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Leaders who create an environment which increases the level of employee engagement, not only experience a significant effect on improving the organization's long term sustainability by delivering greater value to the customer improving the overall value proposition, it has a direct impact on reducing turnover costs through higher retention as well.

When folks feel their input is of value, have challenging work, participate in decision making, and are constantly learning, to name just a few, their level of involvement goes up.

This time of year, many companies are doing their budgets and planning for next year. Do you calculate turnover as a part of the planning process? Or better yet, do you examine those things which would increase the level of employee engagement, thereby reducing real costs and improving the bottom line?

Here is the first of two parts on how you can begin to calculate the real cost of turnover in your organization. The second part will follow in next month's newsletter.

 

David Hildreth

BOOST Associates

What Is the REAL Cost of Your Employee Turnover/Attrition?

If you are like most people in business, then you know the pain of employee turnover. However, do you know the REAL cost of your employee attrition? I'm not talking about the number someone from Finance provided you years ago. I'm talking about calculating the REAL cost to your business today. The following information is designed to help you identify these costs and develop a plan to reduce these costs.

 

The following comprehensive checklist is designed to be used with any organization. This is intended to make this as easy as possible regardless of your size of organization. You may need to add or remove some of these items to your formula. To determine the costs, have the hourly and weekly cost of fully loaded payroll costs (salary plus benefits) of the vacant position, the management staff, the recruitment staff and others as outlined below.

 

It should be noted that the costs of time and lost productivity are no less important or real than the costs associated with paying cash to vendors for services such as advertising or temporary staff. These are all very real costs to the employer.

 

Most Importantly: How does this impact your customers?

 

These calculations will easily reach 150% of the employee's annual compensation figure. The cost will be significantly higher (200% to 250% of annual compensation) for managerial and sales positions.


To put this into perspective, let's assume the average salary & benefits of employees in a given company is $40,000 per year. Taking the cost of turnover at 150% of salary, the cost of turnover is then $60,000 per employee. For the mid-sized company of 150 employees with a 20% annual rate of turnover, the annual cost of turnover is $1,800,000 million! A 2% reduction can bring this number down to $1,620,000 resulting in a savings of an additional $180,000.

 

No matter the size of your company the math can be applied similarly. In smaller companies, those in the 10-50 employee range may actually incur a slightly higher cost.

 

You will never remove all of your employee attrition because some of it is inevitable or necessary. However, reducing turnover has many benefits.

 

So, what are YOUR real employee attrition costs? Here are some of the items you need to include in your calculation: (Again, all will not apply in every situation)

 

Calculate:

  1. The cost of the person(s) who fills in while the position is vacant. This can be either the cost of a temporary or the cost of existing employees performing the vacant job as well as their own. Include the cost at overtime rates.

  2. The cost of lost productivity at a minimum of 50% of the person's compensation and benefits cost for each week the position is vacant, even if there are people performing the work. Calculate the lost productivity at 100% if the position is completely vacant for any period of time.

  3. The cost of conducting an exit interview to include the time of the person conducting the interview, the time of the person leaving, the administrative costs of stopping payroll, benefit deductions, benefit enrollments, COBRA notification and administration, and the cost of the various forms needed to process a resigning employee.

  4. The cost of the manager who has to understand what work remains, and how to cover that work until a replacement is found. Calculate the cost of the manager who conducts their own version of the employee exit interview.

  5. The cost of training your company has invested in this employee who is leaving. Include internal training, external programs and external academic education. Include licenses or certifications the company has helped the employee obtain to do their job effectively.

  6. The impact on departmental productivity because the person is leaving. Who will pick up the work, what work will suffer, what departmental deadlines will not be met or delivered late. Calculate the cost of department staff discussing their reactions to the vacancy.

  7. The cost of severance and benefits continuation provided to employees who are leaving that are eligible for coverage under these programs.

  8. The cost of lost knowledge, skills and contacts that the person who is leaving is taking with them out of your door. Use a formula of 50% of the person's annual salary for one year of service, increasing each year of service by 10%.

  9. The cost impact of unemployment insurance premiums, as well as, the time spent to prepare for an unemployment hearing, or the cost paid to a third party to handle the unemployment claim process on your behalf.

  10. The cost of losing customers the employee is going to take with them to their new position or the amount it will cost you to retain the customers of the sales person, or customer service representative who leaves.

  11. Subtract the cost of the person who is leaving for the amount of time the position is vacant.

These REAL costs will help you determine your TRUE costs of employee attrition. If you would like to use a simple calculator to help you, the University of Wisconsin Extension Office offers the calculator at the below link:


http://www.uwex.edu/ces/cced/economies/turn.cfm#calc 

 

How important is it to you to know your company's current level of employee engagement and if something can be done to improve it?
I hope you have enjoyed what you've read! Please feel free to with a colleague or friend. We value your feedback, so please send any suggestions or comments to [email protected]. See you next month with special invitations to events, motivational quotes, and more useful articles and tips to help you on your path to success!

 

Sincerely,

 

David Hildreth
BOOST Associates
In This Issue
What Is the REAL Cost of Your Employee Turnover/Attrition?
David Hildreth
David Hildreth

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"Recently, I was asked if I was going to fire an employee who made a mistake that cost the company $600,000.  

 

No, I replied, I just spent $600,000 training him.  

 

Why would I want somebody to hire his experience?"

 

~ Thomas J. Watson

CEO of IBM 
















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