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January 5, 2012

Turnover: Costs and Consequences

Filed under: Benefits,Compensation,Compliance4:18 pm

In HR, we are in a unique position to understand just how significantly turnover affects our organizations.  In the most recent month available (Oct. 2011), the Bureau of Labor Statistics reported that voluntary separations comprised almost half of total separations (49%).  Layoffs and discharges (41%) and other separations (less than 10%), including retirement, trailed behind.  Presenting these numbers, however, will get you nowhere. With our access to confidential data, we can watch for trends to determine the overall cost and determine the cause (and possible solutions).

Although estimates vary widely depending on the source, you can be sure that the costs of turnover are significant.  The Harvard Business School calculated that the cost of replacing a sales representative with an annual income of $60,000 is $300,000 – three times the annual salary, plus training, expenses, benefits, and commission.  Here are some costs to consider when calculating turnover:

Termination or Separation – Regardless of whether the employee was fired or quit voluntarily, you must consider costs such as: removing employee from payroll, processing benefits, and retrieving and replacing any of their equipment.  In some cases, you have to consider severance pay and rising unemployment compensation.

Replacement – These costs involve advertising the position, reviewing applications and interviewing candidates, administering employment tests, verifying references and onboarding and training for the new employee.  In some instances, you may also have to replace equipment, such as keys, laptops, or uniforms that were not recovered from the former employee.

Lost production – This is probably the most difficult cost to quantify, and also the largest.  Production is usually affected, even if temporary workers are hired.  Existing employees who must cover the departing employee’s duties may sacrifice some of their production because of the burden.  After the new employee is hired, lost production costs include inevitable errors and inferior quality.

To calculate your turnover rate, the U.S. Bureau of Labor Statistics suggests dividing the number of employees in the company at midmonth by the number of departing employees each month.  For example, if you have 50 employees on January 15 and 5 employees depart between January 1 and January 31, your turnover rate is 10 percent.

Look for more as we explore turnover in the coming months through the blog and our newsletter.

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