rate in the United States was 44.5 percent. If only voluntary separation was considered, it would represent 27 percent, meaning 61 percent of all turnover is voluntary and addressable by the employing organization. It is worth noting that one company I worked for experienced IT Professional turnover that was higher than 80 percent annually of which nearly all of it was voluntary. I was one of those individuals who chose to leave due to leadership dynamics.
What drives turnover
?Of the nine drivers of employee turnover as reported by managementisajourney.com only two were linked to compensation. All the remaining seven are intrinsic rewards related to employee belonging, opportunities and treatment. This was part of a three-year study by Sirota Survey Intelligence,?Predicting Pent-Up Turnover.
The list of drivers from the study are as follows:
Focus on the drivers
?Employee turnover is a complex metric to quantify but given the data provided within this article it clearly has a material impact on the organization’s bottom line. More importantly it influences decisions by other employees who may be considering a change of scenery for themselves. Instead of trying to measure the cost of turnover with any level of accuracy, it would be far more productive for the organization to address the drivers of voluntary turnover. Those levers are well within their control, most are intrinsic, not monetary drivers and with little investment, a measurable reduction in voluntary turnover is within reach.
About that 80% turnover rate
?I‘ll close this article with the cost of turnover that I experienced within the IT Professional space. In a span of 10 months, eight people voluntarily left the organization because of their direct manager. Using the most conservative numbers cited earlier the total cost of turnover would have been $320K - $1M that could have been avoided during the year. After I left the company the scenario continued with an ever-changing cast. The only constant was the manager. Organizations cannot allow either poor performance or poor management. The risk of the later is it multiples according to manager’s span of control. Organizations need to do more, and they need to act quickly.
What’s Next?
?Learning is an ongoing journey. In the next article I’ll talk about how it should fit into your routine.
?To those of you who take the time to read my efforts I sincerely thank you. I would be remiss if I didn’t remind you that this is a two-way conversation so put your comments in and let’s have a volley of ideas, so we all continue our intellectual growth.
?Mr. Gray is a seasoned business strategist experienced in PMO stand up, business transformation, process development, and best practice guidance. He has developed industry-leading methods for staff modeling, project deployment, financial performance, onboarding, and business readiness. Mr. Gray is a problem solver at heart, a sharer of knowledge by choice. He has authored more than seventy thought provoking articles which are all available on Linked-In.
If Mr. Gray makes you think then he considers the effort worthwhile.
Your PMI Guy can be found on LinkedIn at: https://www.dhirubhai.net/in/yourpmiguy/
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