Turnover. Everyone knows it can be a terrible drain on organizational morale and energy. But what does turnover really cost? How does it affect the bottom line? In today’s economic environment, these questions are more important than ever.
As organizations become more focused on reducing costs, the risks of cutting too deeply are very real. If this happens, the ability to retain key talent may be adversely affected. One important role for the HR professional is to understand the cost of turnover and educate management on this cost. The cost of turnover is often overlooked. Its components don’t always “show up” in the budget like other costs do. It is easy for even well intentioned organizations to lose focus on this very important organizational dynamic.
Estimates for the cost of turnover vary greatly. Some estimates range as much as 150%-200% of an individual’s salary. Frankly, I’m skeptical of such estimates. In certain situations, the figure may approach those levels, especially for very senior individuals. Maybe. But the fact of the matter is that in most cases the figure is considerably lower. The US Department of Labor estimates the average cost of turnover to be 33% of an individual’s salary, not 150-200%. But that’s OK. Because even with a lower figure, it is easy for the HR professional to make a compelling case regarding the cost of turnover. Let’s see how.
Suppose you work at an organization with 500 employees. The average salary is $40,000 and the turnover rate is 20%. Doing the math (500 x .2 x $40,000 x .33) tells us that this organization is spending $1,320,000 on turnover each year! This is a telling statistic. But it’s not enough to just understand the numbers. The important question is: how does HR most effectively use this information to make a positive impact on organizational decisions?
First, HR should calculate the cost of turnover using actual numbers from the organization. To do this, you will need all the information discussed in the example above, such as the turnover rate, the average salary, and so forth. Calculate the costs for one typical example of turnover, and then multiply that figure by the total number of departing employees.
Once HR has determined the annual cost of turnover, the next step is to calculate the savings that can be achieved with a reduction of turnover. In our example above, if the attrition rate is reduced from 20% to 10% in our hypothetical organization, the firm saves $660,000.
Compare this to the savings achieved by reducing average salary increases by 1%. With salary increases averaging 3%, this organization will spend $600,000 on salary increases each year (500 employees x $40,000 x.03). Should salary increases be reduced to 2% on average, the organization will spend only $400,000, resulting in an annual savings of $200,000. But by reducing salary increases, the firm takes the risk of negative employee sentiment and higher turnover. By focusing more on doing things to reduce turnover, the company not only avoids the negative reaction, but can actually save more money.
When HR has a good understanding of the cost of turnover and uses that knowledge effectively, it puts itself in a much stronger position to affect the management debate on cost reductions and their impact. By getting in front of management and showing the cost of turnover, HR can help the company avoid costly errors, as well as enhance its own position as a true business partner.
