How Expensive is Turnover?
If we first consider direct turnover costs, we can see this includes expenses such as exit interviews, administrative functions related to termination, and separation/severance pay.
In an article in the Financial Edge, author Annie Mueller describes how even an $8 per hour employee can cost the company $3,500 in turnover expenses.[i] Then there are vacancy costs, which include line items such as net cost/savings incurred due to increased overtime or temporary employees needed to complete the tasks of the vacant position. Finally, there are replacement costs comprising attracting applicants, entrance interviews, testing, reference checks, cost of recruitment agencies, travel/moving expenses, pre-employment administrative expenses, medical exams, and acquisition and dissemination of information. Don’t forget training costs. In 2007, a report in Training magazine described how companies spend on average $1,200 per employee per year on training costs.
But the expenses of turnover don’t simply end there. Turnover affects productivity as well. Research has shown that when new hires join organizations, it takes them time to learn and perform tasks to the desired productivity level set by the organization. Astonishingly, this drop in productivity due to the new hire is the highest cost of turnover.
The research shows that even good workers experience a drop in the level of job performance following employment. Business advisor William G. Bliss describes how in the first month productivity is about 25%, loss of 75% of the employee’s salary.[ii] Then in about 1-3 months productivity grows to 50%, loss of 50% of employee’s salary. It is only around 3-5 months that finally the employee can start reaching closer to full productivity.
A survey of 610 CEOs by Harvard Business School found that the typical mid-level manager needs actually 6.2 months to reach their break-even point.[iii] This means that in addition to the thousands of dollars wasted from separation expenses, the cost of the drop of productivity from the new hire can double the expense.
So bottom-line, what are we really talking about here?
Bliss calculates these costs to easily reach 1.5 times the employee’s annual compensation and up to 2.5 times the annual compensation for managers and sales positions. So if an employee’s annual salary is $50,000, then the cost of that employee’s turnover would be around $75,000. If you had a manager or sales position at around $80,000 annual salary, turnover could be as high as $200,000.
Bliss explains that for a mid-sized company of 1,000 employees who had employees with an average annual salary of $50,000, and who had a 10% annual rate of turnover, the annual total turnover cost would total $7.5 million.
We never really think of disengagement as really that harmful to an organization but considering that disengagement leads to turnover costing companies millions of dollars annually, preventing disengagement in a firm should be a top priority for every executive and manager.
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