by Melissa Lobo
When it comes to cutting company overhead, companies will sometimes resort to measures that could significantly affect their employees’ well-being. Be it in the form of lower starting wages, diminution of benefits, bonus cuts, or even outright cutting back on hours and manpower, these measures tend to send out a message that the company cares little for the welfare of its employees. Consequently, it becomes harder to hire, and companies will experience greater employee turnover.
Of course, there are some instances where losing an employee may be beneficial for a company, such as when the employee is under-performing. But losing highly skilled and well-performing talent is different, and the result can be quite devastating. Employee turnover costs are very expensive, and a cycle of fast turnovers can lead to great economic loss for your business.
Many still fail to realize the full impact of losing an employee because some aspects are hard to put an actual value on. Though some facets of turnover may be difficult to quantify or measure, employers can feel that there is indeed a loss.
Let’s talk about three important costs involved in employee turnover.
First, is your separation cost. This involves your resigned employee’s severance pay, inclusive of benefits due, administration costs (which involve record-keeping), exit interviews, and payroll changes. Further, there are costs involved in having someone help make up for lost hours, either through overtime pay of existing employees or wages that need to be paid to temporary workers.
Second, is recruitment cost, or the expenses involved in finding someone else to hire. This involves advertising fees, the time spent on having to conduct interviews, recruiter commissions, and finally, the process of officially hiring a new employee. Once you have someone new on board, you’ll also need to factor in the cost of having to train them for new responsibilities.
And third, perhaps the least quantifiable is productivity cost. It could take a new hire a while to reach the peak of productivity — normally, around 1-2 years. During this learning period, customer service may also be compromised at some level which may, in turn, minimize potential opportunities for the company.
And if the person you off-boarded was a true asset to your company, the loss of expertise and knowledge can be highly significant, even more so if you invested in that employee’s skill advancement.
A decrease in productivity levels can often be a consequence of overworking other employees and lower employee morale after having lost a co-worker. Although these costs may be considered “softer” indirect costs than those that require the company to shell out “hard” money, its impact overall may be greater.
Now that we know the costs involved, how do we figure out actual losses?
Several case studies compute employee turnover losses to range between 30-400% of the off-boarded employee’s annual salary.
Why the huge gap in terms of losses? That’s because actual percentage loss depends on the field or industry the employee is in, as well as the position that used to be held by the employee.
Typical replacement costs (% of annual salary):
- 30-50% for entry-level and non-skilled positions
- 75-150% for professional or technical positions
- 150%+ for higher positions
The Center for American Progress cited, based on 11 research papers, that employee turnover can on average cost a company from 16% for hourly-paid employees up to 213% worth the salary for highly trained positions.
Another study conducted by the Society for Human Resource Management, on the other hand, concluded that the amount needed to replace an employee is equivalent to six to nine months’ worth of salary. Meaning, that if the position being filled was worth $40,000, it would cost the company around $20,000-30,000 to re-fill the position.
To help figure out your own employee turnover cost, it may simply be formulated like this:
Number of employee departures x Average cost per departure (at least the factors that are measurable) = Cost of employee turnovers
As mentioned earlier, you can divide the cost of departure per employee based on a combination of separation, recruitment, and productivity costs. And…
Total number of employees x Annual turnover percentage = Annual cost of turnover
With a clearer picture of how expensive this can be for your company; your aim should now be on how to effectively minimize your employee turnover percentages.
Turnover cannot be completely avoided. There are many instances, as mentioned earlier, that it serves an advantage– for example when replacing low-performing employees with more driven and talented ones.
But your goal and focus should be to keep regrettable departures to a minimum and make sure your top people stay with you.
Here are three tips to help you do this:
1. Develop an effective hiring system. One way to prevent increased turnover rates is by making sure that you get the right type of people to onboard with you in the first place. According to a study conducted at Harvard University, a whopping 80% of employee turnovers are due to mistakes made during the hiring process.
With an effective system of filtering and matching the right people to open positions, you save yourself the future trouble of having to deal with the hiring process as often.
2. Encourage employees to personally embody your company’s core values in themselves (by making sure that these are values that are important for them too). It is easier to work for a company whose goals are aligned with yours.
Apart from changing who is in the workforce, another way of keeping turnover low, according to Edward E. Lawler III, author of The Agility Factor: Building Adaptable Organizations for Superior Performance and Global Trends in Human Resources, is to aim to “to change the individuals who are already in the workforce.” Meaning to say, help find a way for your people to serve you more effectively.
There are many ways you can do this, but it begins with your genuinely caring for their well-being–as much as you care for your own. Throughout meetings and events, find a way to maximize opportunities to connect, network, educate, inspire, and celebrate with your people.
3. Keep your people engaged through incentives and recognition. Though it may seem easy to recruit the right people, retaining them is a whole different story. People are motivated by opportunities for growth and rewards. Employees who feel that they are valued, perform better at their jobs. Taking the time to motivate, recognize, and appreciate employees goes a long way.
Working without having anything to show for it can burn people out. If you want to retain your workforce, employees should feel that they are thriving in it. One great example of an incentive that has proven to be highly effective is group travel. According to Joseph Pine, co-author of The Experience Economy, recent trends show that the millennial generation values experiential rewards over material things.
The solution boils down to recognizing the value of your people…
Nowadays, more and more organizations have learned to recognize how important it is to retain good employees in their workforce. We often hear it being said that a company is only as good as its people, and so, companies want to be able to keep their best talents under their roofs.
The real focus is now on keeping employees engaged through shared ideals, open opportunities, and meaningful experiences which make them feel that they are not missing out on life even when at work.
