Ever Wonder How to Estimate Turnover Costs?

You just never know when a conversation will turn to the topic of turnover costs. Here's how the pros are doing it these days. Three factoids from a 2016 Willis Towers Watson report that will come in handy for analysis and planning:

•  It takes between five and nine months for a new employee to achieve full productivity, depending on job level.

•  New employees create a productivity drag on managers and team members. We all know this too well, of course, but we frequently don't take this cost very seriously. In most organizations, new employees adjust to knowledge work relatively quickly. We are them, and they are us, so we know their habits only too well.They may even be considered valuable innovators during the time period that could be considered their orientation. But the productivity drag can cost dearly in teams with volume output or customer experience responsibilities. Once you take this seriously, you can create new, less costly, ways to support the employee and minimize the costs.

•  It's possible to estimate the financial cost of employees at risk of turnover. I'm sure Towers would be willing to use your company's data in a customized analysis, but here's their thought process:

 

 

The research indicates, for example, that the global cost of Professional turnover is 59% of their annual compensation and that the percent at risk of turnover is 25%. Predictable turnover of that size, in that job level, will cost those companies 15% of the annual compensation for that group. The costs at the senior manager level, who leave with considerable institutional knowledge, is much higher at 23% of annual compensation for that high earning group.

Knowing this amount could also help you in your budget negotiations. If you know the dollars at risk, why not campaign for a portion of them to invest in avoiding the turnover? Or maybe you want a certain level of turnover. This approach could help you budget for it.

Worrying about a brain drain, poaching or high growth? Take some data out for a spin!

Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create the DIY guide to compensation leadership, Everything You Do (in Compensation) Is Communications @ https://gumroad.com/l/everythingiscommunication . Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, communications and leadership to topics like the CEO Pay Ratio, performance management and compensation implementation discussions at the Café. Margaret is a Board member of the Bay Area Compensation Association (BACA). Before founding re:Think Consulting, she was a Principal at Willis Towers Watson. 

Comments

[Joe Thompson]

Thank you, Margaret.

There have been several studies that have looked at costs associated with turnover, usually to make the case for retention campaigns (as you noted). Often these studies are advertised as showing the cost of losing a good employee.

However, have you come across any studies that estimate the cost of retaining a bad employee? Other than a few well-publicized quips from Tony Hsieh (Zappos - see, for example, https://www.youtube.com/watch?v=9C36EYM-mWQ), I haven't seen good data.

Yet, we know intuitively that making a poor hiring decision can be exacerbated if the person you hire becomes entrenched in your organization. (Which is another way of saying that retention isn't an end unto itself - we want to retain the right talent, but perhaps not every employee.)

[Margaret O'Hanlon]

Great point, Joe. A quick web scan shows that SHRM and Harvard Business Review have data on the cost of poor hiring decisions, including the point that much of turnover comes from these decisions. If you are looking to promote better new applicant screening, I'm sure there data on the ROI of this investment, especially around behavioral screening.