Cost of employee turnover: How to measure, understand and avoid it

Cost of employee turnover: How to measure, understand and avoid it

Cost of employee turnover: How to measure, understand and avoid it

Cost of employee turnover: How to measure, understand and avoid it

Cost of employee turnover: How to measure, understand and avoid it

Unemployment recently reached a 48-year record low of 3.4% in Australia, a record low of 3.7% in the UK, and 3.5% in the US. This reflects a surplus of jobs, shortage of talent, and correspondingly high rates of turnover or ‘mobility’, which is currently sitting at around 9.5% for the general workforce and 22% for professional roles, according to the ABS. In some industries, competition for staff is so high that companies are resorting to offering sign-on bonuses of up to $15,000.

However, with organizational costs also rising, it’s essential to know just what employee turnover is costing you. To help you crunch and understand the numbers, in this post we’ll cover:

  1. How to measure turnover
  2. How to calculate the cost of turnover
  3. How to understand and avoid turnover

1. How to measure employee turnover

Before we get into the technical side of things, here’s a quick terminology refresh.

What is employee turnover?

Employee turnover (often used interchangeably with employee attrition) refers to when employees leave voluntarily (e.g., for a new job, retirement, study) or involuntarily (e.g., termination, redundancy) and the company seeks to rehire for their position.

How to measure employee turnover

To measure turnover, you will need to calculate your employee turnover rate.

Employee turnover rate: the number of employees who leave a company within a specified time period (e.g., 12 months), divided by the total number of employees or average headcount. Then multiply by 100 to express as a percentage.

Employee turnover rate = (# of employees who have left ÷ total # of employees) x 100

So, if you’ve had 12 employees leave out of a total of 80 employees then your annual turnover rate is 15%.

We’ll explore what a high turnover rate could mean later in this post, but first, let’s take a look at what employee turnover might be costing you.

Note: Employee turnover rate is also known as “attrition rate” or “churn rate”.

2. How to calculate the cost of employee turnover

Download our easy-to-use cost of turnover calculator which will do the next part for you (it’s free!).

1. Add up your turnover-associated costs

Let’s say you’re replacing a software engineer whose salary is $100,000. On top of the overt costs of hiring this new employee (e.g., advertising, recruitment), there are many indirect and hidden costs in the hiring and onboarding process that can start to stack up – see if any of the examples below apply to you.

Salaries

Include salaries for everyone involved in hiring, onboarding, and training the new employee. For example:

  • New employee salary e.g., $100,0000 = $54.82 hourly rate
  • Supervisor salary e.g., $150,000 = $82.24 hourly rate
  • HR officer salary e.g., $ 70,000 = $38.38 hourly rate

Pre-hire costs

  • Recruitment agency fees and commissions (usually 10-15% of new hire’s salary) = $10K
  • Advertising for role e.g., $500
  • Opportunity cost of time spent interviewing candidates e.g., 6 hours of interviews =
    • Supervisor: 6 hours x $82.24 = $1,480
    • HR officer: 6 hours x $38.38 = $691
  • Testing costs (e.g., psychometric test) = $350
  • Administration (e.g., payroll, reference checks, testing –  usually 3-7 days work): 24 x 38.38 = $921
  • Opportunity cost of unfilled role/lost productivity of resigning employee (e.g., 3 hours a day for 2-week notice period) 10 x $54.82 = $548

Post-hire costs

  • New employee’s salary during onboarding period (min 2 weeks/76 hours) $54.82 x 76 $4167
  • Orientation and on-the-job training
  • Wage cost of supervisor while providing training (hourly rate x 3, minimum 1 week) ($82.24 x 3) x 38 = $6250)
  • Wage cost of new employee doing on-the-job training (hourly rate x 3, minimum 1 week) ($54.82 x 3) x 38= $9,375
  • Any other mandatory courses, qualifications and annual training budget

2. Calculate the cost of turnover of a single employee

Sum all the costs above and that’s the cost of one employee leaving: $34,282 for a single employee.

3. Calculate your organization’s cost of turnover 

Now, multiply the cost of the single employee leaving by your turnover rate to get the total turnover cost. Using our turnover rate of 15% from before, that’s:

15% x 34,282 = $411,384

Jaw on the floor? The good news is that the first step to addressing the cost of turnover is knowing the cost! Read on to find out what you can do about it.

3. Understanding and avoiding employee turnover

There are a few things to consider when analyzing staff turnover. First and foremost, your employee turnover rate isn’t necessarily “good” or bad”; it’s all about context (similar to an eNPS score). Consider how the following things might be impacting turnover.

  • How is your business changing, and what are your growth goals? e.g., if you’re downsizing, then a high turnover rate makes sense.
  • How has your turnover rate increased or decreased over time?
  • How does your turnover compare to competitors?
  • What is turnover like in your industry? e.g., some industries with higher numbers of junior, temporary, or contingent workers (like hospitality) generally have higher turnover.
  • What’s happening in the broader market? e.g., talent supply, and economic and environmental factors.
  • Lastly, don’t forget that some turnover is good! e.g., when underperforming employees or those of a poor cultural fit leave.

What does a high turnover rate mean?

Once any external factors contributing to turnover have been accounted for, then we need to investigate potential internal drivers of attrition. People analytics tools are excellent at helping diagnose turnover reasons, and intelliHR can even pinpoint where the issues are occurring (e.g., in particular teams, at specific pay grades, or at certain points in the employee lifecycle).

Reasons for turnover

A high turnover rate could point to issues across any, or multiple, of the following areas:

  • Employee engagement
  • Recruitment and ineffective hiring
  • Culture, team dynamics or managers
  • Onboarding
  • Career development and opportunities for progression
  • Salary and benefits
  • Leadership
Attrition Analysis | Offboarding Feedback | intellyHR

Interestingly, recent research by McKinsey & Company highlighted the discrepancy between the reasons managers perceived staff were leaving, and the employee’s actual reasons: Managers reported compensation, work-life balance and physical/emotional health as the top three reasons, whereas employees cited not feeling valued by the organization, managers and not feeling a sense of belonging.

Therefore, to properly understand turnover, it’s vital to collect feedback from employees at exit interviews and all the way throughout the employee journey. Check out how intelliHR’s engagement and listening tools can help you do this.

Avoiding excessive turnover

Knowledge is power, and once you understand where your turnover is coming from, then you have the power to do something about it.

One key takeaway from McKinsey’s & Company’s findings is that the employee-cited reasons were all people-centric and emotionally driven. Thus to avoid excessive turnover, we recommend shifting the focus from how to reduce employee turnover to how to increase employee retention by doing the following three things (check out the posts linked below to learn more).

1. Listen to your employees.  

2. Nurture and recognize top talent.

3. Focus on psychological safety and inclusion. 

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