Turnover cost

Turnover costs – it is both material and non-material cost incurred by the enterprise at the time of replacement of employees. The cost of turnover includes the cost of employment at a given position, all severance pay and bonus packages, baskets related to employment and training of a new employee and the cost of employing a deputy for the time when the position is not filled. When a company is characterized by high employee turnover, it is exposed to a decrease in productivity or company profitability (Jones C., Finkler S. A., Kovner C. T. (2012) p. 181-182).

Three main elements related to the cost of turnover

There are three main elements related to the cost of turnover. It stands out for example:

1. Manning positions - when the position is empty, the enterprise bears the cost of employing a deputy and then costs related to recruitment and the initial stage of employment of the person.
2. Vacancy - time when the position remains empty. It directly affects the reduction of productivity.
3. Implementation - new employees are not 100% productive. The enterprise must invest resources and time in integration, training and development.

Every organization should realize how much the cost of marketing the unit is. To reduce costs, the company should reduce staff turnover. Reducing turnover also affects the improvement of profitability and the increase of profits through more efficient operations (Mitchell B., Gamlem C. (2012) p. 104).

Indirect Costs of Turnover

The estimated turnover costs do not reflect in 100% the impact of the turnover on the company. They do not include, among others:

• Reducing morale
• Possibility of making mistakes by overloaded employees who work in a part-time team
• Decrease in efficiency due to staff shortages
• Effectiveness of the substitute person

All these factors are very difficult to estimate but should be included in the calculation of the actual turnover costs. High rotation in the company may also affect other areas. Lower experience of employees, especially in the training of new generators may have an impact on the safety or quality of work performed. After adding all the elements, the real turnover cost turns out to be much higher.

The Saratoga Institute estimates that taking into account all indirect and direct costs, the average cost of turnover equals the annual salary in a given position (Mitchell B., Gamlem C. (2012), p.58-61) .

Reducing Turnover through Better Selection

Complete elimination of trading is not possible. This is because trading is not an event that results from the presence of individual factors, such as workload, the possibility of promotion or ambiguity of roles. Rotation is a process. However, there are tools that can reduce overall turnover and increase retention. These tools are used in the recruitment process (Watlington E., Shockley R., Guglielmino P., Felsher R. (2010), p. 22-27).

Approaches that bring the most benefits

Evaluating Risk Factors Some of the candidates are characterized by a greater propensity to trade. This can be identified before employment based on the traits that candidates have. Recruiters check, for example, the time of employment in a previous company or the candidate's attitude to making friends in the workplace. Motivational Fit Targeting motivations is another approach that reduces turnover. Just employing a suitably qualified employee will not guarantee more stable and productive work. The motivation of the employee is very important here. To properly motivate staff, a company should have an individual approach to the employee (Pinder C. C. (2012), p. 44-48).

Examples of Turnover cost

• Recruiting Costs: The costs associated with recruiting, interviewing and selecting new employees to fill the position of an employee who left. This includes the cost of advertising and promotion, interviewing expenses, and fees associated with the use of a recruitment agency.
• Training Costs: The costs associated with training a new employee to take on the position of an employee who left, including the cost of orientations, manuals, and training materials.
• Lost Productivity: The cost associated with decreased productivity during the time it takes for a new employee to be fully trained and become productive.
• Loss of Knowledge: The cost associated with the loss of knowledge and expertise of the previous employee that may not be fully replaced by the new employee.
• Cost of Benefits: The cost associated with providing benefits to the new employee that may include health insurance, vacation and sick pay, bonuses, and other benefits.

Limitations of Turnover cost

Turnover costs can be a significant burden for businesses, however, there are several limitations to consider when calculating them. These include:

• The inability to accurately track the recruitment costs associated with replacing an employee. These costs can include advertising, interviewing, and onboarding fees.
• The difficulty in calculating the cost of lost productivity that occurs when an employee leaves and their position is vacant.
• The lost opportunity cost of not having the best person in the job.
• The costs associated with training a new employee, who may take longer to reach the same level of productivity as their predecessor.
• The intangible costs of morale, which can be difficult to accurately measure.
• The lack of visibility into long-term costs that may be incurred, such as the potential for higher insurance premiums due to a high turnover rate.

Other approaches related to Turnover cost

Turnover costs can also be approached from other perspectives. These include:

• Recruiting and selection costs – this includes the cost of searching for and selecting new staff, such as advertising, interviewing, background checks and onboarding.
• Separation costs – these are the costs associated with processing the paperwork of a departing employee, including severance pay, outplacement services and other related expenses.
• Training costs – when a new employee is hired, they must be trained in their role. This can include the cost of hiring a trainer, as well as the cost of any materials used in the training process.
• Administration costs – there are administrative costs associated with turnover, such as the cost of processing the paperwork, maintaining records and other related tasks.
• Lost productivity – when an employee leaves, their role must be filled, which can lead to a period of lost productivity as the new employee learns the job.

In summary, turnover costs include a range of material and non-material costs associated with hiring, training and replacing employees. These costs can have a significant impact on a company's bottom line if not managed effectively.

Turnover cost — recommended articles

Displacement of employees — Indirect labor costs — Effects of employee departure — Indirect labor — Employee attrition — Multi skilling — Direct labor cost — Hidden cost — Direct labor efficiency variance

References

• Beveridge W. H. (2014), Full Employment in a Free Society , Sixpense
• Jones C., Finkler S. A., Kovner C. T. (2012), Financial Management for Nurse Managers and Executives,Saunders, 4th Edition
• Mitchell B., Gamlem C. (2012), The Big Book of HR , Career Press, Revised and Updated Edition
• Pinder C. C. (2012), Work Motivation in Organizational Behavior,2nd Edition, Psychology Press, New York
• Teichler, U., & Cummings, W. K. (eds.) (2015), Forming, recruiting and managing the academic profession
• Tesar G., Kuada J. (2013), Marketing Management and Strategy, Routledge, New York
• Watlington E., Shockley R., Guglielmino P., Felsher R. (2010), The High Cost of Leaving: An Analysis of the Cost of Teacher Turnover, "Journal of Education Finance", Vol. 36, No. 1

Author: Aleksandra Szczęch