How to calculate turnover
What is turnover and how much does turnover cost?
Turnover is measured by the number of employees who left the organization, either voluntarily or involuntarily, as a percentage of headcount (i.e. your total number of employees).
For example, when an employee earning $40,000 leaves an organization, the lost knowledge that walks out the door with them, coupled with the cost of hiring and training someone new and waiting for them to get up to speed can cost a company conservatively $27,000.
According to the BC Human Resources Management Association:
Annual median turnover rates, Canada 2010 2011
|Annual median turnover rates, Canada||2010||2011|
|Public sectors only||6.3%||7.2%|
|Private sectors only||12%||11.8%|
Do you know how to calculate turnover for your organization and what the associated costs are?
How to calculate the cost of turnover
a) Direct and indirect costs of losing an employee (conservative)
- Lost brain trust, knowledge of your business (three months’ wages) = $10,000
- Reduced productivity prior to last day (operating at 50% for three months) = $5,000
b) Direct and indirect cost of hiring an employee (conservative)
- Job posting, resume screening, interviews, testing, meetings = $2,000
- Training costs: coaching, reduced productivity (three months’ wages) = $10,000
Total cost = A + B
$15,000 + $12,000
= $27,000 per employee that needs to be replaced
PLUS: are there any other costs that should be included for your missed any costs that should be included for your organization?
Imagine you are an employer with 25 employees. Of those employees, the average annual salary is
a) 25 employees at $40,000 average salary
- Five of these employees left this year
- These five need to be replaced
Given that five out of your 25 employees have left, your turnover rate is 20%
How to calculate turnover rate
Turnover rate % = Terminated employees/all current employees x 100
5/25 x 100 = 20%
At 20% turnover, this amounts to a total turnover cost of $135,000 (five employees x $27,000 per employee) that may have been avoided.
Although a certain amount of turnover may actually be a good thing, it is important to measure and track it so that you know what it’s costing you, how you can prevent it when you want to, and how you can minimize costs when the turnover is positive.
It is also important to keep in mind that each organization’s cost of losing people will be different based on individual factors. In an organization with highly skilled, specialized employees, it may take up to five years for new hires in certain positions to be fully productive, and the hiring process may take from six months to one year.
All of these factors have costs associated with them. What costs do you incur that may or may not be noted above?
For example, BCjobs® states: a large hotel chain calculated that a 10% decrease in annual employee turnover led to a decrease in lost customers of between 1% and 3%. That translated to an annual revenue increase of between $50 and $100 million. (In this case, not only did they save money on turnover costs, they also improved their bottom line by having longer-term employees.)
When is turnover a good thing?
Reduced productivity is an enormous drain on organizations, particularly when you aren’t aware it is occurring. When you are aware of reduced productivity and are actively working to increase it, you may find that improvement is not possible because either an employee is unwilling or unable to improve, or perhaps they are simply no longer a fit for the organization. How you manage this ties in with your organization’s overall philosophy on performance improvement and termination, and ultimately knowing when turnover is an opportunity.
Unfortunately, if you are not paying attention, you may not even notice.
A guide to calculating turnover
Calculating turnover for your business is a topic covered in our recently published HR Guide: a free booklet that contains the proven steps to achieving effective HR that will save your organization thousands of dollars.
As well as many including many steps on how to create greater efficiencies and reducing expenses, our HR Guide explains how much turnover costs a company just like yours.
What’s been your experience of turnover? What’s the turnover like in your organization?