The Very High Cost of Employee Turnover

We all suspect that the cost of employee turnover is high but how high? I recently conducted a survey sponsored by Revature (www.revature.com)  of more than 200 corporate recruiting and hiring managers to learn about this. The results are quite stunning. I also created an interactive web application, a cost of employee turnover calculator, so you can calculate this cost for your own company. This is the link:

https://ninovshiny.shinyapps.io/Cost_of_employee_turnover_app/

The average turnover rate reported by the surveyed companies was 16%. This means that if your company has 1,000 employees, over a period of one year 160 of them will be gone and eventually replaced by new employees. What are the costs associated with this? These costs are in excess of $10,000,000. Yes, you read this right: 10 MILLION.

How do we get to this number?

There are four main buckets of costs associated with hiring employees:

1)     Job posting costs, costs of screening, recruiting, and interviewing applicants.

2)     Costs of training and onboarding new employees.

3)     Lost productivity during the time when the new employee is not hired yet but the old employee is gone.

4)     Lost productivity during the time the new employee is getting up to speed.

About 85% of the costs are hidden. They result form lost productivity which is the most overlooked cost of high employee turnover.

Let’s start with the largest bucket: the costs of lost productivity.

The survey respondents indicated that it takes about 5-6 weeks to fill a vacated position. They also indicated that it takes 4-5 months for the new employee to become fully productive. How can we calculate the lost productivity starting with these numbers?

We start with the average salary for a position. Let’s say, it is $70,000. Benefits on top of the salary are usually about 30% of the total compensation. This brings the total compensation to $100,000. Analysis conducted by PwC a few years ago showed that the total compensation is about 40% of the value that an employee produces for the company. Thus, we calculate this value to be $250,00 a year. This is the annual revenue generated for the company by an employee whose salary is $70,000.

The math form here is straightforward. If a position is unfilled for 5 weeks, this means that the cost of lost productivity is about $24,000: $250,000 annual value divided by 52 weeks and then multiplied by 5 weeks during which the position was unfilled. And this is from one position. Multiply this by 160 (16% turnover rate) and you get the staggering number of $3.8M.

To estimate the cost of lost productivity during the learning phase I made the assumption that on day one the new employee will produce about 50% of what they will produce when fully productive and that their productivity increases linearly to 100% at the end of the fifth month. This means that during these 5 months of lower productivity about $29,000 of value will not be produced for the company. Multiply this by 160 and you get $4.6M.

The cost of formal and informal training and the onboarding costs were not part of the survey.

The obvious costs - buying ads on LinkedIn and other job sites, and time spending screening, evaluating, and interviewing applicants – are actually quite moderate: about $10,000 per position. They don’t change much if you use a staffing agency instead of your internal recruiting team. These costs add up to more than $1.5M if the attrition rate is 16%.

This is how we get to $10M of total costs associated with 16% turnover rate for a company with 1,000 employees.

There are a few important insights from this analysis.

First, decreasing the employee turnover rate by just a few percentage points can have big positive impact on the company financial health. Let’s say, in the case of our company with 1,000 employees we are able to reduce the employee turnover rate from 16% to 10%. This brings down the costs from more than $10M to about $7M: a reduction of 30%+.

The second best method to reduce these costs is to steepen the learning curve. If you hire more qualified employees or you train new hires better, you will get them faster to full productivity.

Third, shortening the hiring process is critical. Every day a position is unfilled costs you dearly. You don’t see these costs in the accounting books but they are real.

I created an interactive web application that you can use to calculate the cost of employee turnover in your company. The default values in the app are the average values from the survey but you will have full control over the inputs (employee salaries, time to fill a position, etc.). None of your data is recorded by the app. This is the link to the app:

https://ninovshiny.shinyapps.io/Cost_of_employee_turnover_app/

Note: the survey sponsored by Revature was conducted in July 2020 and was focused on technology positions.