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Business LibreTexts

7.1: The Costs of Turnover

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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 “Successful Employee Communication”.

    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”.

    Figure 7.1 United States Yearly Turnover Statistics, 2001–11