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7.2: The Costs of Turnover

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    23769
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    Learning Objectives

    1. Be able identify the difference between direct and indirect turnover costs.
    2. Describe some of the reasons why employees leave.
    3. Explain the components of a retention plan.

    According to the book Keeping the People Who Keep You in Business by Leigh Branham (Branham, 2000), the cost of losing an employee can range from 25 percent to 200 percent of that employee’s salary. Some of the costs cited revolve around customer service disruption and loss of morale among other employees, burnout of other employees, and the costs of hiring someone new. Losing an employee is called turnover.

    There are two types of turnover, voluntary turnover and involuntary turnover. Voluntary turnover is the type of turnover that is initiated by the employee for many different reasons. Voluntary turnover can be somewhat predicted and addressed in HR, the focus of this chapter. Involuntary turnover is where the employee has no choice in their termination—for example, employer-initiated due to nonperformance. This is discussed further in Chapter 9.

    It has been suggested that replacement of an employee who is paid $8 per hour can range upwards of $4,000 (Paiement, 2009). Turnover can be calculated by

    separations during the time period (month)/total number of employees midmonth × 100 = the percentage of turnover.

    For example, let’s assume there were three separations during the month of August and 115 employees midmonth. We can calculate turnover in this scenario by

    3/115 × 100 = 2.6% turnover rate.

    This gives us the overall turnover rate for our organization. We may want to calculate turnover rates based on region or department to gather more specific data. For example, let’s say of the three separations, two were in the accounting department. We have ten people in the accounting department. We can calculate that by

    accounting: 2/10 × 100 = 20% turnover rate.

    The turnover rate in accounting is alarmingly high compared to our company turnover rate. There may be something happening in this department to cause unusual turnover. Some of the possible reasons are discussed in Section 7.1.1 “Reasons for Voluntary Turnover”.

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    Figure \(\PageIndex{1}\): United States Yearly Turnover Statistics, 2001–11 Source: Data from Bureau of Labor Statistics, “Job Openings and Labor Turnover Survey,” accessed August 11, 2011, http://www.bls.gov/jlt/#data.

    In HR, we can separate the costs associated with turnover into indirect costs and direct costs. Direct turnover costs include the cost of leaving, replacement costs, and transition costs, while indirect turnover costs include the loss of production and reduced performance. The following are some examples of turnover costs (Maertz & Campion, 1998):

    • Recruitment of replacements
    • Administrative hiring costs
    • Lost productivity associated with the time between the loss of the employee and hiring of replacement
    • Lost productivity due to a new employee learning the job
    • Lost productivity associated with coworkers helping the new employee
    • Costs of training
    • Costs associated with the employee’s lack of motivation prior to leaving
    • Sometimes, the costs of trade secrets and proprietary information shared by the employee who leaves
    • Public relations costs

    To avoid these costs, development of retention plans is an important function of the HR strategic plan. Retention plans outline the strategies the organization will use to reduce turnover and address employee motivation.

    Table \(\PageIndex{1}\) Turnover Costs
    Direct Indirect
    Recruitment costs Lost knowledge
    Advertising costs for new position Loss of productivity while new employee is brought up to speed
    Orientation and training of new employee Cost associated with lack of motivation prior to leaving
    Severance costs Cost associated with loss of trade secrets
    Testing costs
    Time to interview new replacements
    Time to recruit and train new hires

    Costs of Turnover 

    This video provides an overview of the cost of employee turnover.