Calculating the Real Cost of Employee Turnover: A Step-by-Step Guide
Employee departures cost a hefty amount. Research suggests that direct replacement costs an organization around 50%-60% of an employee’s annual salary, while total cost ranges from 90% to 200% of annual salary. When calculating the cost of employee turnover many factors come into play which directly or indirectly impacts the overall cost of employee turnover.
From the cost of searching, hiring, onboarding to the cost of advertising, background check, training, a lot of parameters affect the turnover cost that generally goes unnoticed. In this blog, we will drill deeper into these parameters to understand how these affect your turnover cost and how you should calculate them.
- What is Employee Turnover
- Calculating Employee Turnover Rate
- Calculating Turnover Cost
- Total Annual Turnover Cost
What is Employee Turnover?
It is measured as the loss of employees in the workforce during a period, typically one year. Employees can leave the organization for plenty of reasons including voluntary resignations, layoffs, terminations, retirement, and more. Due to this, turnover is further subcategorized into
1. Voluntary Turnover
Voluntary turnover refers to the situation where an employee chooses to leave the organization on his/her wish. This can be due to better opportunities, workplace conflicts, lack of desired opportunities, switching work fields, and more.
Voluntary turnover can further be categorized as functional and dysfunctional.
Functional turnover doesn’t affect the performance of an organization. This is due to the exit of poor performers or employees whose talents are easy to replace.
Whereas, dysfunctional turnover hurts the performance of an organization. This is because of the exit of high performers or difficult to replace talents that ask for greater time and effort in refilling the position.
2. Involuntary Turnover
In the case of involuntary turnover, the employer chooses to terminate the employee. Possibly, because of poor performance, misbehavior, rule violation, company layoff compulsion, and more.
Calculating Employee Turnover Rate
Calculating the employee turnover rate is no rocket science. It is simply calculated as the percentage of employees leaving the organization during a period. To calculate this, you need to put in three numbers into the turnover rate formula. These are number of employees,
- At the beginning of the year
- At the end of the year
- Who left during the year
Calculating Turnover Cost
The turnover “cost” calculation is trickier than the turnover “rate” calculations as a lot of factors contribute to its formula. To start with, it considers costs involved in the following processes that are majorly impacted after an employee resigns till a new hire comes on board.
- Notice Period
- Vacancy Period
- Hiring Period
- Training and Orientation Period
Notice period costs include the last paycheck for the employee, leave encashment, separation pay, time to process benefits and separation, changes in unemployment taxes, coordination with payroll and other departments, exit interviews, transition meetings, among others.
Vacancy period takes into account the cost of advertising and recruiting, interview expenses, temp or contract employees, lost productivity of exiting employees, screening resumes, creating job assessments, no. of weeks for hiring, and more.
Hiring period counts the process of continuous follow-ups, negotiations, interviews, background checks, relocation costs, sign-on bonuses, and other involved tasks.
Training and orientation period involves the process of onboarding the employee, providing the onboard essentials, inducting about the company, project, and work, conducting one-on-one team meetings, organizing a three-month induction program, and more.
Turnover cost of every period further constitutes two costs – direct and indirect. To get a holistic view of your turnover cost, consider both these costs as they directly impact your organization’s cost and productivity in a multitude of ways.
To calculate the direct turnover cost, gather all the below information as it directly adds to your turnover cost.
- Employee’s base salary
- Employee benefit amount including a company vehicle, car allowance, mobile phone, laptops, annual leaves, and more
- Time to fill the position
- Cost of admin task including separation processes
- Advertising and recruiting fees
- Interview expenses
- Cost of background checks
- Temporary or contract employees
- Cost of medical examination of the candidate
- Cost of hiring new employee including resume screening, background check, interviewing, reference checking, onboarding
- Sign on bonus for a new employee
- Relocation costs
- On-job training cost
- Productivity ramp-up cost
Indirect costs are often neglected as they are hard to quantify. But these processes have a significant impact on the overall business. Having said that, you can always quantify the cost in terms of hours and days spent on these processes.
- Lost knowledge during the transition
- Lost productivity of existing employees
- Conducting transition meetings
- Overtime for employees to cover departing employees’ duties.
- Creating or updating job descriptions
- Lost productivity of peers, supervisors, and subordinates
- Posting openings on various job boards
- Selecting recruiters
- Screening resumes
- Scheduling interviews
- Conducting interviews (Several levels of interviews)
- Creating and scoring job assessments
- Coordinating meetings with the hiring manager
- Setting up and conducting new hire orientations
- Informal onboard training
- One on one with a new team member
Additional Employee Turnover Impact
- Product roll-out delays
- Dip in employee morale
- Dent in the business’s reputations
- Loss of organizational knowledge
- Missed project deadlines
- Loss of client relationships
- Aggravated clients
- Disruption among internal departments
- Chain reaction causing additional turnovers
- Delayed achievement of department and organizational goals
Total Annual Turnover Cost
To calculate your annual turnover, add both direct and indirect turnover cost, then multiply the calculated total cost with the number of departing employees in a year.
These costs can differ according to the departments or employee roles as the value of lost productivity, average salary and many other factors directly depend on the value of the position being filled.
For instance, the turnover cost of managerial or executive roles is significantly high in comparison to the turnover cost of entry-level employees.
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