Employee turnover & impact on the bottom line
What costs are associated with turnover & how does this impact on a company’s bottom line?
Costs of turnover that can be measured directly fall in two areas: separation costs, and replacement costs. Separation costs may include severance pay, costs associated with an exit interview, outplacement fees and possible litigation costs, particularly for involuntary separation. Replacement costs are the well-known costs of a hire, including sourcing expenses, HR processing costs for screening and assessing candidates, the time spent by hiring managers interviewing candidates, travel and relocation expenses, signing bonuses, if applicable, and orientation and training costs.
Direct & Indirect Costs
There are a number of other areas too in which turnover adversely impacts a corporation, although the effect is harder to quantify. Indirect costs actually represent the greatest losses for the organization. Turnover results in a loss of productivity, since it results in lower productivity of the departing employee, unproductive time for both colleagues and managers, and a general disruption of the team dynamic. Potentially even more damaging to a corporation are lost sales and even lost customers resulting from the departure of an employee. Employee retention is not only critical for cost-efficiency but an important factor in revenue growth as well, because of its direct link to customer acquisition, satisfaction and retention.
Calculating the Cost of Turnover
Estimates of the total cost of losing a single position to turnover range from 30 percent of the yearly salary of the position for hourly employees to 150 percent, as estimated by the Saratoga Institute, and independently by Hewitt Associates. Even a conservative estimate, that the loss of one person is equal to his or her annual salary, clearly illustrates the negative financial impact of employee turnover. For example, for a company with 100,000 employees at an average salary of £20,000 and a turnover rate of ten percent, the cost of that turnover equals £200 million. A reduction in turnover of one-half percent would result in savings of £1 million pounds.
Another way to estimate the major cost impact of turnover on companies is to look at the total compensation costs as a proportion of a firm’s revenue. According to a Mercer/CFO Magazine study, companys spend on average 36 percent of their revenue on human capital expenses. Again, using conservative estimates: for a company with total compensation costs at this average, an average rate of employee turnover of 25 percent and a cost associated with turnover equivalent to one time the salary, the cost of turnover represents on average about nine percent of revenue.
Bottom Line Impact
The impact of employee turnover on the corporate bottom line is dramatic. The Taleo Research study, Internal Mobility, provides in depth detail, and presents a model and formula for you to calculate the impact of a reduction in turnover on your company’s profit margin.
HR professionals need to understand turnover’s costly impact and focus on ways to keep their best employees on board. One effective means of retaining top employees is to offer them growth opportunities within the organisation. Implementing programs that increase employee satisfaction and retention can combat excessive turnover and directly improve corporate financial performance.
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