Employee turnover is a term which is widely used in organizations today. The impact of employee turnover has received extensive attention by senior management, human resources professionals and industrial psychologists. In fact it is proven to be one of the most costly and apparently difficult human resource challenges facing organizations. This paper provides an overview of what exactly employee turnover is and how the direct and indirect cost is calculated?
Employee turnover can be a major concern for management in an organization. The company may experience direct costs such as time and money due to separation, replacement, or training and an indirect impact such as poor customer service, the loss of valuable resources, and reduction in revenue. Employee turnover can be burden to the company and a headache to the management team. In Human Resources Management it is important to recognize the problem, define and analyze the reasoning for high turnover, find a solution for the avoidable resignations, and manage the outcome.
In order to completely understand the impact of employee turnover, it is important to understand the calculations behind the problem. The most commonly used formula to calculate employee turnover is: the number of exits divided by number of employees over a specific period of time. Currently the national employee turnover average is 12 percent. If a company experiences high turnover it may incur extensive financial expenditures as well as a decrease in profits due to customer service concerns. Besides, delay in service, dissatisfied customers, job errors, decrease in revenue, team morale is also affected.
Direct Cost & Calculations
Employee turnover cost is mainly divided into two distinct portions called the direct costs and hidden costs. The direct costs are those costs that can be quantified by examining records and making good estimates of time and resources. These costs are sometimes difficult to measure exactly but, never the less, are very real. Direct cost is the total of separation cost, the cost of vacancy of the position, replacement cost and training cost. These are costs which are very prominently noticed (Outlaw, N.D.).
Calculation of Direct Costs
- Separation costs include the following: the costs incurred for exit interviews; administrative functions related to termination; separation/severance pay; and any increase in unemployment compensation.
- Vacancy costs include the net cost or savings incurred due to increased overtime or temporary employees needed to complete the tasks of the vacant position.
- Replacement Cost include: John (2000) estimated that an organization incurs the consequent replacement costs which include search of the external labor market for a suitable candidate, selection between competing candidates through interviews and other tests, induction of new candidate, and formal and informal training of the candidate until they attain performance levels equivalent to the initial lost resource. The factors that come under replacement costs are as follows: Attracting and recruiting; Screening applicants; Conducting employment interviews; Pre-employment evaluations; Drug testing / credit / criminal checks; Checking candidates’ references; Additional staff time to process hiring paperwork; Travel or moving expenses; Permits, fees, or licenses for new employee; Post-employment information gathering and dissemination cost; Set up of benefits for employee; and Uniforms or special equipment (Outlaw, N.D.).
- Training Cost include the following: Orienting employee; Training literature and materials; Formal class training, fees, and employee’s time; Time in informal training or coaching by manager; and Certification on equipment, systems or skills.
Impact – Indirect Cost
Majority of the time organizations look only at the direct cost but ignore the hidden cost. The hidden cost of turnover is said to be much greater than direct costs but harder to quantify. Studies indicate that as much as 80 percent of the total cost of turnover is hidden. The factors to consider in hidden cost are reduced productivity, inefficiency, loss of cash and assets during the change, loss of customer or orders, lower sales efficiency and even lower morale and productivity (Outlaw, N.D.).
Many researchers argue that high turnover rates might have a dangerous negative impact on the profitability of organizations if not managed properly (Hogan, 1992; Wasmuth and Davis, 1993; Barrows, 1990). Along with direct costs, companies experience an indirect impact on the organization such as customer service and satisfaction. A recent research by Catherine (2002) suggest that turnover include other costs, such as lost productivity, lost sales, and management’s time, estimate the turnover costs of an hourly employee to be $3,000 to $10,000 each. This evidently demonstrates that turnover affects the profitability of the organization. Additionally, the loss of intellectual capital also adds to this cost, since not only do organizations lose the human capital and relational capital of the departing employee, but when these employees join the competitors, they are potentially gaining these assets (Meaghan et al. 2002). Therefore, if employee turnover is not managed properly it would have both short term and long term adverse impact. It affects the organization adversely in terms of personnel costs and in the long run it would affect its liquidity position. Therefore, reducing employee turnover need to be given top priority in organizations and is an important component in achieving quality outcomes. Reducing high turnover rates can aid to optimize facility resources.
Employees are the backbone of any successful organizations and therefore, it is important that they need to be motivated and maintained in organization. This will help the organizations to be globally competitive in terms of providing quality products and services to the society. Though organizations can benefit from new hires, as they may offer new ideas and fresh approaches to procedures, products and services, and may add on to the companies’ vision and goals, but in reality the cost of employee turnover affects bottom-line performance. Therefore, it is important to make strategies to encourage and motivate the current working staff to continue working in the company.
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- Catherine M. Gustafson (2002). staff turnover: Retention. International j. contemp. Hosp. manage. 14 (3) : pp 106-110.
- Hogan J.J. (1992). Turnover and what to do about it, The Cornell HRA Quarterly. 33 (1): pp 40-45.
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- Meaghan S. and Nick B. (2002), Voluntary turnover: knowledge management-friend or foe? J. intellect. Cap. 3 (3): pp 303-322
- Outlaw, W. (N.D.) Sales Turnover Calculator.
- Wasmuth W.J and Davis S.W (1983). Managing employee turnover: why employees leave, The Cornell HRA Quarterly, pp. 11-18.