What Is The Cost Of Employee Turnover?

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5th May 2014

4 min read

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editor@leaderonomics.com

In HR Talk, we pick one human resources (HR) related topic each week, and gather a few HR experts to share their opinions on it. If you have any questions about the HR industry, send them to us atmystarjob@leaderonomics.com and we will get our panel of experts to answer them.

This week’s topic;

What is the cost of employee turnover?

Ang Hui Ming – Co-founder and human resource director, Leaderonomics

When there is employee turnover, there are always costs associated with it. Here are some of them:

i) Measurable Costs:

Direct costs that are incurred when an employee leaves and needs to be replaced. These include:

a) Recruitment costs (job posting, advertising, recruitment costs, interview cost, headhunting, background checks)

b) Onboarding costs (orientation and formal retraining costs)

c) Possible higher salary cost or replacement costs

ii) Indirectly Measurable Costs:

Costs that are incurred which require some estimation as they are not directly “cash” or have impact on the profit line. These includes:

a) Cross training costs when an existing employee needs to train the new person on the job

b) Forgone costs of certifications and other qualifications of the previous employee

c) Administrative costs of processing the exit and onboarding

Subjectively measurable cost:

Cost that are hard to quantify, butis a genuine felt loss to an organisation and its team:

a) Lost knowledge and expertise

b) Lower productivity or downtime incurred while position is still vacant

c) Probability of errors for newcomer

d) Lost relationships within the organisation and also with external parties (customers, vendors, associates, partners)

e) Disturbed culture and team dynamics

However, we cannot only see the costs in every situation.

There is also the benefit of employee turnover, which should not be forgotten. For example:

i) Opportunity for new talent to join the organisation. This can bring about fresh ideas, new energy and different perspectives or best practices that is not common in the organisation

ii) The lifting of corporate ceilings. When there is turnover, there is opportunity for employees in the organisation to move into different roles. Allowing for job rotations and internal promotions is healthy for an organisation.

iii) Rejuvenation of the organisation and existing employees if the turnover is intentional to remove low productivity employees, troublemakers or people who resist change that is needed to move the organisation forward.

Whatever the reason for employee turnover, there will be cost incurred. It is important to do one’s best to retain good employees, and to have the courage to also know when it is necessary to have some employee turnover.

Suriahni Abdul Hamid – HR adviser for industry partnerships division, TalentCorp

Cost of turnover? This is one question that HR professionals constantly face, but a pretty difficult subject to explain to managers who keep losing good talent.

I must admit, I’m not a “numbers” person. What we typically hear is that it will cost the company at least five times the cost of the employee that we lose, which includes the cost of hiring and training of new employees.

To better understand the extent of cost of turnover, let’s ask a different question instead, i.e. what can we gain from not losing good talent?

A few key factors that impacts employee retention are: knowledge of the direction of the company, clarity of roles and responsibilities, acquiring the learning for oneself professionally and personally, getting exposure in relevant platforms within the company and externally, experiencing the different dynamics of the company and seeing the rewards and recognition of one’s contribution.

All these factors, when implemented well, do take lots of time, energy, money and creativity. Can we easily put a ringgit sign on all of these? I suppose we can try. However, how do we quantify the tacit knowledge that our talents accumulate over the years, or what will it take to grow an expert in a company?

When we lose good talent, they bring with them skills, knowledge and networks. There’s no guarantee that new employees can do better than the ones who left the company. It looks like we can gain so much more by retaining good talents.

Given all that we know now, how can we be better at spotting good talenta and how can we provide them with relevant development interventions that will enable them to not only contribute to the company but also feel engaged and proud to be with the company?

Perhaps, with this, we have lesser chance to ask, “What’s the cost of turnover?” in the future.

Lee Soo Fern – Malaysia talent leader, Ernst & Young

The loss of employees, particularly the brightest and best talents, can have a significant negative impact on an organisation, not just in terms of hard, direct costs, but also in other intangible ways.

When you lose an employee, you have to begin the process of hiring and training a new person to fill the vacancy. The direct costs involved to replace the person include advertising, recruiting, hiring and training the new employee.

But there are also indirect costs, which are largely hidden, but potentially much higher in comparison. They include opportunity costs, lowered or lost productivity, lost knowledge and skills, diminished morale amongst remaining employees and compromise in quality. Most organisations do not necessarily quantify and monitor such indirect costs and as such, are not able to gauge the real impact of employee turnover to their bottom line.

It is rare today for employees to remain with one or two employers throughout their entire career. Employees are likely to move to a number of different opportunities in their employment lifetime. As such, employers will need to work hard to attract and retain their best talents who can impact positively on their businesses and bottom lines.

This may mean reviewing and changing workplace policies and benefits like implementing workplace flexibility, addressing employee engagement, tailoring development and career paths for individual employees. In the long run, the investment to make an organisation a great place to work may not seem so significant when compared to the returns in the form of engaged, loyal employees who will contribute positively to the organisation.

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