The True Cost of Employee Turnover

When speaking to a SHRM chapter recently I was shocked that only 30% of the audience was even tracking their turnover.

If you are NOT tracking the cost of employee turnover, how are you going to get a start on reducing it? If you are not serious about tracking it, don’t start activities to reduce your turnover. The time and money you spend will probably be wasted because it will not have the targeted focus to drive down your numbers.

Turnover Costs by the Numbers

I have seen countless formulas and studies to determine the cost of turnover in an organization. Everything I have seen indicates that the best measure is roughly three months of salary for every person who leaves. I have also seen a formula that the cost of employee turnover for:

• Entry level employees is 30-50% of annual salary
• Mid-level employees is 150% of annual salary
• High-level employees as high as 400% of salary

Some people might say these numbers are overstated, but think about the cost of a middle level manager who walks out the door, and a key deadline is missed because no one can fill their shoes, or a major opportunity is not capitalized on.

A third formula I have seen calculates that the cost of turnover is 25% of the annual salary. Those numbers can be staggering if you are running at 10% turnover. Imagine the bottom line impact if you could cut turnover in half, to 5%. The savings are huge even when looking at lower level employees.

I used to see this when software developers would leave an organization I was with. We could calculate how much a delayed product roll-out would cost us, and the numbers were mind boggling. This is particularly the case when talking about knowledge-based businesses. All your resources walk on two feet and when that person walks out the door on you, so does their knowledge.

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Stick With Your Target

Regardless of what number you pick as a target or the formula to calculate the cost of turnover; stick with it. Don’t start adjusting your measures so you start to feel good about where you are going. If you do that, you will not feel good as you see profits start to deteriorate. When that happens, you will see your good people start to jump ship because they realize you aren’t addressing the problem and that you are in denial. Once turnover starts to accelerate, it is very hard to slow it down much less put a stop to it.

The Good, The Bad and The Neutral

I recommend you classify your turnover as “good,” “bad” or “neutral” turnover. Some turnover is good. Yes, that’s what I said! There are times when you have to fire people or permanently reduce your workforce. That’s reality. If you want to take that into account when calculating your turnover by all means do so. Just don’t play games with the numbers to make yourself feel good about your lousy turnover. Whatever you choose, use the same measurement over time.

When you fire a non-performer it should be good turnover. When a top performer leaves to go to elsewhere, it is bad turnover. Neutral turnover can be things such as an employee who left the organization to retire. Classify your turnover and start tracking it in the three categories.

This also forces the managers to discuss with HR whether the turnover was good, bad, or neutral. That dialog enables management to see if you have a manager who is realistic or making excuses because they are not doing what they need to do to retain top people. Trends will become very evident in various operating units, plants or departments. If you are a Plant Manager, General Manager, VP or owner, you want to be monitoring your turnover numbers and asking questions about what activities are taking place to reduce it.

From this point forward you need to adopt a “No Excuses” mentality when it comes to bad turnover. You will look at your bad turnover and realize it is turnover that is not acceptable, AND THEN START TO TAKE ACTION TO ADDRESS IT. No Excuses!

About the Author
Jeff Kortes is known as the “No Nonsense Guy.” He is the President of Human Asset Management, and author of “No Nonsense Retention … Painless Strategies to Retain Your Best People. He has trained hundreds of first-line supervisors, managers, and executives during his career. His approach to training is no-nonsense, and practical. Jeff is also a member of the National Speakers Association and a regular speaker on the topics of retention, recruiting and leadership.