How Much Does Your Employee Turnover Cost?

By William H. Pinkovitz, Joseph Moskal and Gary Green

New-Online Employee Turnover Calculator

Many surveys say that the number one issue facing business is finding and keeping good employees. Nationally, the average annual employee turnover rate for all companies is 12 percent. In our 1996 Wisconsin study, we found that 75 percent of the demand for new employees is simply to replace workers who have left the company.* The good news is that there are many proven methods to help you do a better job of finding and keeping good employees. The bad news is well known to every manager who has ever suggested increasing employee training, developing formal job descriptions, implementing exit interviews for departing employees, or establishing more rigorous search and screen procedures. They all cost money. Employee turnover (replacing employees) also costs money. We all know that. We also know better systems and training can help us find better employees and keep the good ones. The dilemma is knowing how much to spend to ensure you're getting an adequate return on your investment in people. The following worksheet is a start. It will help you calculate the cost of employee turnover for your company. Knowing the cost of losing and then replacing an employee will help you determine how much you can afford to invest in keeping them. It will also help you analyze whether your investment in keeping your employees is adding to your bottom line. The accompanying worksheet was adapted from formulas developed by Wayne Cascio (see Costing Human Resources, PWS-Kent, 1991) and H.L. Smith and W.E. Watkins (see"Managing Manpower Turnover Costs" in Personnel Administrator, vol. 23 #4, 1978). Smith and Watkins identified three major cost categories: separation costs, replacement costs, and training costs. Cascio added a category to include the performance differential between the employee who leaves, and the replacement. We've added another category, vacancy costs, to account for the added costs/savings realized while the position is vacant. Separation costs include:

the costs incurred for exit interviews; administrative functions related to termination; separation/severance pay; and any increase in unemployment compensation.

Vacancy costs include the net cost/savings incurred due to increased overtime or temporary employees needed to complete the tasks of the vacant position. Replacement costs include the cost of:

attracting applicants; entrance interviews; testing; travel/moving expenses; preemployment administrative expenses; medical exams; and acquisition and dissemination of information.

Training costs include both formal and informal training costs. Performance differential recognizes the difference in productivity between those who leave and their replacements (Cascio, 1991). Typically separation, replacement, and training are all net costs. However, vacancy costs and the performance differential can result in either a net cost or savings. For example, if overtime and/or temporary employees' costs are less than the employee would have earned while the position is vacant, a vacancy savings occurs. If the new employee's performance exceeds the predecessor's, a net performance benefit can result. It's important to note that only tangible costs are included on this worksheet. Intangible costs are just as real and often much greater than the costs we can quantify. Examples of intangible costs include: the uncompensated increased workloads other workers assume due to vacancies, the stress and tension turnover causes, declining employee morale, and decreased productivity due to loss of work group synergy. These costs are very real. However, they are difficult if not impossible for most businesses to measure. Just be aware that completing this worksheet will provide you with only a portion of the total cost of employee turnover. When completing this worksheet, include all quantifiable costs -- salary, materials, and expenses. A final reminder: This is simply an example, not your own customized worksheet. Modify, add, or delete categories as appropriate for your business. The example is included to help you get started. *For more information about our face-to-face interviews with 78 companies (which represent over 20 percent of Rock County, Wisconsin's 72,000 employees), you can contact the authors at this e-mail address: bill.pinkovitz@uwex.edu.

THE COST OF EMPLOYEE TURNOVER Please enter numbers with no spaces or commas, decimals are ok. This program only works on JavaScript-enabled browsers.(Internet Explorer/Netscape 3.0 or higher) Separation Costs
0

cost of exit interviewer's time.....................................................................................$

+ cost of terminating employee's time.........................................................................$

+ cost of administrative functions related to termination...............................................$

0

+ separation pay.......................................................................................................$

+ increase in unemployment tax.................................................................................$ Vacancy Costs

cost of additional overtime.........................................................................................$

+ cost of additional temporary help............................................................................$

- wages and benefits saved due to vacancy................................................................$ Replacement Costs

preemployment administrative expenses......................................................................$

0

+ cost of attracting applicants.....................................................................................$

+ cost of entrance interviews......................................................................................$

+ testing costs............................................................................................................$

+ staff costs...............................................................................................................$

+ travel and moving expenses.....................................................................................$

+ postemployment information gathering and dissemination costs.................................$

0

+ cost of postemployment medical exams...................................................................$ Training Costs

cost of informational literature.....................................................................................$

+ formal training costs................................................................................................$

+ informal training costs.............................................................................................$ Performance Differential

differential in performance costs/benefits....................................................................$

Reset

TOTAL TURNOVER COSTS PER EMPLOYEE........................................................$

Adapted from Costing Human Resources, by Wayne Cascio, 1991.

THE COST OF EMPLOYEE TURNOVER Sample Completed by ACE Manufacturing

Separation Costs cost of exit interviewer's time (15 minutes preparation; 30-minute interview; and 15-minute follow up @$18 per hour)................................................................ $18 + cost of terminating employee's time (30 minutes @$9.50 per hour).......................................5 + cost of administrative functions related to termination (2 hrs @ $12).................................... 24 + separation pay (1 week @ $320).......................................................................................320 + increase in unemployment tax (marginal rate increase + add tax) ...................................272 Vacancy Costs cost of additional overtime (20 hours@ $14.25 per hour for 3 weeks)................................ 855 + cost of additional temporary help (20 hours @ $11 per hour for 2 weeks)....................... 440 - wages and benefits saved due to vacancy (40 hours @ $9.50 per hour for 3 weeks) ....(1,140) Replacement Costs preemployment administrative expenses (3 hours @ $12)....................................................... 36 + cost of attracting applicants (ads, agencies, and staff time) ...............................................162 + cost of entrance interviews (5 interviews x 1 hour x $16) ....................................................80 + testing costs (aptitude, skill, drug--1 hour @ $16 + $30) ...................................................46 + staff costs (staff meetings -- one 30-minute meeting with 3 people @ $16 per hr) ............24 + travel and moving expenses (interviewees and new employee) ..............................................0 +postemployment information gathering and dissemination costs (payroll, benefits, policies, and procedures, employee records, 2 hours @ $14 + 2 hours @ $9.50) ...................47 + cost of postemployment medical exams ......................................................................75 Training Costs cost of informational literature (manuals, brochures, policies) ..................................................10 + formal training costs ..............................................................................................................50 + informal training costs (OJT, mentoring, socializing - 1 day @ $16 per hour + 1 day @ $9.50 per hour) ...........................................................................................204 Performance Differential differential in performance costs/benefits (salary differential, vacancy lag, learning curve) ..760

TOTAL TURNOVER COSTS PER EMPLOYEE ...............................................................$2,288

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