The High Cost of Turnover
Fast Fact
While the 2004 average turnover rate for all industries was 18%, the top three industries with the highest turnover were retail, service (profit) and service (nonprofit) with annual turnover rates of 34%, 24% and 22%, respectively. 1
Turnover occurs when employees leave the organization. Because human capital plays a large role in the outcome of a firm's financial performance, the negative impact of employee turnover gets HR professionals and other executives increasingly concerned. The link between high turnover and low financial performance for corporations is strong. 2 When employees leave, they take with them their knowledge, skills and abilities that helped contribute to goals, profit and performance of the organization. Turnover causes lost productivity and can contribute to low employee morale. It also means that HR and line managers must take additional time to outprocess employees, reorganize existing work, source their replacement, interview candidates, prepare offers and orient new employees to the new position and organizational culture.
HR professionals are in a unique position to understand the overall impact turnover has on an organization. Unlike managers who are often stove-piped in their respective departments and lack access to confidential turnover data, HR professionals are able to view company trends and evaluate patterns of turnover. This perspective allows HR professionals to view the aggregate cost of turnover for the entire organization and, when possible, learn its root causes and suggest possible solutions. But like managers in marketing, accounting, R&D and other disciplines, merely communicating turnover numbers--such as percentage of increases or decreases in turnover--is not enough. For example, when a new product or service offering is introduced, a product manager often provides a profit and loss statement for the product being developed. Likewise, to keep in step with other business professionals, HR should also describe turnover in financial terms. It not only helps describe the financial impact to the company, but can also help in deciding the sense of urgency and scope of solutions required to solve the underlying causes of turnover. For example, if the causes of turnover in an organization are related to lack of career growth and the turnover costs are calculated at $125,000 a year, then a solution that costs $35,000 to hire a consultant to devise career paths and train managers and employees about career management would be cost-effective and beneficial. When presented this way, reducing turnover becomes a compelling priority.
While cost of turnover may include the intangible costs of low morale, which arguably may be difficult to measure, there are many tangible costs and activities that can be accounted for. Cost of turnover is usually categorized into four primary categories: separation processing costs, replacement hiring costs, training new hire costs and lost productivity or business costs. 3 Separation costs include the time and expense required in order to exit an individual from the organization. For voluntary turnover, the costs may include exit interviewer's time, paperwork processing and other costs depicted in the example below. For involuntary turnover, however, the costs are usually greater. This is because costs associated with the many meetings among the employee, the manager and the HR professional to execute the progressive discipline process can be exceedingly high.
Replacement costs generally include sourcing, interviewing and hiring expenses associated with finding new staff. Training costs include the on-boarding process of a new employee and the proper acclimation to the environment and new work procedures and processes. Higher turnover rates for short-term employees usually indicate that recruitment and hiring practices are selecting the wrong employees or communicating unrealistic expectations to candidates. Commitment to the organization is an important determinant of whether a person will remain in a job, and turnover often results when newcomers fail to integrate into the organization's culture. 4 Orientation programs conducted over the first several months after the new employee starts are an effective way of building early commitment and reducing turnover for first-year employees.
Finally, lost business and lost productivity costs are another category of turnover costs. While this category includes the "savings" incurred by not paying wages for the exited employee, it also includes costs associated with lost morale, lost revenue and the performance differential as the new person comes up to speed, etc. For purpose of illustration, the table below depicts the turnover costs of a nurse position in the Denver/Boulder area. In this example, the hourly rate for the nursing position is $20, and benefits account for 35% of salary. Although line item costs for each category may not necessarily apply for all organizations, many of them would be similar.
Calculating Turnover Costs
(Sample for Registered Nurse Position in Denver/Boulder area)
Separation Processing Costs:
+ cost of exit interviewer's time
(60 minutes @ $16 x 135%)
$22.00
+ cost of departing employee's time
(30 minutes @ $20 x 135%)
$14.00
+ cost of administrative functions relating to the departure
(2 hours @ $14 x 135%)
$38.00
+ cost of separation pay associated with the departure
(40 hours @ $20)
$800.00
+ cost of unemployment tax related to the departure
(assumes account reimbursement of 4 weeks @ $337)
$1,348.00
Replacement Hiring Costs:
+ cost of attracting applicants
(annual ad budget / number of positions filled)
$500.00
+ pre-employment administrative expenses
(3 hours @ $24 x 135%)
$98.00
+ cost of entrance interviews
(5 interviews @ 1 hour x 2 interviewers @ $30 x 135%)
$405.00
+ cost of aptitude, skill, drug etc. testing
(30 minutes @ $14 x 135% + $16 + $25)
$51.00
+ cost of hiring decisions meetings
(1 hour x 2 interviewers @ $30 x 135%)
$81.00
+ cost of post employment physical exams
(assumes performed in house)
$50.00
+ post-employment information gathering (records, payroll, etc.) (1 hour @ $14 + 1 hour @ $20 x 135%)
$46.00
+ cost of signing bonus
(RN's in Denver area currently ranging from $1K - $3K)
$1,000.00
+ cost of employee finder's fee
(Denver area currently ranging from $500 - $1K)
$500.00
Training New Hire Costs:
+ cost of information literature (manuals, brochures, policies, etc.)
$10.00
+ cost of general orientation
(16 hours @ $20 + 16 hours @ $16 x 135%)
$778.00
+ cost of job orientation
(unit orientation 80 hours @ $20 + 40 hours @ $25 x 135%)
$3,510.00
Lost Productivity and Lost Business Costs:
+ cost of additional overtime to cover the vacancy
(20 hours @ $30 x 135% x 6 weeks)
$4,860.00
+ cost of additional temporary help
(20 hours @ $37 x 6 weeks)
$4,440.00
- wages and benefits saved due to the vacancy
(40 hours @ $20 x 135% x 6 weeks)
<$6,480.00>
+ cost of performance differential while new employee gets up to speed (96 hours @ $20 x 135% x 20%)
$519.00
+ cost of low morale-related time wasted due to "water cooler grumbling" (1 hour @ $20 x 135% x 5 days x 6 weeks)
$810.00
+ cost of lost customers, sales, profits due to the departure
(gross profit loss per patient $3,100 per day x 3.5 days x 25% profit margin)
$2,713.00
+ cost of additional employee departures related to the departure (if just one other nurse leaves, the cost is equal to the total of these costs)
$16,113.00
Total
$ 32,226.00
Source: ©2000-2004 KeepEmployees, Inc. (www.keepemployees.com/healthcare3.htrm)
While resource restraints may make it impossible for HR departments to calculate individual turnover costs for all positions, it is possible to calculate the turnover costs for key positions and then extrapolate those costs to similar positions within the organization. For example, in an organization that hires a large portion of mid-level engineering or technical talent, it is possible to calculate the turnover costs for one engineer and then use that turnover figure for each engineer that leaves the company during the year. As with all metrics that involve departments outside of HR, it is important to seek their involvement for coming up with specific cost assumptions such as loss of productivity costs, etc. This will ensure buy-in and support when the turnover calculations are presented to senior executives.
Another strategy for developing turnover costs is to evaluate costs not only by functional areas, but also by organizational level. This is because higher level executive turnover costs can be dramatic. Outside of the high salary costs associated with executive base compensation, executive relocation costs and morale impact to the organization and subordinate staff when an executive leaves can be significant. In addition, severance packages for executives who depart involuntarily may be as high as six to 18 months of an executive's total compensation package.
HR professionals may be able to use the potentially high costs associated with executive turnover in their organization to justify additional costs for using executive search consultants and executive assessment center services to assist in scanning the market for key talent and then properly assessing applicants' competencies for position and organizational fit.
By calculating the financial impact of employee turnover, HR professionals can link employee activity to business impact. Doing so will get executives' attention and also create an opportunity for HR professionals to devise cost-effective solutions for reducing a difficult and costly organizational problem.
Resources
Edwards, D. (2005, February). LTC employee turnover costs the nation billions every year . Nursing Homes. 54, 2, 16.
Reinfield, G. (2005, October). High sales turnover attributed to poor management. Printing News, 16, 11.
Simmons, T., & Hinkin, T. (2001, August/September). The effect of employee turnover on hotel profits: A test across multiple hotels . Cornell Hotel and Restaurant Administration Quarterly, 42, 5, 60.
Waldman, D., Kelly, F., Arora, S., & Smith, H. (2004, January-March). The shocking cost of turnover in health care . Health Care Management Review, 29, 1, 2.
Endnotes
1Dooney, J., & Smith, N. (2005). SHRM human capital benchmarking study: 2005 executive summary. Alexandria, VA: Society for Human Resource Management.
2Huselid, M. (1995). The impact of human resource management practices on turnover, productivity and corporate financial performance. Academy of Management Journa l, 38, 3, 635.
3Cascio, W. (1991). Costing human resources: The financial impact of human behavior in organizations (Third Edition). Boston: Kent Publishing Company.
4Leibowiz, Z., Schlossber, N., & Shore, J. (1991, February). Stopping the revolving door. Training and Development Journal, 45, 2.
Special thanks to SHRM
Fast Fact
While the 2004 average turnover rate for all industries was 18%, the top three industries with the highest turnover were retail, service (profit) and service (nonprofit) with annual turnover rates of 34%, 24% and 22%, respectively. 1
Turnover occurs when employees leave the organization. Because human capital plays a large role in the outcome of a firm's financial performance, the negative impact of employee turnover gets HR professionals and other executives increasingly concerned. The link between high turnover and low financial performance for corporations is strong. 2 When employees leave, they take with them their knowledge, skills and abilities that helped contribute to goals, profit and performance of the organization. Turnover causes lost productivity and can contribute to low employee morale. It also means that HR and line managers must take additional time to outprocess employees, reorganize existing work, source their replacement, interview candidates, prepare offers and orient new employees to the new position and organizational culture.
HR professionals are in a unique position to understand the overall impact turnover has on an organization. Unlike managers who are often stove-piped in their respective departments and lack access to confidential turnover data, HR professionals are able to view company trends and evaluate patterns of turnover. This perspective allows HR professionals to view the aggregate cost of turnover for the entire organization and, when possible, learn its root causes and suggest possible solutions. But like managers in marketing, accounting, R&D and other disciplines, merely communicating turnover numbers--such as percentage of increases or decreases in turnover--is not enough. For example, when a new product or service offering is introduced, a product manager often provides a profit and loss statement for the product being developed. Likewise, to keep in step with other business professionals, HR should also describe turnover in financial terms. It not only helps describe the financial impact to the company, but can also help in deciding the sense of urgency and scope of solutions required to solve the underlying causes of turnover. For example, if the causes of turnover in an organization are related to lack of career growth and the turnover costs are calculated at $125,000 a year, then a solution that costs $35,000 to hire a consultant to devise career paths and train managers and employees about career management would be cost-effective and beneficial. When presented this way, reducing turnover becomes a compelling priority.
While cost of turnover may include the intangible costs of low morale, which arguably may be difficult to measure, there are many tangible costs and activities that can be accounted for. Cost of turnover is usually categorized into four primary categories: separation processing costs, replacement hiring costs, training new hire costs and lost productivity or business costs. 3 Separation costs include the time and expense required in order to exit an individual from the organization. For voluntary turnover, the costs may include exit interviewer's time, paperwork processing and other costs depicted in the example below. For involuntary turnover, however, the costs are usually greater. This is because costs associated with the many meetings among the employee, the manager and the HR professional to execute the progressive discipline process can be exceedingly high.
Replacement costs generally include sourcing, interviewing and hiring expenses associated with finding new staff. Training costs include the on-boarding process of a new employee and the proper acclimation to the environment and new work procedures and processes. Higher turnover rates for short-term employees usually indicate that recruitment and hiring practices are selecting the wrong employees or communicating unrealistic expectations to candidates. Commitment to the organization is an important determinant of whether a person will remain in a job, and turnover often results when newcomers fail to integrate into the organization's culture. 4 Orientation programs conducted over the first several months after the new employee starts are an effective way of building early commitment and reducing turnover for first-year employees.
Finally, lost business and lost productivity costs are another category of turnover costs. While this category includes the "savings" incurred by not paying wages for the exited employee, it also includes costs associated with lost morale, lost revenue and the performance differential as the new person comes up to speed, etc. For purpose of illustration, the table below depicts the turnover costs of a nurse position in the Denver/Boulder area. In this example, the hourly rate for the nursing position is $20, and benefits account for 35% of salary. Although line item costs for each category may not necessarily apply for all organizations, many of them would be similar.
Calculating Turnover Costs
(Sample for Registered Nurse Position in Denver/Boulder area)
Separation Processing Costs:
+ cost of exit interviewer's time
(60 minutes @ $16 x 135%)
$22.00
+ cost of departing employee's time
(30 minutes @ $20 x 135%)
$14.00
+ cost of administrative functions relating to the departure
(2 hours @ $14 x 135%)
$38.00
+ cost of separation pay associated with the departure
(40 hours @ $20)
$800.00
+ cost of unemployment tax related to the departure
(assumes account reimbursement of 4 weeks @ $337)
$1,348.00
Replacement Hiring Costs:
+ cost of attracting applicants
(annual ad budget / number of positions filled)
$500.00
+ pre-employment administrative expenses
(3 hours @ $24 x 135%)
$98.00
+ cost of entrance interviews
(5 interviews @ 1 hour x 2 interviewers @ $30 x 135%)
$405.00
+ cost of aptitude, skill, drug etc. testing
(30 minutes @ $14 x 135% + $16 + $25)
$51.00
+ cost of hiring decisions meetings
(1 hour x 2 interviewers @ $30 x 135%)
$81.00
+ cost of post employment physical exams
(assumes performed in house)
$50.00
+ post-employment information gathering (records, payroll, etc.) (1 hour @ $14 + 1 hour @ $20 x 135%)
$46.00
+ cost of signing bonus
(RN's in Denver area currently ranging from $1K - $3K)
$1,000.00
+ cost of employee finder's fee
(Denver area currently ranging from $500 - $1K)
$500.00
Training New Hire Costs:
+ cost of information literature (manuals, brochures, policies, etc.)
$10.00
+ cost of general orientation
(16 hours @ $20 + 16 hours @ $16 x 135%)
$778.00
+ cost of job orientation
(unit orientation 80 hours @ $20 + 40 hours @ $25 x 135%)
$3,510.00
Lost Productivity and Lost Business Costs:
+ cost of additional overtime to cover the vacancy
(20 hours @ $30 x 135% x 6 weeks)
$4,860.00
+ cost of additional temporary help
(20 hours @ $37 x 6 weeks)
$4,440.00
- wages and benefits saved due to the vacancy
(40 hours @ $20 x 135% x 6 weeks)
<$6,480.00>
+ cost of performance differential while new employee gets up to speed (96 hours @ $20 x 135% x 20%)
$519.00
+ cost of low morale-related time wasted due to "water cooler grumbling" (1 hour @ $20 x 135% x 5 days x 6 weeks)
$810.00
+ cost of lost customers, sales, profits due to the departure
(gross profit loss per patient $3,100 per day x 3.5 days x 25% profit margin)
$2,713.00
+ cost of additional employee departures related to the departure (if just one other nurse leaves, the cost is equal to the total of these costs)
$16,113.00
Total
$ 32,226.00
Source: ©2000-2004 KeepEmployees, Inc. (www.keepemployees.com/healthcare3.htrm)
While resource restraints may make it impossible for HR departments to calculate individual turnover costs for all positions, it is possible to calculate the turnover costs for key positions and then extrapolate those costs to similar positions within the organization. For example, in an organization that hires a large portion of mid-level engineering or technical talent, it is possible to calculate the turnover costs for one engineer and then use that turnover figure for each engineer that leaves the company during the year. As with all metrics that involve departments outside of HR, it is important to seek their involvement for coming up with specific cost assumptions such as loss of productivity costs, etc. This will ensure buy-in and support when the turnover calculations are presented to senior executives.
Another strategy for developing turnover costs is to evaluate costs not only by functional areas, but also by organizational level. This is because higher level executive turnover costs can be dramatic. Outside of the high salary costs associated with executive base compensation, executive relocation costs and morale impact to the organization and subordinate staff when an executive leaves can be significant. In addition, severance packages for executives who depart involuntarily may be as high as six to 18 months of an executive's total compensation package.
HR professionals may be able to use the potentially high costs associated with executive turnover in their organization to justify additional costs for using executive search consultants and executive assessment center services to assist in scanning the market for key talent and then properly assessing applicants' competencies for position and organizational fit.
By calculating the financial impact of employee turnover, HR professionals can link employee activity to business impact. Doing so will get executives' attention and also create an opportunity for HR professionals to devise cost-effective solutions for reducing a difficult and costly organizational problem.
Resources
Edwards, D. (2005, February). LTC employee turnover costs the nation billions every year . Nursing Homes. 54, 2, 16.
Reinfield, G. (2005, October). High sales turnover attributed to poor management. Printing News, 16, 11.
Simmons, T., & Hinkin, T. (2001, August/September). The effect of employee turnover on hotel profits: A test across multiple hotels . Cornell Hotel and Restaurant Administration Quarterly, 42, 5, 60.
Waldman, D., Kelly, F., Arora, S., & Smith, H. (2004, January-March). The shocking cost of turnover in health care . Health Care Management Review, 29, 1, 2.
Endnotes
1Dooney, J., & Smith, N. (2005). SHRM human capital benchmarking study: 2005 executive summary. Alexandria, VA: Society for Human Resource Management.
2Huselid, M. (1995). The impact of human resource management practices on turnover, productivity and corporate financial performance. Academy of Management Journa l, 38, 3, 635.
3Cascio, W. (1991). Costing human resources: The financial impact of human behavior in organizations (Third Edition). Boston: Kent Publishing Company.
4Leibowiz, Z., Schlossber, N., & Shore, J. (1991, February). Stopping the revolving door. Training and Development Journal, 45, 2.
Special thanks to SHRM
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