The Ridiculously High Cost of Employee Turnover

July 11, 2012 Darcy Jacobsen

“Inconceivable!” That’s one of my favorite lines from the classic movie, The Princess Bride, and I have to admit it’s been running through my mind a lot over the past few weeks, as we’ve been trying to calculate the astronomical cost of employee turnover.

The source of my astonishment was the creation of an infographic for our new paper that shows the incredible costs of turnover. (It’s called 5 Reasons You Need Strategic Recognition). One might think that an infographic like this would be simple, but it turns out, as anyone knows who has really tried to do it… the cost of turnover is not an easy number to calculate. We spent literally hours talking over the numbers and calculations to make sure that the end result would reflect reality for our customers.

Every way we sliced the numbers, even with exceedingly conservative (i.e., ridiculously low) per-person costs resulted in a shocking expense associated with high turnover. The totals dwarfed the cost of even the most robust recognition program. Programs that hit industry benchmarks and cost 2% of payroll spend wouldn’t hold a candle to how much employee turnover is costing companies. And when you consider that those programs can boost retention up to 31%, the business case for recognition is astounding.

Creating this graphic was a real education for me. So much work went into it that I thought I would take a few minutes here on the blog to walk you through how we got the calculation that we did..

Here’s the final product:

Calculating Turnover Costs Infographic

Company Size: Our customers tend to range in size from 1,000 to 350,000 employees, therefore we figured 10,000 employees was a reasonable number.

Breakdown: Since many companies seem to break down at a 70/20/10% level, in terms of manager/employee ratio, we thought this was a safe bet for our ACME Average Company.

Average Salaries: We had a look at the Bureau of Labor Statistics numbers and did some averaging and generalizing and arrived at a conservative estimate of a $30/70/150K breakdown for salaries.

Cost to Replace: Here’s where it starts to get more complex. In our paper we noted that SHRM has estimated the cost to replace an employee at $3,500, which was the lowest estimate of 17 organizations surveyed, but we agree with experts who suggest that the cost to replace really does vary by role. Still, the cost to replace even a minimum wage employee, when you factor in time lost, training time, interviewing and advertising investment, etc. is significant. It goes up exponentially when an exhaustive talent search is needed. In the end the estimate we thought captured the most nuance was a chart published in this paper by the Jack Phillips ROI Institute. To save over-complication we averaged the costs into a 75% of annual salary turnover cost.

❺ Annual Turnover %: While the US Labor Bureau reports average turnover costs at 38%, we thought that was a little excessive for our example. In their recent study of workplace psychology, the American Psychology Association estimated turnover at the very best companies to be 11%. We thought that most companies would find the high cost at even a low 11% to be illuminating, so we chose that number.

Then it was all over but the calculating. We determined that if you had 10K employees @ those given annual salaries, with a cost to replace at 75% of salary, at an 11% turnover rate, your annual loss would equal $X, and in this case $X is a whopping $41.3 million.

If that number seems impossibly high, and your company has new recruits beating down the doors so you spend little on recruitment, note that even if everyone in the company made entry level wages and cost only $3,500 to replace, the turnover would still run you $3 million annually.  You can see why I was blown away.

When you do the numbers this way—substituting real metrics for our estimates—for your company, even in the most conservative manner possible, I think you’ll be really surprised what talent loss is costing you, even before you factor in the intangibles. When you consider that strategic recognition can boost those retention numbers dramatically, it’s amazing there are any companies out there without programs. Yet according to the latest Mood Tracker survey, 46% of employees don’t feel they are being recognized effectively.


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