What could possibly be a ¼ million dollar expense yet go unnoticed by Accounting? Employee Turnover (ETO) is the answer. If you are like me, you have a hard time believing ETO can cost an organization this much. Well, I took out my slide-rule and crunched the numbers. After a critical review, the result I came to was in fact a number higher than $250K. This CIO letter will help you understand ETO and give you some pointers on reducing it.
Just what is employee turn-over and how is it calculated? Employee turnover occurs when employees leave voluntarily and the position must be re-hired for. The ratio is used by HR and management to compare year over year within an organization and compares their numbers against an industry average. It’s typically used as a proxy for organizational effectiveness. It can also be used to indicate a company’s success with hiring and retention practises.
After years of working with this ratio, it has proven to me to be one of the most costly and seemingly intractable human resource challenges confronting organizations. Turnover affects the bottom line, whether you see it or not. Turnover is a silent but effective profit killer. The ratio is calculated by dividing the number of people who voluntarily leave during a year by the total number of employees. For example, if your department has 100 employees and 10 people leave, your turn-over rate is 10%.
In Canada the average ETO in all industries ranges from 10%-16%. In the U.S., from 2000 to 2008, the average turnover rate was 13.3%. However, rates vary widely over different job sectors. For example, Utilities industry turnover is 6.5% whereas healthcare is 15.5%. The Technology industry is in the middle at 10.8%.
Improving employee retention can have a significant positive impact on an organization. The Harvard Business Review reports that a mere 5% increase in employee retention results in a 10% decrease in costs, while productivity increases from 25% to 65%. Before we can start to manage these costs we need to be aware of what theyare. Some obvious costs come quickly to mind, but there are also numerous others you may never have considered that can have a serious impact on your bottom line.
Here is a breakdown of costs:
Separation process costs: costs related to the time and expense required to exit an employee from the Organization. It typically includes: exit interview cost, cost of administrative issues related to separation, and cost of separation pay if applicable. Plus all the IT costs like security, keys, computers, files, and phones that are required after the person leaves.
Recruitment cost: cost of sourcing, interviewing, and hiring expenses of the replacement. It may include advertising expenses, agency fees, interview costs, cost of tests or exams and the difference between the new and separated employee’s annual compensation.
Training and orientation costs: are those related to the on-boarding process of a new employee and the training expenses occurred when getting new recruits up to speed.
Finally lost productivity costs: Typically includes costs of additional overtime, cost of additional temporary employee, cost of lost customers or profits, cost of lower productivity because of the negative feeling remaining employees may harbour and cost of additional employee leaves related to the termination.
Here is some math: Assume the average time to replace is 10 weeks, training is 10 weeks until full productivity, and average separation cost is 2 weeks. Then an employee earning $52,000 per year will have about $22,000 in lost productivity. Assume a team of 50 employees that has an ETO of 10% will result in losing 5 employees – costing a total of $110,000. The cost of recruitment typically is ½ year’s salary. When you add all these costs you arrive at $242,000 for only 5 employees per year. Change a few variables and the cost can be as high as 150% of an employee’s salary.
Lowering turnover can be tackled from 2 sides: Your current employees, and Hiring new employees:
1. Manage workload
- Make sure your team is not over taxed. Stay late a few nights to see who is constantly staying late to get work done.
2. Recognize good performance
- Rewarding and recognizing people for doing good work lets them know they are appreciated. Tangible and intangible rewards are a great way to show management appreciation for workers who excel.
3. Training and promoting from within
- Always a great policy to improve staff productivity and will also increase moral and employee loyalty.
- Listening gives your employees a sense of empowerment. They understand they are not alone and powerless when you listen. But you have to genuinely listen.
5. Exit interviews
- Learn why they are leaving so you can prevent the same problem from reoccurring.
6. Monitor total compensation
- Make sure your organization compensates staff at market rates.
1. Contract to Hire
- Try before you buy. This allows both you and candidates to ensure there is a fit.
2. Personality screening
- Match your company profile with your target hiring group, not just skills but also for personalities.
3. Team interviewing
- Group interviews allow the team to buy in and support hires.
4. Tenure Bonuses
- Offering bonuses to staff for staying with the company over a set period can help employees get over hurdles. Recognizing anniversaries with a simple reward makes the employees proud of their tenure.
Employee turn-over is never a cause and effect but more about system feedback. Changing a high turn-over environment is not easy, but small changes can have huge benefits.