Employee turnover is costing your company a ton of money. Here’s how to figure out its exact cost.

I just purchased emergency travel insurance from a particular company for one simple reason—they answered their phone on the first ring. They didn’t make me listen to a recording saying a few throwaway lines like, “Your call is important to us. Unfortunately, due to a rise in the volume of calls, our wait times have increased.”

(Let’s not kid ourselves … your employee turnover is high, and you can’t find people who are willing to work for you, which is why your wait times have increased. But I digress.)

I didn’t even bother to shop around for a better insurance rate. Here’s why. If I have an emergency and need to use this service, I’m confident a real person will quickly answer the phone and assist me. Can you offer the same assurance to your customers?  How much business is your company losing due to high employee turnover and poor service? My guess is a ton.

The True Cost of Employee Turnover

Companies know replacing an employee costs considerable time, energy, and lost productivity. Few can put a dollar figure on the actual cost. Lack of hard data means investments in retention and recruitment programs get placed on the back burner. Cost of turnover estimates for a single position range from 30% of the yearly salary for hourly employees (Cornell University) to 150%, as estimated by the Saratoga Institute.

The McQuaig Institute puts this into terms that most of us can relate to. A fast-food restaurant must sell 7,613 children’s combo meals at $2.50 each to recoup the cost of losing just one crew member. To recoup the cost of losing just one salesclerk, a clothing store must sell almost 3,000 pairs of khakis at $35.

How many of your products or services must you sell to make up for one employee?

These examples represent the cost of turnover, which encompasses replacement costs, training costs, separation costs and lost productivity. You may be thinking that positions in your company are considerably more sophisticated than those found in fast food restaurants or retail organizations and that it’s impossible to come up with a number. But even an approximate number is better than no number at all.

Calculating your cost of turnover

Calculating your cost of turnover is simpler than you think. Begin here: Make a list of everyone who has left your organization this year, and using the information below, calculate how much the loss of each employee has cost your firm. If you want to capture an entire year’s worth of information, consider capturing the data for those who left the company the previous year as well.You can group the business costs and impact of employee turnover into four major categories: 1) costs due to a person leaving; 2) hiring costs; 3) training costs; and 4) lost productivity costs.

Costs due to a person leaving

Once an employee has announced their resignation, they have begun to transition out of the company. While working out their notice period, their full attention is no longer on your business. Others in the organization are picking up their slack, which prohibits them from giving full attention to their own jobs.

In addition, consider the following costs:

•    Employees who must fill in for the person who leaves before finding a replacement;
•    The addition of temporary help or the use of consultants to fill in while the position is being restaffed;
•    The cost of a manager or other executive having an exit interview with the employee to determine what work remains, how to do the work, why he is leaving, and so on;
•    The cost of training the company has invested in this departing employee; the cost of lost knowledge, skills and contacts of the departing employee;
•    Cost of lost customers the departing employee is taking with him (or that leave because it hurts service ) and;
•    The increased cost of unemployment insurance.

Hiring Costs

You might be lucky and find a candidate on a free website, but most likely, you will need to post and advertise elsewhere.

Consider the following hiring costs:

•    The cost of advertising, internet posting, employment agencies, search firms, employee referral awards;
•    Increase in starting pay as salaries have risen since you last hired, bringing everyone else in the department up to market rates;
•    Time spent screening resumes, arranging interviews, conducting interviews (by both HR and upper management), checking references and notifying candidates who didn’t get the job;
•    The use of assessment testing, background checks, drug screening (usually done on more than one candidate) and time spent interpreting and discussing results;
•    Time spent assembling and processing all the new hire paperwork, explaining your employee benefit programs, and entering the necessary data to ensure the employee receives a paycheck.

Training costs

It would be nice if employees could integrate into their organizations without any training, but usually this is not the case. Things are done differently in every organization, so you must factor in the following costs:

•    New employee orientation or onboarding;
•    Specific training for the person to do his job, such as computer training, product knowledge, company systems;
•    Time spent by others to train this person and money spent on outside training to ensure they can do their jobs.

Loss of productivity costs

Because new employees do not enter the organization completely trained, it will take time before they are fully productive.

Factor in the following productivity costs:

•    During this time of lost productivity, the person’s manager is also spending more time directing, reviewing work, and possibly fixing mistakes. (Errors will be made that are not caught right away and will cost money to correct down the line, such as with a customer who receives an incorrect price or an incorrect shipment due to the new employee’s lack of experience);
•    Add the loss of goodwill as you scramble to preserve your relationship with your valued customer or client;
•    Employee morale plummeting as overworked employees assume responsibility while the new hire is training.

Now that you’ve closely examined the costs associated with each person leaving, you can then plug this information into a spreadsheet to determine the real cost of employee turnover in your organization.

Your Assignment: List the people in your organization who’ve recently left. Next, jot down how much you think this loss will cost your organization. Finally, calculate the actual cost of this employee leaving, based on the guidelines I’ve provided above.

How’d you do? Were you close or very far off in terms of your guess? Are you in better shape than you thought? Or is it time for an intervention? 

Given the high costs involved and the impact on productivity and customer retention, a well thought out retention program can easily pay for itself over and over again and is certainly worth further consideration.  

Roberta Matuson, president of Matuson Consulting, helps organizations achieve dramatic growth and market leadership by maximizing talent.  She’s the author of six books, including the newly released Can We Talk? Seven Principles for Managing Difficult Conversations at Work, Evergreen Talent, and the international bestseller, Suddenly In Charge, a Washington Post Top 5 Business Book For Leaders. Contact her at  roberta@matusonconsulting.com.