How much do you think it costs your business when an employee leaves? £5,000? £10,000? Actually, it’s a lot more. And that’s just the financial price. There are also a whole host of non-financial implications that can be detrimental to your business. In this article, we set out the full implications associated with staff turnover and what you can do about it.
If you can see it, you don’t have to be it. Which is why measuring your employee turnover is so important. Including a turnover figure in your monthly HR reporting is simple to do and can be calculated as crudely as this:
This approach covers all leavers including those who have left involuntarily through redundancy, retirement, dismissal and even death. To identify your voluntary leavers – those you may be able to retain – you need to take a different approach.
Next Level Analysis
Many organisations create voluntary and involuntary turnover rates to give more depth to their data. It’s as simple as identifying the reason for leaving and recording this in your HR system and pulling the data into your reports.
Other factors are equally useful to note. Reporting on individuals’ level of seniority or experience will help you to identify any workforce planning requirements and overlaying your leavers’ data with their performance ratings will identify which calibre of employee you are losing and will help you decide how to take action.
If your leavers tend to be top performers this could indicate a lack of challenging work or poor career progression. And it’s a problem that needs to be solved fast because better performers add more value. On the other hand, if all your poor performers are leaving you might not be so worried.
Whoever’s leaving your business, employee turnover generates a range of direct costs that are incurred in a number of ways:
Economic modelling experts, Oxford Economics, calculate that – for an employee earning £25,000 per year or more – the average direct cost to hire is £5,433. This varies significantly depending on sector, ranging from a low of £3,874 in retail to £6,630 in legal.
If £5.5k sounds bad, that’s not the worst of it. The most significant financial loss is incurred due to reduced productivity.Employees need to produce enough output to cover the cost of their wages. However, they also generate additional revenue to be used to service the capital invested in your firm. This could take the form of bank loans, dividends on shares or profits taken by the owners.
All the time a new employee is getting up to the expected standard, their output is insufficient to cover these costs and you’re losing capital income.As the graph below shows, Oxford Economics estimate reduced productivity costs businesses an average of £25,181. For retail this dips to £16,240 per employee and for legal eagles it’s £35,307.
Taken together, the direct costs and reduced productivity figures mean the average employee costs £30,614 to replace. If every employee who left your business walked out of the door carrying £30k you’d soon put a stop to it. So, what exactly can you do to stem the flood of cash?
When Does Turnover Become Problematic?
While turnover is expensive, it’s important to note that not all turnover is bad. Losing bad apples won’t concern most businesses as these employees can be replaced with better performers who will generate greater profit. The key is to do this quickly before other employees’ performance dips under the pressure of taking on additional responsibility.
If your business operates in a particularly tight labour market you may find replacements hard to come by. Working with a specialist recruiter will mean you have a knowledgeable partner keeping a look out for good candidates. That frees your supervisors up to manage poor performers, confident that they can replace them with someone better should the time come.
In some cases you will have truly regretful losses – star performers or individuals with a highly specialist skillset or relationships, or who are a significant benefit to the business. These people often generate more profit for your business so losing them is more costly.
Replacing these employees with the best candidates you can find is critical to business success. As the graph below shows, recruiting someone from the same sector carries significant cost savings, particularly in more specialist roles.
Source: Oxford Economics
Limit your exposure to the costs of out-of-sector hiring and partner with a recruiter to gain access to a pool of suitable candidates experienced in your industry. Other less tangible issues, such as cultural fit and learning style, also play a part in how quickly an individual can hit the ground running and start adding value. Secure the right person with the right skillset and you’ll maximise productivity, fast.
Understand What’s Happening and Why – Then Act
It’s important to have a good understanding of the norms for your industry. What may feel like high turnover levels could be symptomatic of your sector. Industry turnover data is useful to help you benchmark your position and decide how extreme, or otherwise, your situation is.
Developing an understanding of who is leaving the business and why is also very helpful. You may be able to spot patterns in your HR data which can give you a starting point for solutions. For example, consistent mention of poor line management in exit interviews may mean training is required. Or a repeated failure of new parents to return to work could require a review of flexible working policies and practice.
With every leaver taking £30k with them, controlling employee turnover means controlling costs. Minimise the cost to your business by understanding and controlling voluntary turnover and securing experienced new hires who can add value from day one.