Wednesday, May 12, 2010

The Hidden Costs of Employee Turnover

Managing a business is a big job. Whether you are the CEO who has to worry about the entire organization or a mid-level manager with responsibility for a small department, every day is filled with stress as you try and find ways to do more work with reduced resources. Most managers have a variety of methods to measure their success. They have productivity metrics, departmental objectives, and sales goals. Ultimately all managers and leaders are judged by their results on the bottom line through the Profit and Loss (P&L) statement.

When looking over your P&L you see such items as Sales, Rent, Salaries, Utilities, Supplies and of course, Taxes. Good executives know how to manage their P&L and are experts at digging down into the details to find ways to save money by buying supplies in bulk, eliminating unproductive product lines, and eliminating unnecessary expenses. But the cost of employee turnover is a hidden cost that most companies spend no time thinking about. I’m convinced that if companies actually measured the cost of employee turnover they would take an entirely different view on the issue of Employee Engagement – and spend more time focusing on how to get their employees to want to stay and not go to a competitor.

What is the cost of employee turnover?

Most estimates range from 150% of the employee’s salary for rank and file workers to 250% for managers and above. This means that to replace an employee who has a salary of say, $50K, it will cost you $75K in addition to the salary of the new person. To replace a manager or executive could well cost you $250K - $300K.

Pretty expensive, isn’t it?

But most managers don’t think about the cost of employee turnover because these expenses don’t show up on the P&L statement and therefore they can’t be seen. And because they aren’t visible, none of them get managed.

Inexperienced managers and executives look at employee turnover as a cost savings. Since they are no longer paying the salary of the person, they believe that turnover actually saves them money. Of course, if this person was doing work that is totally unnecessary then maybe you are saving money.

What kind of hidden costs are associated with employee turnover? Here are just a couple of examples:
  • The cost of another employee filling doing this persons work until they are replaced. If they were an hourly employee, you are now paying the person filling in overtime.
  • The cost of loss productivity from the person who is temporarily filling in for them.
  • The cost of running an ad to fill the opening
  • The cost of time to review all of the resumes submitted
  • The cost to interview the applicants
  • The partial productivity of the person as they are getting trained
  • The loss in productivity from the person training them
  • The direct training costs for the new employee for things like employee manuals, training software, etc.
  • The loss in customer knowledge that will now result in lower sales
  • The cost of all the paperwork associated with both the person leaving and the new person coming on board. This is not just new hire paperwork, but also the insurance and benefit paperwork for both the new and exiting employee.
And this is really just the tip of the iceberg. If you sit down and think about your business you can probably come up with a dozen more items to add to this list.

How big a problem is employee turnover?

A 2009 study from Deloitte found that 49% of the respondents planned to look for a new job in the next 12 months.

Can you afford to lose half of your work force? Worse, can you afford to lose half of your work force when the employees that leave are the employees with all of the knowledge?

At ECI Learning Systems LLC, we are dedicated to helping companies get the greatest return from their most valuable asset: their employees. We work with you to align 3 key organizational factors:

• Your Company Culture
• The Leadership Styles of your key managers
• The Expectations of your Employees

When these 3 factors are aligned, you create an energy in your company that improves productivity, reduces absenteeism, increases creativity, and positively impacts your bottom line. Contact ECI Learning Systems LLC today to get your free Workplace Evaluation.

Until next time.....

Dave Meyer
ECI Learning Systems, LLC

1 comment:

  1. Great Post Dave,

    One of those things that is hard to measure but it makes a significant difference. Organizations need to find ways 1) to recruit the right candidates, 2) select the right ones, and engage them through mission, training, orientation, perhaps even assigning a buddy to show them the ropes.

    I know that when I have been connected quickly with a team mate the engagement, performance and longevity is improved over being left to fend for my self.

    Keep up the good work