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The High Cost of Turnover

If the cost of employment is your highest business expense, the fact that there are significant costs associated with employee turnover may get lost in the shuffle. But the cost of turnover can be astronomical and it comes right off the bottom line. In an average-size agency ($1 million-$2 million annual revenue), a negligible staff turnover rate of 5 percent, just one employee, could cost as much as $100,000 or more. Study after study shows that replacing an employee can easily cost up to two times the individual’s annual salary plus benefits. "How can that be?" you ask. Well, the costs add up quickly.

First, there are the clear-cut, direct costs that are easily identified and quantified:

  • Recruiting costs, such as advertising and Internet posting.
  • Recruitment firm fees (if applicable)--estimate 25-30 percent of the annual salary for the new employee.
  • Internal staff time to search for and interview potential candidates.
  • Pre-employment assessments, background checks, drug screening.
  • For a management position, possible relocation expense, hiring bonus, or referral bonus.
  • Administrative costs for handling changes to payroll, benefits, COBRA, severance, etc.
  • The cost to hire a temporary replacement (part-time salary or temp-agency fees) and/or the cost of existing employees to fill in while the position is vacant (overtime, bonuses).
  • The cost of specific internal or external training programs plus licensing or certification fees (not only do you lose the investment in the former employee, you’ll likely need to redo that training or certification for the new employee).
  • Printing costs for business cards.
  • Email address, system security access and passwords. Updates to telephone directories, both internal and online. (These costs include both taking the exiting employee off and putting the new employee on.)

Lost productivity is a cost.
Indirect and intangible, perhaps, but the cost of lost productivity is very real. Here are just some of them.

  • Lost productivity while the position is vacant. When current employees are reassigned to fill-in for the departed individual, the lost productivity will amount to at least 50 percent of the departing individual’s compensation and benefits for each week the position is vacant. If the position stays vacant for any length of time, increase the cost for lost productivity to 100 percent of the salary paid to the exiting employee.
  • Lost productivity while the departing employee prepares to leave. Departing employees won’t be fully productive for the last few weeks they’re on board (before and after they submit their resignation). Figure a loss of productivity of 50 percent or more.
  • Lost productivity caused by the buzz about the departing person’s reasons, discussions on who will perform their work, planning going away parties, etc. Even if the time spent is only a few hours per person, expect departmental productivity to decline by 10-20 percent for a few weeks.
  • Lost productivity while the manager assesses what work remains and determines how to cover the work until a replacement is found.
  • Lost knowledge, skills, and contacts that the departing employee takes from the agency can be estimated at 50 percent of the person’s annual salary, increased by 10 percent for each year of service.

Even after the position is filled, it’s still costing you money. Research shows that, on average, it takes 13.5 months for a new employee to reach maximum efficiency in performance. Effectiveness will range from 25 percent or less during the first few weeks, gradually climbing to 50 percent, then 75 percent, up to 95 percent or so by the end of the first year. Expect an average productivity of about 70 percent the first year—that’s another 30 percent added to the cost of turnover.

The cost of lost business.
And don't forget the potential for lost revenue. Producers or CSRs may take business with them or come back for it later. Worst-case scenario: client retention can take a major hit if service levels deteriorate significantly, which is a real possibility particularly if turnover is high.

Even a small amount of turnover will be costly. And while you're adding the potential costs, consider the possible multiplying effect. All too frequently we don’t lose just one employee. Turnover seems to occur in "bunches." If it becomes known that there has been some turnover, others may begin to target the agency specifically. And, many times, the departed employee will recruit former coworkers.

Not all turnover is bad.
In spite of the costs, there are times when your organization is better off without a particular individual—the poor performer or one who may be creating turmoil and generating ill will. These folks often negatively impact the whole organization, lessening overall productivity. Remember, too, that hiring new people can bring in fresh ideas and techniques. Without them you can run the risk of becoming stagnant.

Turnover is a symptom. If turnover is high, it is almost surely an indication that there is a management issue.

The turnover myth.
Contrary to popular belief, money has little to do with turnover. Most surveys have found that satisfied employees won’t leave a job for money unless they are offered at least 15% more. That assumes, of course, that you are paying a “fair” wage—one that is competitive in your marketplace for comparable work.

 

If you need help making sure that turnover is not affecting your bottom line, call Pam at  530.295.1093 or e-mail

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