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The loss of organisational knowledge, skills and contacts associated with the loss of experienced employees has a significant impact on revenues, productivity and competitiveness.
Staff turnover is very disruptive for a business. Numerous sources estimate the costs of staff turnover at between 50% and 150% of the staff member’s remuneration.
Staff turnover impacts in three areas:
- Lost sales/reduced services levels
- Reduced productivity
- HR and management overhead
Lost sales/reduced service levels
Employee turnover impacts customer service when someone who has an intimate understanding of their client moves on and a new person has to go through an extended learning period. In the public or not-for-profit sectors this could result in reduced, or less efficient, service levels for clients. In the private sector this will invariably result in lost sales.
Lost sales can be calculated by factoring in:
- The weeks that a sales job is vacant multiplied by the average weekly sales of the previous incumbent, plus
- The reduced sales generated by the new employee compared to the previous incumbent multiplied by the number of weeks to get up to the sales levels achieved by the previous incumbent
- The lost sales can be substantial depending on the product knowledge, skill levels and network required to be successful in that specific field. It would not be uncommon for the cumulative impact to be the loss of many months of sales.
Upon completion of initial training, employee productivity is typically very low to start with and then gradually increases over some months. During this time, a supervisor or co-worker often oversees the new employee, affecting their own productivity and the productivity of the entire team adversely. Allowance should also be made for the cost of mistakes the new employee makes in getting up to speed. Depending on the uniqueness and complexity of the role, reduced productivity levels can extend over many months.
HR and management overhead
There are substantial HR and management costs associated with managing the separation, recruitment, onboarding and training process. Some of these are highlighted below:
- Separation – exit interview, severance benefits, administrative expense in stopping payroll, superannuation, taxation, other benefits, temporary employee or fill ins, and management planning
- Recruitment – advertisements and agency costs, internal recruiter’s time to: understand the position requirements, review applications, prepare for interviews, conduct interviews, conduct reference checks, make the offer and notify unsuccessful candidates
- Onboarding and training – company orientation costs, job and departmental training and manager’s time in developing a relationship with the new employee
A staff turnover calculator is provided on the Equal Opportunities for Women Agency website (www.eowa.gov.au). Using the calculator to estimate the costs associated with replacing an administrative position with an annual salary of $70,000 p.a. resulted in the following:
|Employee filling-in while the position is vacant (8 weeks @ $1,400 pw)||$11,200|
|Lost productivity of fill-in employee||$2,800|
|Conducting an exit interview||$500|
|Manager's time for managing exit process, recruitment, onboarding & training (2 weeks @ $2,800 pw, spread over 6 months)||$5,600|
|Training provided to departing employee during employment period||$5,000|
|Lost departmental productivity (reduced by 5% in first two months)||$2,800|
|Severance and benefits continuation (4 weeks of salary)||$5,600|
|Lost knowledge, skills and contacts (50% of annual salary)||$35,000|
|Separation administrative functions (1 week @ $700 pw)||$700|
|Decreased employee productivity (25% lower in first 6 months)||$9,100|
|Minus the savings in salary for departing employee (8 weeks @ $1,400 pw)||-$11,200|
The assumptions used in this calculation arrived at a total cost of $67,100 for turnover of one position on a salary of $70,000 (96%). Costs would be significantly higher than this if an external recruitment agency had been used and if the complexity of the role required more than six months to get up to speed.
Competitiveness and profitability
While turnover costs are significant at the individual and department level, they are even more significant at the company level and national economy level. At current wage rates, it is highly likely that staff turnover is costing any company with 100 or more employees over $1 million per annum (assuming a staff turnover rate of over 15%). In a study published in 2008, the Australian Human Resource Institute estimated that the cost of staff turnover amounted to $20 billion per annum across the economy.
With most sectors of the economy facing increased levels of competition, stagnant demand and low margins, retention of experienced and high performing employees becomes even more critical. Many employees stay with their organisation for between five and six years, implying that staff turnover typically ranges between 15% and 20% per year. Increasing the average tenure of employees by one or more years will have a major impact on productivity, costs and profitability.