Cost of turnover refers to the expense involved in replacing an employee who leaves a company or organization. The costs of employee turnover can be significant — it involves expenditures for recruitment and training of replacements, as well as the loss of money invested in the departing employee. There can also be intangible costs to the overall functioning of an organization through the loss of the employee.
Recent studies show that employee turnover can be very expensive. Employers have begun to look more carefully at how turnover affects them both economically and in terms of overall functioning. Knowing the cost of losing and replacing employees can aid employers in understanding the value of their investment in keeping them.
There are many different costs involved when an employee leaves her employment, either voluntarily or through termination. Administratively, there may be insurance, payroll, and pension forms to be processed. Personnel records have to be updated to include the reasons for the employee’s departure. Depending upon the nature of the company or organization involved, the documentation of the separation might have to be very detailed. If the employee is a member of a union, there may be contested hearings when the departure is involuntary.
The cost of turnover may also involve the expense to an employer of paying unemployment compensation. In the US, the amount and duration of unemployment compensation is fixed by each state. Generally, it is a percentage of the person’s wages paid over a fixed period, sometimes up to a year or more. If the departed employee has difficulty finding suitable work, the period of compensation might be extended. If benefits are contested by the employer, there may be expenses for legal representation and attendance by company personnel at a hearing before a state administrative law judge.
When an employee leaves voluntarily, there can still be great expense involved. There is the loss of the time and money invested in the initial recruiting, hiring, and training of the employee. Intangible costs, such as experience gained on the job, the person’s leadership abilities, and overall contribution to the organization can also be factored into the cost of turnover.
Replacement costs are an additional cost of losing the employee. Depending on the level of experience of the new hire, the replacement costs may be more than those of losing the former employee. There may be increased work load for other employees, which affects their functioning until the vacancy is filled. Even after a replacement is found, there can be a loss of productivity due to things being out of sync or a loss of morale.
Studies suggest that investment in employee retention is more cost effective than turnover costs. Public and private employers may find it more beneficial to invest in employee support and skills development. Organizational leaders should track and record turnover costs and rethink their policies when turnover percentages exceed the national average for a given field or enterprise. By calculating the cost of turnover, employers can determine how much to invest in preventing it.