Calculating the Cost of Turnover in Your Organization

Although the costs of employee turnover can be difficult to calculate and, strictly speaking, do not appear as a line item your organization's financial statements, they are real costs that you should take into account for when creating an employee retention action plan.

Using this simple guide to get a better handle on what turnover is likely costing your organization can help drive home the importance and necessity of working to retain your employees. This is especially true of your organization's "preventable" turnover, since these are the employees who didn't need to leave but decided to go because of unresolved workplace issues.

Calculating Your Annual Turnover

Your first step to calculating your turnover costs is to calculate your organization's turnover. Typically, this measure is calculated on an annual basis and is further divided between involuntary and voluntary turnover, with voluntary turnover then further allocate between "non-preventable" and "preventable":

• Involuntary turnover occurs when an employee is discharged or terminated, whether for just cause or because of a reduction in force (RIF). Terminations for cause contribute to turnover costs because these employees usually have to be replaced.
• Voluntary turnover occurs when an employee leaves by their own choice and this can be caused by a number of factors. Some of this turnover is "non-preventable", meaning that it is beyond the organization's control. Non-preventable turnover refers to employees who leave in order to take of family members, for example, or because of health problems or because they have decided to move out of the area.
• "Preventable" turnover, on the other hand, is caused by problems employees are having in their work environment. Some of the key drivers of preventable turnover include general job dissatisfaction, concerns about the direction of the organization, unmet job expectations, performance problems, situational constraints, difficulties fitting in to the organization's culture, high levels of job stress, what feels like little recognition for their efforts and a lack of career advancement opportunities. These are issues that organizations can address and resolved but they need to which causes of preventable turnover are most prevalent.

Calculating your turnover estimate is quite straightforward but you will need the following numbers:

Total number of employees who left in the past year = ____

Total number who left voluntarily = _________

Total number who left involuntarily = _________

NOTE: The sum of the voluntary and involuntary departures must equal the total number who left

Your average staffing levels of the past year (the number of employees at the beginning of the year + the number of employees at the end of the year/2) = _________

With these numbers in hand, you can then calculate your turnover in three different ways:

Total employee turnover for the year = (Total number leaving/average staffing) x 100 _________

Voluntary employee turnover for the year = (Total number leaving voluntarily/average staffing) x 100 _________

Involuntary employee turnover for the year = (Total number leaving involuntarily/average staffing) x 100 _________

From these numbers alone, you may not know how to divide your voluntary turnover between "preventable" and "non-preventable" exits. This is where the InsightEXIT survey tools comes in handy because that is the first question asked!

Once you have made these calculations, you should have a pretty good sense of how much of an impact preventable turnover is having in your organization.

Estimating Your Turnover Costs

Turnover costs fall into several different categories and each of these categories include both direct costs and indirect costs. The four main categories are:

1. Termination Costs
2. Replacement Costs
3. New Hire/Onboarding Costs

Now let's look at each category in detail.

Calculating Your Termination Costs

This category includes the costs associated directly to the employee's departure. The "tangible" costs in this category include:

• Administrative costs for processing separations (such as stopping payroll, benefit deductions, benefit enrollments, COBRA notification and administration and the cost of the various forms needed to process a departing employee)
• The cost impact of any unemployment insurance premiums
• Any severance payments/separation pay
• Accrued vacation time expenses
• Retirement plan contributions
• Any extension to benefits

There are also "intangible" costs associated here as well, such as:

• The payroll cost of temporarily filling the position while it is vacant. This can be either the cost of a temporary hire or the cost to have existing employees performing the vacant job as well as their own jobs, especially if any overtime is paid
• The cost for a manager who has to understand what work remains and how to cover that work until a replacement is found
• The cost of training invested in this employee, including internal training, external programs and external academic education as well as licenses or certifications obtained to help the employee do their job effectively
• The cost of lost institutional knowledge, skills and contacts that the person who is leaving is taking with them

Calculating Your Replacement Costs

This category includes all costs relating to searching for candidates, reviewing their credentials, interviewing them, considering all candidates available and then making a selection. These include both tangible and intangible costs, such as:

• The cost for attracting candidates, such as for advertising, posting and/or promoting the open position
• The cost, if applicable, of the internal recruiter's time to understand the position's requirements, develop and implement a sourcing strategy, review candidate's backgrounds, prepare for interviews, conduct interviews, prepare candidate assessments, conduct reference checks, make the employment offer and notify unsuccessful candidates
• The cost for using any external recruiting services
• The cost in time taken by internal personnel to review and explain the position requirements with prospective candidates, to review each candidate's background and experience, to conduct interviews, to discuss their assessments and to select a finalist
• The travel expenses for candidates (and for their families if applicable) and/or for recruiters
• The administrative cost for handling, processing and responding to the resumes received
• The cost of drug screening, educational and criminal background checks and other reference checks
• The cost of any pre-employment tests/reviews to help assess a candidate's skills, abilities, aptitude, attitude, values and behaviors
• Any signing bonuses and/or reimbursements for moving and relocation costs

Calculating Your New Hire/Onboarding Costs

In this category, you need to think about the costs for bringing in new employees, as well as estimating the formal and informal costs of training them. These can include:

• The costs of bringing the new employees member on board, including putting that person on payroll, establishing IT and security passwords and identification cards, any internal and external publicity announcements, telephone service, establishing email accounts, costs of establishing credit card accounts, or leasing other equipment such as cell phones, automobiles, pagers, etc.
• The cost in time for onboarding the new employee, including both the new employee's time and those responsible for conducting the onboarding - remember to include both general orientation to the organization and orientation specific to the position
• The cost for any orientation materials or onboarding materials/supplies
• The cost associated with department training, including training with electronic medical records systems and/or specialized equipment
• The cost of various training materials needed
• The cost of "lost productivity" of the new employee compared to that of current employees, with one possible calculation based on a productivity level of 0%-10% for their first week of employment, of 25% for weeks 2 to 4, of 50% for weeks 5 to 12 and of 75% for weeks 13 through 20 - you simply apply the difference to the payroll expenses for that new employee over the same time periods
• The cost of coworkers' and supervisory personnel's lost productivity due to their time spent on bringing the new employee "up to speed"
• Costs, if applicable, of aiding the new hire's spouse/partner in seeking employment

Calculating and adding all these costs together will likely demonstrate that the financial impact when employees leave your organization can be very significant. This is not to say that all turnover should or could be eliminated but rather that organizations would benefit from identifying the factors that are driving preventable turnover at their organization and taking action to prevent future departures for those same reasons. In other words, a well-designed and effectively-implemented program of employee retention may easily pay for itself in a very short period of time.

This is exactly what the InsightEXIT system is designed to achieve!

Try our handy ROI calculator to estimate your turnover costs.