From a business perspective, we should always look at the cost of any action we take. Engaging in a good old cost benefit analysis will help us determine which action is likely to be the most efficient and effective.
For example, how does the cost of improving hiring results and/or the cost of improving retention measure up against the cost of turnover? What is our Return on Investment (ROI)?
Of course, strictly bottom-line thinking may miss the subtleties of the cost of turnover, such as loss of institutional knowledge, reduced productivity, etc. Still, any analysis is better than none. So let's get to analyzing.
Cost of Turnover:
The cost of turnover is generally viewed as anywhere from 33% of the employee's annual salary to 300% of an employee's annual salary. Part of the discrepancy is the inability to strictly account for the costs utilized in determining the cost of turnover. Other discrepancies come in to play as well, like the hourly rate of the employee creating the advertisements, reviewing resumes, and conducting interviews.
The Sasha Corporation looked at the cost of turnover for an $8 employee as reported by 15 different organizations, including the Society for Human Resource Management and Cornell University. Their meta-analysis revealed that the average cost was $9,444.47. When they removed the highest 5 estimates, that number fell to $5,505.80. (http://www.sashacorp.com/turnframe.html)
Considering an $8 an hour employee would earn about $16k annually, working 40 hours a week with no overtime, means that the average fell between 33% and 56% of the employee's annual wage. Of course, this should be balanced against the fact that replacing an $8 an hour employee is generally less costly than replacing a $30 an hour employee.
JDA Professional Services calculates the cost of replacing an employee earning $60,000 a year as being $150,000 or 250% of the employee's annual salary. The chart below shows the calculation:
(Click image to enlarge)
(http://www.jdapsi.com/Client/articles/coh)
For the purposes of this blog post, let's presume the average cost of replacing a professional employee earning $60,000 a year to be closer to 150% of his or her annual salary. I arrived at 150% by removing the cost of pre-employment testing, recruiter fees, salary increases, sign-on bonus, relocation, training, and consulting fees from the JDA Professional's estimate.
The Cost of Hiring:
Really, the cost of hiring is included in the cost of turnover. It would be foolish to account for this cost twice. Any increase in the cost of hiring will equally increase the cost of turnover.
The way to view the cost of hiring is by looking at the increase in the cost of hiring as it impacts the turnover rate. For example, if you have 100 employees who all earn $60,000 a year, and you have 20% turnover, your annual cost of turnover (presuming 1.5x annual salary) would be $1.8 million (20 employees terminated x $60,000 (salary) x 1.5 (cost of turnover) = $1,800,000).
Again, presuming the cost of turnover to be approximately $90,000 per employee, let's consider a 10% increase in the cost of turnover due to spending more on pre-employment testing. This would result in the cost of turnover increasing to $99,000.
If the result were a 20% drop in turnover (16% turnover vs 20%), the annual cost of turnover would drop to $1,584,000.
The additional cost of hiring would equal $144,000, and the savings due to reduction in turnover would be $216,000. The net savings would be $72,000 or a 50% ROI.
The Cost of Retention:
So, through attrition and better hiring practices, you can help reduce your turnover rate. The idea is that in hiring employees who are better suited to be long-term hires, you reduce turnover.
What about the current staff who were hired before the implementation of pre-employment testing? Are you subject to waiting for them to leave before they can be replaced with long-term hires?
The truth is, I did not even want to ask the last question, given how obvious of a set-up it is. Of course you are not subject to waiting for them to leave.
The cost of retention includes factors like incentive programs, recognition programs, training, wage increases, better working conditions, better equipment, improved benefits, and creating clear career paths for employees.
The cost of these will vary, but JDA Professional Services calculates the cost in the following chart:
(Click image to enlarge)
(http://www.jdapsi.com/Client/articles/coh)
JDA Professional Services concludes that the cost of keeping an employee is significantly less than the cost of replacing that employee. Even compared to the lower cost I proposed ($90,000 for a $60,000 employee), JDA's estimate of the cost of retention is less than 1/4 of the cost of turnover.
Retention via Employee Relations:
Simply showing employees that they are valued and recognizing their contribution to the organization is a cost effective way of reducing turnover.
Recognition programs and Employee Problem Resolution policies are extremely helpful in decreasing the number of disgruntled employees. Employees want to know they are valued. This can be achieved through simple recognition programs, such as giving a pat on the back or acknowledging the employee at a company meeting.
Similarly, keeping an open door policy and encouraging employees to discuss any workplace problems with management is helpful in resolving the inevitable issues that do arise. It is important to keep the lines of communication open and to encourage employees to take advantage of their ability to improve their working conditions.
Of course, one could assign costs to these measures (time to resolve complaints x hourly value of employee resolving complaints, etc.), but even including those costs, the cost/benefit analysis is amazing.
Utilizing the figures above, if an employee whose hourly worth is $200 an hour spent 50 hours a year dealing with employee complaints and providing recognition, the cost would be $10,000. If these efforts resulted in one less termination of a $60,000 a year employee, the savings would be $80,000. That is an 800% ROI.
The Take-Away:
The cost of retention, turnover, and hiring vary by company and by position. The actual cost of each individual termination could vary even if the individuals worked at the same company in the same position. Outside factors such as the labor market can impact the amount of money necessary to replace an employee.
Knowing the cost of hire/turnover and retention helps business owners make educated decisions on how to best spend their time and money to reduce the turnover and thus improve organizational outcomes. With consistent long-term employees, organizations are better suited to obtain new customers and keep current customers.
Of course, while it is valuable to calculate on the front end to help in decision making, take heed of James Barlament's plea to review what you have done and to determine whether or not it was successful.
In the calculation above regarding increasing the cost of hire, we presumed what the impact to turnover was. Once you implement the program, you can measure the actual impact. If the reality shows that the cost does not provide a return, then the program should be revisited in order to improve outcomes.
Works Cited:
http://www.sashacorp.com/turnframe.html
http://www.jdapsi.com/Client/articles/coh
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