Employee turnover: The cost of losing an employee

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Man is the first M of 5M (man, materials, machines, minutes and money) of an organization. It is getting challenging day by day to retain talents. Although a small turnover of employees can be beneficial for the organization but a high rate of employee turnover is alarming for the organization. Although a small turnover may create opportunity of career growth for existing employees or create opportunity for a new one, but high turnover is an obstacle that many businesses face. High turnover disrupts and destabilizes that culture of constant improvement. It starts to feel less safe to experiment in an unstable team environment, it becomes a block for the performance and the missing connection to a collective vision undermines basic motivation.

It takes into account all costs involved in recruiting, hiring, training & developing the replacement to the present level of efficiency is employee turnover cost & replacement cost takes into account the notional cost that may be required to acquire a new employee to replace the present one.

Types of Replacement Cost

Direct Cost: All direct charge related to turnover & recruitment.
Indirect Cost: The overhead in the HR staff should be allocated to all HR functions and the overhead for the functions related to turnover are included in the turnover cost.
‘Some research predicts that a salaried employee replace cost may be up to 6 to 9 times of employee’s monthly salary or even more based on position.’

Estimated Cost: Usually form experts who have credibility with the cost item. For example: opportunity cost for a particular position.

Prorated HR Cost: A training cost may be calculated pro rata basis if employee leaves 1 year after training. The usual life time for this type of program is two or three years. Cost related to uniform, engagement program or any other such types of cost needs to be considered.

Linking Cost: Turnover may be directly linked to customer dissatisfaction which is linked to sales.

‘If new employee leaves just after 1 week, it costs less but if specialized employee leaves after having confidence and learning, it costs a lot.’

Factors that can affect costs

  • Length of Service
  • Level of employment
  • Importance of job
  • Nature of Job
  • Nature of organization industry
  • Availability of substitute

Calculation of Replacement Cost

  1. Cost due to person leaving
  2. Recruitment Cost
  3. Training Cost
  4. Lost of Productivity/ Consequence of Turnover

1. Cost due to person leaving

Costing related to exit interview in an example of the cost. Here, we need to consider the time pay for person who is conducting exit interview an well as time pay for the person who is leaving. 

For example, lets consider an employee with salary $ 500 is leaving and an employee with salary $ 1200 is conducting exit interview. As per organization policy, every employee needs to work 8 hours per day & 22 days per week. Exit interview took 1 hour. 

Now we will calculate cost due to exit interview: 

Time pays for the person who conducted exit interview =   500/ (22 x 8) = $ 2.84

Time pays for the person who conducted exit interview = 1200/ (22 x 8) = $ 6.81

Cost for exit interview = $ 2.84 + $ 6.81 = $ 9.65

2. Recruitment Cost

Candidate sourcing Cost (Advertisement preparation cost, agency cost, headhunting consultant cost, referral bonus etc., campus program cost etc.)

Interview Cost (Time pays for Interview board member, external consultant cost, cost for candidate entertainment, venue cost, utility cost, allowance for candidate/ interviewer, pre-employment test cost, cost for communicating candidate, time pay for CV review & shorting, preparation for interview, logistics cost etc.

Employment Process (background verification cost, medical test cost, time pay for top management approval, cost for notifying successful candidate)

Induction & Socialization ( Induction program cost, time pay for organizer, venue cost, utility cost, cost due to manager’s time lost for building the trust & confidence on new employee)

3. Training Cost

Training cost is the actual training cost. It includes internal training cost (venue cost, utility cost, time pay for in house trainer, stationary & logistics cost, external trainer cost, external consultant cost)

4. Lost of Productivity/ Consequence of Turnover

It is a critical measure to measure & convert into amount. As and when someone decide to leave, his/her productivity goes down. Lots of time is spent on handover process. New employee needs sometime to align with the process and the manager needs to spent time with the successor. 


Suggestions to reduce employee turnover

  • Benchmark your employee retention rate
  • Build a culture that cares
  • Recognize your employees
  • Establish a feedback culture
  • Take corrective measure of your exit interview
  • Lean into your mission
  • Enhance your benefit package
  • Invest on growth
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