I would say none but maybe that is unfair, so let’s say few. Recently I estimated a client’s turnover to cost to be between $600,000 and $3,000,0001. Despite my respect for the Finance Director, I am pretty sure he hadn’t factored any amount in their budget for turnover (other than perhaps some direct recruiting costs). These are enormous numbers. The upper end of this range is 6% of the client’s annual revenue!
How can turnover possibly cost that much?
Some of the hard, direct costs of turnover are quite easy to measure. How much does the ad cost? What am I paying a recruiter? How much do I pay for police or credits checks? How much time did my search team spend on reviewing and interviewing candidates?
However you need to also consider softer, and almost-hidden, costs: the learning curve upon hire, the cost of errors, additional overtime, the time of managers or others coaching a new employee. For front line roles there are revenue opportunities lost due to lost sales, missed upselling or compromised customer service levels…
Turnover is a basic metric that needs to be tracked, monitored, and action taken if poor tends develop.
Regardless of your turnover percentage, you should be tracking it monthly or quarterly. Employee turnover varies by industry and like any metric you need to compare yourself to your peer group. The Canadian2 voluntary, annual turnover average is about 7.2% but that is an aggregate for all industries. Retail turnover is, not surprisingly, very high. It is not unusual to see retail employee turnover numbers at 80% but on average is it 14%. At the other end of the scale, unionized work environments are generally very low – some times less than one percent. Most healthy corporate environments I am familiar with have less than 5% employee turnover.
What turnover is healthy and what is detrimental?
If the people who leave your organization are not strong employees, high achievers, or holding hard to find skill sets, or are leaving roles with long learning curves, then turnover may not be overly troublesome. Departing employees save you the cost of a termination package or the cost of errors they could be making for your organization. However, that still means you made a bad hire which costs you money no matter what.
On the other hand, if the people leaving were hard to find key contributors or key components of your succession plan it is far more worrisome. These are the departures that really cost.
Likely you have some of each.
High turnover hurts your organization in many ways.
First it means you are spending money on non-core activities – money that could be better spent on other activities within the organization.
High turnover diverts your HR department (and other departments that are affected) from its strategic role and results in a high number transactional activities for both HR and payroll. Transactional activities (paperwork, data entry, etc.) are needed but add very little value to the organization in the long run. They reduce your staff’s available time for other more strategic work.
High turnover is distracting for existing employees as it causes disruption in the work environment even if it is weaker employees who are leaving. Furthermore, existing employees start to question why they remain as they are often suffering the brunt of the extra work as they wait new recruits. It is a morale reducer.
I know my turnover is higher than I would like but what can I do about it?
The Harvard Business Review reports a 5% increase in employee retention results in a 10% decrease in costs. Focused work in this area will reward the effort.
You can tackle turnover from two sides: existing employees and new recruits. You need to make sure your high value, top performers are satisfied with their job content, environment, financial, and non- monetary rewards so that they are not tempted to consider other opportunities. Additionally you must identify any root causes of employee turnover.
From a recruiting perspective you must ensure that you make the very best hire considering fit and competencies every time so that the time, money and energy devoted to that process are well spent. This not only requires good sourcing and great interviewing, but also reliable and effective normative testing. Normative testing, as opposed to Ipsative testing, can help you understand so much more about a potential employee that doesn’t necessarily surface in the interview. Furthermore it can help you manage the employee more effectively once hired.
The more turnover costs in a particular role, the more effort you should put into making sure you hire well for that role. Then ensure the right mechanisms are in place to create long tenure.
The solutions to reduce employee turnover take time, but work in the long run when you are committed to them. As you refine your recruiting practices, focus on keeping the key top performing employees and worry less about those with whom you will likely part ways with in the long term. Bottom line, reducing turnover will result in significant improvement in company profitability – something that will be beneficial to all.
- Ranges in literature I reviewed were between 50% of salary on the low end and 300% of salary on the high end. Metrus Group, Teragram Coaching & Consulting.
- Conference Board of Canada 2011-2012 rate