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How to Really Calculate the Cost of Employee Turnover

by Jul 18, 2014, 12:56 am ET

Employee turnover costs are often described with generic numbers such as “$X,000.00 per employee” or “X% of annual salary” (actual dollar amounts and percentages vary from source to source). It is tempting to go with simple sound bites like these, but keep in mind that they are based on averages. These overall tendencies probably don’t accurately describe your specific organization, department, or team.

The following is a simple but detailed method of computing the cost of employee turnover. The main factors in this calculation (aside from specific costs) are time and money involved with a departing employee, such as:

  • Time spent on filling the vacant position;
  • Hours/weeks in lost productivity before the employee leaves
  • Time that coworkers and the manager/supervisor combined will need to make up for the vacant employee (overtime, added shifts, etc.);
  • Number of hours in lost productivity resulting from orientation and training of a new employee; and
  • Time spent on admin and hiring tasks (advertising, resume screening, interviewing, onboarding).

We can directly translate between time and money (time = $) to provide specific costs by multiplying hours by hourly wage for different types of employees, tasks, and responsibilities. The numbers that you provide can either be averages for your organization, department, or team, or they can be specific to a single turnover event. The calculation will total all the time and costs spent with every employee turnover so you can determine what the final cost is for your business.

Here are the steps to calculate all of this:

Pre-Departure Costs

Enter the number of weeks that the employee works for the organization before they leave in the first column. Next, estimate the hours per week of lost productivity while the departing employee is still working. If you don’t have a specific number, you can estimate lost productivity at about 50-75 percent of weekly hours.

The next two lines are for coworkers and the manager/supervisor. In most cases, you can assume that coworkers and the manager/supervisor combined will need to put in a number of hours equal to lost productivity in order to make up the difference.

Enter the hourly pay for each employee type in the right column. Multiply number of hours per week by hourly pay for each line, and then add up the total.

 

Time (Weeks)

 

Hours Per Week

 

Hourly Pay ($)

 

 

Departing
Employee

________

×

________

×

________

=

________

Coworkers

________

×

________

×

________

=

________

Manager/Supervisor

________

×

________

×

________

=

________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

________ 

Vacancy Costs

Enter the amount of time taken to fill the vacant position, the hours per week that will be needed to make up for the vacancy (e.g., extra shifts, overtime), and hourly pay for each type of employee. Multiply the number of weeks by hours per week by hourly pay for each line, and then add up the total.

 

Time (Weeks)

 

Hours Per Week

 

Hourly Pay ($)

 

 

Coworkers

________

×

________

×

________

=

________

Manager/Supervisor

________

×

________

×

________

=

________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

________

Orientation and Training Costs

Enter the number of weeks required to train a new employee, number of hours per week spent on training, and hourly pay for each type of employee. Multiply number of weeks by hours per week by hourly pay for each line, and then add up the total.

 

Time (Weeks)

 

Hours Per Week

 

Hourly Pay ($)

 

 

New Employee

________

×

________

×

________

=

________

Coworkers

________

×

________

×

________

=

________

Manager/Supervisor

________

×

________

×

________

=

________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

________

 

Administrative and Hiring Tasks

Enter the total number of hours spent on each task, and the hourly pay for the type of employee responsible. Multiply hours per week by hourly pay for each line, and then add up the total.

 

Hours Per
Employee

 

Hourly Pay ($)

 

 

Separation
Processing

________

×

________

=

________

Changes in
Scheduling

________

×

________

=

________

New Job
Advertisements

________

×

________

=

________

Resume Screening

________

×

________

=

________

Reference
Checking

________

×

________

=

________

Interviewing
Candidates

________

×

________

=

________

Onboarding
Processing

________

×

________

=

________

 

 

 

 

 

 

Total

________


Additional Hiring Costs

This section can include any additional expenses related to employee turnover. Simply enter the total cost and then add up the total. (Some of the most common expenses are listed here, but you may have others to add to this list.)

 

Cost ($)

Job
Advertisements

________

Recruiter,
Search, Temp Agency

________

Background
Checks, Drug Tests, Assessments

________

Orientation or
Training Fees/Services

________

 

Total

________


Total Cost of Turnover (Per Employee)

Now just enter the total amounts from each section above and add them up.

 

Cost ($)

Pre-Departure
Costs

________

Vacancy Costs

________

Orientation and Training Costs

________

Administrative and Hiring Tasks

________

Additional Hiring Costs

________

 

Total

________

 

Total Annual Total Cost of Turnover

To obtain the total annual cost of turnover, simply multiply to total cost per employee by the number of departing employees.

Total Cost of
Turnover (Per Employee)

 

Number of
Departing Employees (Per Year)

 

 

________

×

________

=

________

What is obvious from all of this is that employee turnover is expensive. Although some companies do better than others at recruiting, hiring, and retaining their employees, there is almost always room for improvement. What you really want to know is how much room for improvement there actually is.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • Keith D. Halperin

    Thanks, Greg. As long as a company still has money to pay recruiters, the poorer the retention is, the better for us. It’s foolish trying to fill a full cup, but there’s job security in trying to fill a sieve!

  • Andree

    Good try! But I don’t agree with your last part (Total Annual Total Cost of Turnover). You imply that it is the same cost for losing an entry level employee as losing a senior manager… Jack Phillips when with the Jack Phillips Center for Reaserch (now the ROI Institute) did extensive research on that matter and its turnover costs summary table is based on turnover cost range as a percente of annual salary by job category. Noted that this costs are fully loaded to include all of the costs of replacing an employee and bringing him/her to the level of productivity and efficiency of the former employee. Easy and simple to use to build a good business case…

  • Greg Willard

    Andree: Thanks, and great point! It can be very helpful to go through the calculations separately for each type of job role.

    That would be a great way to determine what kinds of variations exist (and WHY) without needing to rely on general “rule-of-thumb” percentages.

  • Greg Willard

    Keith: True enough, but that’s also why this type of calculation can be valuable for recruiters. When we break things down like this, it is possible to show how recruiters can and do influence the cost of turnover. For example, reducing vacancy time also impacts lost productivity, overtime pay, need for a temp agency, etc.

  • Keith D. Halperin

    Thanks again, Greg. These figures might be very useful IF they can increase recruiters’ pay, budgets, influence, etc. If they’re used to try and make up for a lack of influence/power, then you’re already at a disadvantage. IMHO, this type of analysis should be the primary determiner of new actions, tools, etc:
    will they make things better for those who use them?

    Cheers,

    Keith

  • http://www.verticalelevation.com/ Carol Schultz

    This is a very good “turnover 101″ article Greg. It can give folks that don’t know a lot a good place to begin.

    You’ve missed things like costs related to sales turnover and have neglected to consider cost of benefits.

  • http://www.gatelyconsulting.com/ Robert Gately

    A financial services firm was replacing 200 customer service reps a year with an average annual salary of $48,000. After doing the calculations, they used an Excel workbook, they were able to show that the full cost of that turnover was about $72,000 per employee, or $14.4 million per year. They were flabbergasted. That’s a big number even for a 2,500 employee company. By the way, their Cost-To-Hire was less than $10,000 per employee.

    When we apply the approach to valued executive personnel, for example, the results can get really striking. The reason is that key personnel have roles where things like relationships, institutional knowledge and talent for the job can have considerable value. We’re dealing with situations where a question like, “What would it cost if Mark or Sally were hit by a bus?” elicits worried looks and responses like “I have no idea. Boy that would be a real problem.”

    Analyze those types of situations carefully, and you’ll find Cost-To-Replace can run into the millions. An executive team calculated the replacement cost of a particular key person at $50 million. After learning this, the CEO wrote him a bonus check for $6 million. Do you think any recruiter can make him an offer he can’t refuse?

  • Michael Minns

    I have studied and analysed this important HR cost for a number of years and on the evidence before me I have concluded that, as a rule of thumb and incorporating all the aspects outlined in the above discussion, the cost to replace and employee is equivalent to the salary of the incoming(replacement ) employee .
    That is ; if a $150,000 pa employee is to be replaced by someone of equal salary then the costs of doing so is $150,000