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Understanding and Calculating the Cost of Turnover

Written by: John M. Beane

Article Overview: A brief look at how one determines their turnover rate. Another article details the causes of turnover and how to reduce it's impact on your organization.

Understanding and Calculating the Cost of Turnover

Employee turnover is a costly disease that goes undetected in many firms. Most CEOs just accept it as part of the cost of doing business. But, successful CEOs recognize the cost of, understand the reasons for, and find ways to lower turnover as much as possible. Let’s consider the cost of just losing one person. Imagine that this person is a good employee, not great, just good. They get their job done with a minimal amount of fuss and bother. They make around $30,000 a year and receive another 25% in benefits. So, their total cost to the firm is $37,500 per year.

Let’s assume they leave and you have to find a replacement. Then, the other members of your staff have to pick up the slack but they are busy so things are not done quite as well as they should be. During this time, it is easy for something important to be overlooked and left undone that could cost you later.

You run an ad looking for a replacement and begin the interviewing process. After a month or two, a candidate is finally selected and begins to learn the job. In six months or so, they can do the work at the same level of the old employee. What is the cost associated with this? In the past, low-level employee departures could cost up to 25% of their annual salary with professionals costing up to 1.5 times their salary. Today, it could be at least 50% up to twice the annual salary.

Do the following to calculate what your turnover is and the cost of this turnover last year:
- Determine how many people you employed on average for the year.

- Determine how many people left your employment last year.

- Divide the average employment number for the year into the number of the employees who left and you have your annual turnover. If you want to know a monthly number divide by 12.

- Divide last year’s payroll by the average number of employees to determine the average annual salary.

- Multiply the average annual salary by the number of employees who left.

- Multiple that number by .35 (we’ll be conservative) and you likely have about what turnover cost you last year.

This does not include what we like to call the ‘cost of lost opportunity’. This is what the existing employee may have done to improve your company since they know it better than the new employee. It may take the new hire several years to get to the same level of knowledge as the one you lost.

An organization can only be as good as its people. Having the right people in the right job is what sets one company apart from its competitors in the marketplace. In the book, Good to Great, Jim Collins says great companies have a knack of putting the right people on the bus and, then once on board, into the right seats. Do you?

This sounds easy but anyone in business knows that it is not. That is where we can help you by utilizing our expertise. A validation study of a convenience store chain that used our methods showed it had an 89.3% reduction in monthly turnover, saving from $42,417.50 to $92,686.25 per month! It went from 172% turnover to just 19% in 18 short months!

A large metropolitan hospital reduced it's critical nursing turnover from 65% to 15% in just 18 months using our methods.

What if you could save $10,000, $5,000, or just $1,000 a month? What would that mean to your organization? Remember, this money usually just falls to the bottom line since it was not actually captured anywhere on your profit and loss statement.

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Article Tags: annual salary, annual turnover, ceos, costly disease, departures, doing business, employee turnover, fuss, job, level employee, payroll, six months, slack



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