Employee retention: what employee turnover really costs your company and what to do about it
It is one of the largest costs in all the different types of organizations, but it is also one of the most unknown costs. It’s employee turnover.
Businesses routinely record and report costs such as wages and benefits, worker’s compensation insurance, utilities, materials, and space; however, most companies do not have and report the cost of employee turnover. It may be much higher than you think.
How much is it costing you?
Several well-regarded studies have recently estimated the cost of losing an employee:
o SHRM, the Society for Human Resource Management, estimated that it costs $ 3,500.00 to replace an employee of $ 8.00 per hour when all costs were considered: recruiting, interviews, hiring, training, reduced productivity, etc. SHRM’s estimate was the lowest of the 17 nationally respected companies calculating this cost!
o Other sources provide these estimates: It costs you 30-50% of the annual salary for entry-level employees, 150% for mid-level employees, and up to 400% for high-level specialty employees!
o Do a quick calculation: Think of a job in your organization where there has been some turnover, perhaps supervisors. Calculate your average annual salary and the number of supervisors you lose annually. For example, if your average annual salary is $ 40,000, multiply it by 125% (or 125% of your annual salary, a reasonable cost estimate for supervisors). This means that it costs $ 50,000 to replace just one supervisor. If this company loses ten supervisors a year, then 10 times $ 50,000 equals $ 500,000 in replacement costs for supervisors alone. This is the final cost. The cost of the top line? If the company’s profit margin is 10%, then it costs $ 5,000,000 in revenue to replace these ten supervisors.
Do these numbers seem incredible?
Here is an actual estimate from a well regarded organization in my community. The HR director of this human services organization (disabled housing, sheltered workshops, etc.) estimated that 30 entry-level people leave his organization on average each quarter.
This averages ten people per month. Let’s be more conservative and lower the SHRM estimate (see above) to $ 3,000.00 to replace each employee.
This equates to $ 30,000 per month, or $ 1,000.00 in employee turnover costs every day of the month! Annually, this totals $ 360,000.00.
Actual turnover costs are often much higher than we think, until we estimate them.
You may be thinking, “Some employee turnover is inevitable, and even desirable.” You’re right. Some turnover is necessary to replace poor or marginal employees with more productive ones and to bring in people with new ideas and experience. However, high turnover costs are avoidable and unnecessary. This is where companies should focus their efforts. The goal is to retain valuable performers and replace poor ones.
Most companies group both types of performers when looking at billing. By doing so, they are losing the cost and importance of replacing the top performers.
Why don’t more companies see this as a costly problem?
There are a variety of reasons this is not seen as a problem, all of which cost companies in experience and dollars. How many of these occur in your organization?
1. There is no process for tabulating costs. One survey found that only 44% of its respondents had a process for estimating turnover costs; 43% of companies relied on intuition and 13% had no process. (1)
2. Costs are not reported to senior management. It is a business axiom that one of the best ways to get the attention of top management is to show them what something costs. However, most top management never see the churn cost estimates because most companies do not measure them, or if they do, they do not report them to top management.
3. It is an inescapable cost of doing business. Except it isn’t! While some turnover is inevitable and desirable, most turnover, especially among your best and best employees, can be largely avoided. Thinking that billing is just a normal cost of doing business is the same quality of thought that says accidents are just an inescapable part of being in the construction business.
4. It is a human resources problem. While HR should be a key partner in reducing the cost of turnover, this is a strategic issue that requires the attention and actions of top management, in addition to HR efforts, to resolve.
5. Costs are underestimated, so they are less worrying. If costs are underestimated because the organization disagrees or does not know what to measure, the statistics generated either register less concern than they should, or are disputed and ignored.
What costs must be fully estimated?
A comprehensive program measures the following costs:
Compensation and benefits during training
Reduced or lost business
It is necessary that there is a prior agreement between Human Resources, Finance and Operations on which cost measures will be considered valid. Then it must be measured and reported.
6. Wait until there is a crisis. I was surprised when the CEO of an organization told me that she knew one of her capable managers was unhappy, but decided that no action was necessary because she had not yet received a resignation letter.
Prevention works best. Start measuring your turnover costs and, more importantly, watch who is leaving to see if you are retaining your best employees.
The time to do this is now. Waiting until there is a crisis to take action limits your options and your success rate. It also often triggers the common response of offering more money for someone to stay, rather than fixing the original problem. Why do so many retention efforts fail?
These are some of the most common reasons that company retention efforts fail, even when implemented by capable people.
1. No evaluation, so ineffective solutions are chosen. In their rush to correct a costly problem, companies often forgo a relatively short and cost-effective assessment to correct the situation more quickly. However, implementing a solution without diagnosing who is leaving and why they are leaving often results in solutions that are unable to address the root causes of turnover.
Diagnosing the causes of turnover always pays for itself. Don’t start without an evaluation.
2. Implementing too many solutions instead of the most effective ones. Managers often brainstorm a number of plausible solutions and then implement many of them, especially those favored by top management. However, what is most needed is to select and implement a limited number of solutions that will be most effective in solving the problem. Implementing too many solutions, even the good ones, will drain your resources and undermine your efforts and success.
3. There is no way to measure success to know what works. How can you tell which retention solutions you’ve implemented are working effectively and which aren’t, where you need to make improvements, and what strategies you need to discard if you don’t have a way to measure your results?
How can we do a better job of retaining employees, especially the most valuable ones?
First, classify your employees into three categories: top performer, medium performer, and lowest performer. Your goal is to retain your best performers; develop and retain intermediate performers, converting them into near-superior or superior performers, if possible; and potentially replace the lower performing ones.
Second, internally agree on the metrics you will use to calculate turnover costs. Be sure to factor in all costs. Most organizations vastly underestimate them.
Third, report turnover costs to senior management on a monthly, quarterly, and yearly basis.
When your turnover costs are unacceptably high, or higher than the average for your industry, take an assessment. Find out who is leaving and why. Exit interviews can help you find out why.
You need to know if those who are leaving are the best, medium or lowest performers in order to measure the level of experience your organization is leaving. Obviously, you are going to employ (and pay) different strategies if your best employees leave voluntarily, compared to mid-level or lower.
Develop solutions capable of solving the problems you discover, and implement only a limited number of them.
Measure the success of your retention efforts and refine them.
Two very important strategies to save a great deal of time and money.
Very key strategy n. # 1: Don’t wait until turnover costs become unacceptably high before implementing an ongoing retention program. Put a retention program in place before you have a crisis situation. Not only do you need to find out why employees are leaving your organization, you also need to find out why others are staying.
Very key strategy n. # 2: Survey your best employees now to find out what’s keeping them there, why they might leave, what kinds of competitive offers they might find attractive, and what they need to be happier and more productive in their jobs. You’ll do a better job of keeping them (along with your expertise and value). You will also find very helpful information on the improvements your organization needs.
This means driving improvements in your organization with what your best employees tell you, rather than focusing on taking care of the ever-present complainers in each organization.
How valuable are retention efforts? One source estimated that a 10% reduction in employee turnover was worth more money than a 10% increase in productivity or a 10% increase in sales.
Retain and win.