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Many surveys
say that the number one issue facing business is finding and keeping
good employees. Nationally, the average annual employee turnover
rate for all companies is 12 percent. In our 1996 Wisconsin study,
we found that 75 percent of the demand for new employees is simply
to replace workers who have left the company.*
The good news is that there are many proven methods to help you
do a better job of finding and keeping good employees. The bad news
is well known to every manager who has ever suggested increasing
employee training, developing formal job descriptions, implementing
exit interviews for departing employees, or establishing more rigorous
search and screen procedures. They all cost money.
Employee turnover (replacing employees) also costs money. We all
know that. We also know better systems and training can help us
find better employees and keep the good ones. The dilemma is knowing
how much to spend to ensure you’re getting an adequate return on
your investment in people.
The following worksheet is a start. It will help you calculate
the cost of employee turnover for your company. Knowing the cost
of losing and then replacing an employee will help you determine
how much you can afford to invest in keeping them. It will also
help you analyze whether your investment in keeping your employees
is adding to your bottom line.
The accompanying worksheet was adapted from formulas developed
by Wayne Cascio (see Costing Human Resources, PWS-Kent, 1991) and
H.L. Smith and W.E. Watkins (see"Managing Manpower Turnover
Costs" in Personnel Administrator, vol. 23 #4, 1978). Smith
and Watkins identified three major cost categories: separation costs,
replacement costs, and training costs. Cascio added a category to
include the performance differential between the employee who leaves,
and the replacement. We’ve added another category, vacancy costs,
to account for the added costs/savings realized while the position
is vacant.
Separation costs include:
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/savings incurred due to increased
overtime or temporary employees needed to complete the tasks of
the vacant position.
Replacement costs include the cost of:
attracting applicants;
entrance interviews;
testing;
travel/moving expenses;
preemployment administrative expenses;
medical exams; and
acquisition and dissemination of information.
Training costs include both formal and informal training costs.
Performance differential recognizes the difference in productivity
between those who leave and their replacements (Cascio, 1991).
Typically separation, replacement, and training are all net costs.
However, vacancy costs and the performance differential can result
in either a net cost or savings. For example, if overtime and/or
temporary employees’ costs are less than the employee would have
earned while the position is vacant, a vacancy savings occurs. If
the new employee’s performance exceeds the predecessor’s, a net
performance benefit can result.
It’s important to note that only tangible costs are included on
this worksheet. Intangible costs are just as real and often much
greater than the costs we can quantify. Examples of intangible costs
include: the uncompensated increased workloads other workers assume
due to vacancies, the stress and tension turnover causes, declining
employee morale, and decreased productivity due to loss of work
group synergy. These costs are very real. However, they are difficult
if not impossible for most businesses to measure. Just be aware
that completing this worksheet will provide you with only a portion
of the total cost of employee turnover.
When completing this worksheet, include all quantifiable costs
-- salary, materials, and expenses. A final reminder: This is simply
an example, not your own customized worksheet. Modify, add, or delete
categories as appropriate for your business. The example is included
to help you get started.
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