Employee Turnover – What are the costs? How can you stop it?

printer Printer Friendly Version

Author John Towler, Ph.D.
Original Publication Exchange Magazine

How to reduce employee turnover and churn

There is no question that employee turnover is on the increase. The US Bureau of National Affairs reports that it is at a ten year high. The situation in Canada isn’t any better and in fact, it is expected to worsen. The World Competitiveness Yearbook ranks Canada as 36th out of 47 countries in terms of competitiveness. The USA ranks number one. Canada’s problem is caused by high income taxes and a severe brain drain to the USA.

The size of the problem

Regardless of which side of the border you happen to be on, certain industries are particularly hard hit. The hospitality industry suffers from 100% to 125% annual turnover rates. Fast food companies and retailers regularly struggle to cope with turnover rates that are only slightly lower and high tech firms face disturbingly high rates. High tech is a special case in which rapid changes in development, the lack of trained people and the sheer growth of the industry has contributed to the problem. The annual turnover rates for software developers, programmers and analysts are now running at 38%. System engineer turnover is at 34% and on average, the industry has a 25% change in staff each year.

The costs

The US Department of Labor estimates that even if you pay only $6 an hour, it costs a company $3600 for each employee that leaves. Fast food companies calculate that it costs $1500 to replace a manager and at least $500 for every crewmember that quits. Trucking companies say the cost of replacement can be $5000 and costs in the insurance industry can be as high as $35,000.

These costs can be broken down into direct and indirect costs. The direct costs are easy to calculate. Just use this formula. You only need to know the annual wage.

Take 25% of the annual wage. Calculate the cost of benefits (assume 30% of the wage and take 25% of this) and add the two together.

Annual Wage:
$________ x 25%
= $________

Benefits (Annual Wage:
$________ x 30%
= $________ x 25%
= $________

Total costs per employee:
$________

Now if you really want to scare your financial people, calculate the cost for each salary level and multiply this figure by the number of people who leave each year.

But the bad news isn’t complete. You have to add to this, the cost of lost sales, lost productivity, low morale, lost management time taken up by dealing with problem employees, time involved in recruitment and training, management time spent in the selection process and increased workloads and resentment as co-workers pick up the slack until a new person is hired.

The good news is that there are solutions to the turnover problem.

The Solutions

Identify the factors that contribute to employee turnover. Employee surveys are the best way to obtain this information.

Examine your organization’s recruitment procedures. Identify the critical requirements for each job as well as factors that contribute to a good fit between the person and the organization. Make sure that you are using the latest and best assessment instruments to screen new employees to ensure that you hire the best person and avoid getting someone else’s rejects. Use assessment instruments to determine who is ready for promotion and who has the required skills.

Review your performance appraisal and compensation practices. Faults in either one will lead to worker discontent.

Improve communications. Managers who communicate with employees and pay some attention to them, reap huge rewards. Today’s workers want to know as much as possible about the company, its plans for the future, pending changes, how it is doing and where it is headed. Tell them.

Provide flexible, sensible schedules. The workforce has changed and people need something other than the old 9 to 5, or 8 to 4 time frame. Flex time, working from home, and other arrangements may make sense.

Make your workforce feel appreciated. Employee loyalty has very little to do with a paycheck. People like to feel wanted, appreciated and rewarded.

Review your benefit package. Is a competitor offering more? Does your plan meet the needs of your workforce?

Provide training and educational opportunities. Most people want to be able to do the best possible job, so why not help them acquire the skills that they need to do it? Lifelong learning is a goal for many workers now and this includes courses and topics that may not be job-related.
Employee turnover may be a fact of life, but you can prevent it from getting out of hand. Refusing to deal with it will only make it get worse. Taking a few positive steps will keep it under control, reduce it and save money. What more could you want?

Can turnover really be reduced?

Yes. There are many case studies about successful efforts to reduce turnover. These deal with almost every kind of industry. Here are some examples taken from current human resource and management literature.

1. Doubletree Guest Suites, NYC reduced its turnover rate from 50% to 15% by changing its hiring practices. This involved better scrutiny and assessment of applicants, checking skills, ensuring that new hires fit into the corporate culture and involving more people in the interviewing process.

2. Guardian Industries, an automotive glass manufacturer in Auburn Indiana, used an employee survey to determine employee concerns and then took steps to address critical issues. They reduced their turnover by 50%.

3. Hewitt Associates of Lincolnshire, Ill. report that an employee survey of a 6,000-employee credit-card-processing company was used to isolate the factors that led to a turnover reduction of 38%.

4. A major retail grocery chain was plagued by sudden strikes. They initiated a bi-annual employee attitude survey and have not had a strike since. They report that turnover has been reduced, but have not disclosed actual figures.

John Towler is a Psychologist and the founder of Creative Organizational Design. Please send comments about this article to jtowler@creativeorgdesign.com. For more information, please contact us.

Re-printable with permission.