versus skilled or professional workers). As a benchmark, however, consider that the average employee in the United States misses 2.3 percent of scheduled work time, or an average of 5.5 unscheduled absences per year (slightly more than one workweek). 16 In comparison, the average European employee misses an average of 10 days per year, or two workweeks. 17 Expressed in different terms, on an average day about 25 percent of the Norwegian workforce is absent (roughly 3 months per year) compared with 4.2 weeks for Sweden, 1.8 weeks for Italy, and 1.5 weeks for Portugal. 18
It is also important to note that the dollar figure just determined (we will call it the “Time 1” figure) becomes meaningful as a baseline from which to measure the financial gains realized as a result of a strategy to reduce absenteeism.
At some later time (we will call this “Time 2”), the total cost of absenteeism should be measured again. The difference between the Time 2 figure and the Time 1 figure, minus the cost of implementing the strategy to reduce absenteeism, represents net gain.
Another question that often arises at this point is, “Are these dollars real?
Since supervisors are drawing their salaries anyway, what difference does it make if they have to manage absenteeism problems?” To be sure, many calcula- tions in HR measurement other than absenteeism involve an assessment of the value of employees’ time (for example, those involving exit interviews, atten- dance at training classes, or the time taken to screen job applications). One way to account for that time, in financial terms, is in terms of total pay to the employee. The idea is to use the value of what employees earn (salaries, benefits, and overhead costs) as a proxy for the value of their time.
Total pay, however, is generally not synonymous with the fixed costs, vari- able costs (e.g., those that vary with employee productivity, such as sales com- missions), or opportunity costs of employee time. It is a convenient proxy, but must be used with great caution. In most situations, the costs of employee time simply don’t change as a result of their allocation of time. They are paid no matter what they do, as long as it is a legitimate part of their jobs.
The more correct concept is the opportunity cost of the lost value that employees would have been creating if they had not been using their time to manage absen- teeism problems. That cost is obviously not necessarily equal to the cost of their wages, benefits, and overhead. That said, it is so difficult to estimate the opportu- nity cost of employees’ time that it is very common for accounting processes just to recommend multiplying the time by the value of total pay. The important thing to realize is the limits of such calculations, even if they provide a useful proxy. 19
or critical resources of the organization (such as when departing employees take clients with them or when they possess unique knowledge that cannot be re-created easily), it makes sense to track turnover very closely and with greater precision. Even a very rigorous logic with good measures can flounder, how- ever, if the analysis is incorrect.
Turnover occurs when an employee leaves an organization permanently.
Not included as turnover within this definition, therefore, are transfers within an organization and temporary layoffs. The rate of turnover in percent over any period can be calculated by the following formula:
Number of turnover incidents per period
⫻ 100%
Average workforce size
In the United States, for example, monthly turnover rates average about 1 per- cent, or 12 percent annually. 20 However, this figure most likely represents both controllable turnover (controllable by the organization) and uncontrollable turn- over. Controllable turnover is “voluntary” on the part of the employee, while uncontrollable turnover is “involuntary” (e.g., due to retirement, death, or spouse transfer). Furthermore, turnover may be functional, where the employ- ee’s departure produces a benefit for the organization, or dysfunctional, where the de parting employee is someone the organization would like to retain.
High performers who are difficult to replace represent dysfunctional turn- overs; low performers who are easy to replace represent functional turnovers.
The crucial issue in analyzing turnover, therefore, is not how many employees leave but rather the performance and replaceability of those who leave versus those who stay. 21
In costing employee turnover, first determine the total cost of all turnover and then estimate the percentage of that amount that represents controllable, dysfunctional turnover-resignations that represent a net loss to the firm and that the firm could have prevented. Thus, if total turnover costs $1 million and 50 percent is controllable and dysfunctional, $500,000 is the Time 1 base- line measure. To determine the net financial gain associated with the strategy adopted prior to Time 2, compare the total gain at Time 2 (say, $700,000) mi- nus the cost of implementing the strategy to reduce turnover (say, $50,000) with the cost of turnover at Time 1 ($500,000). In this example, the net gain to the firm is $150,000. Now let’s see how the total cost figure is derived.
Analytics: The Components of Turnover Costs
There are three broad categories of costs in the basic turnover costing model:
separation costs, replacement costs, and training costs. This section presents only the cost elements that make up each of these three broad categories. Those who wish to investigate the subject more deeply may seek information on the more detailed formulas that are available. 22
Separation Costs
Following are four cost elements in separation costs:
1. Exit interview, including the cost of the interviewer’s time and the cost of the terminating employee’s time.
2. Administrative functions related to termination, for example, removal of the employee from the payroll, termination of benefits, and turn-in of company equipment.
3. Separation pay, if applicable.
4. Increased unemployment tax. This is a relevant concern for firms doing busi-
ness in the United States. Such an increase may come from either or both of two sources. First, in states that base unemployment tax rates on each com- pany’s turnover rate, high turnover will lead to a higher unemployment tax rate. Suppose a company with a 10 percent annual turnover rate was paying unemployment tax at a rate of 5 percent on the first $7,000 of each employ- ee’s wages in 2007. But in 2008, because its turnover rate jumped to 15 per- cent, the company’s unemployment tax rate may increase to 5.5 percent.
Second, replacements for those who leave will result in extra unemploy- ment tax being paid. Thus a 500-employee firm with no turnover during the year will pay the tax on the first $7,000 (or whatever the state maximum is) of each employee’s wages. The same firm with a 20 percent annual turnover rate will pay the tax on the first $7,000 of the wages of 600 employees.
The sum of these four cost elements represents the total separation costs for the firm.
Replacement Costs
The eight cost elements associated with replacing employees who leave are the following:
1. Communicating job availability.
2. Preemployment administrative functions, for example, accepting applica-
tions and checking references.
3. Entrance interview, or perhaps multiple interviews.
4. Testing and/or other types of assessment procedures.
5. Staff meetings, if applicable, to determine if replacements are needed, to
recheck job analyses and job specifications, to pool information on candi- dates, and to reach final hiring decisions.
6. Travel and moving expenses, for example, travel for all applicants and
travel plus moving expenses for all new hires.
7. Postemployment acquisition and dissemination of information, for
example, all the activities associated with in-processing new employees.
8. Medical examinations, if applicable, either performed in-house or con-
tracted out.
The sum of these eight cost elements represents the total cost of replacing those who leave.
Training Costs
This third component of turnover costs includes three elements:
1. Informational literature, for example, an employee handbook.
2. Instruction in a formal training program.
3. Instruction by employee assignment, for example, on-the-job training.
The sum of these three cost elements represents the total cost of training replacements for those who leave.
Note two important points. One, if there is a formal orientation program, the per-person costs associated with replacements for those who left should be included in the first cost element, informational literature. This cost should reflect the per-person, amortized cost of developing the literature, not just its delivery. Do not include the total cost of the orientation program unless 100 percent of the costs can be attributed to employee turnover.
Two, probably the major cost associated with employee turnover, reduced productivity during the learning period, is generally not included along with the cost elements instruction in a formal training program and instruction by employee assignment. The reason for this is that formal work-measurement programs are not often found in employment situations. Thus, it is not possible to calculate accurately the dollar value of the loss in productivity during the learning period. If such a program does exist, then by all means include this cost. For example, a major brokerage firm did a formal work-measurement study of this problem and reported the results shown in Table 2–2 . The bottom line is that we want to be conservative in our training-cost figures so that we can defend every number we generate.
The Costs of Lost Productivity and Lost Business
By all means include the costs of lost productivity and lost business in the fully loaded cost of employee turnover, if your organization can tally those costs accurately. Seven additional cost elements might be included: 23
� The cost of additional overtime to cover the vacancy (Wages ⫹ Benefits ⫻ Number of hours of overtime)
� The cost of additional temporary help (Wages ⫹ Benefits ⫻ Hours paid)
Table 2–2
PRODUCTIVITY LOSS OVER EACH THIRD OF THE LEARNING PERIOD FOR FOUR JOB CLASSIFICATIONS
Weeks in
Classification learning period 1 2 3
Management and partners 24 75% 40% 15%
Professional and technicians 16 70 40 15
Office and clerical workers 10 60 40 15
Broker trainees 104 85 75 50
Note: The learning period for the average broker trainee is two years, although the cost to the firm is generally incurred only in the first year. It is not until the end of the second year that the average broker trainee is fully productive.
Productivity loss during each third of the learning period
� Wages and benefits saved due to the vacancy (these are subtracted from the overall tally of turnover costs)
� The cost of reduced productivity while the new employee is learning the job (Wages ⫹ Benefits ⫻ Length of the learning period ⫻ Percentage reduction in productivity)
� The cost of lost productive time due to low morale of remaining employees (estimated as aggregate time lost per day of the work group ⫻ Wages ⫹ Benefits of a single employee ⫻ Number of days)
� The cost of lost customers, sales, and profits due to the departure (Estimated number of customers ⫻ Gross profit lost per customer ⫻ Profit margin in percent)
� Cost of additional (related) employee departures (If one additional employee leaves, the cost equals the total per-person cost of turnover.)
The Total Cost of Turnover
The sum of the three component costs—separation, replacement, and training—
represents the total cost of employee turnover for the period in question. Other factors could also be included in the tally, such as the uncompensated perfor- mance differential between leavers and their replacements, but that is beyond the scope of this book. 24
Remember, the purpose of measuring turnover costs is to improve management decision-making. Once turnover figures are known, particularly among segments of the workforce deemed “pivotal,” managers have a sound basis for choosing between current turnover costs and instituting some type of turnover-reduction strategy. These might include actions such as the following:
appoint a retention czar whose job is to help build a supportive culture and employee commitment, 25 provide realistic job previews, hold managers and supervisors accountable for retention, 26 conduct and follow up on employee surveys, and institute merit-based rewards to retain high performers. 27
Consider the impact of a simple, nonfinancial strategy to improve retention.
Managers at NationsBank realized that voluntary turnover rates among back- office workers were much higher than those in the rest of the bank. After instituting a one-on-one communications program, the bank reduced voluntary turnover by 25 percent. How? By having line managers come in at off-hours (e.g., 1 A.M.) to meet with night-shift employees and thoroughly explain benefits of which the em- ployees were unaware. The managers were trained to communicate with workers in a problem-solving manner—not “tell and sell”—and their efforts paid off. 28 Think about the fully loaded cost of turnover. It includes not just separation and replacement costs, but also an exiting employee’s lost leads and contacts, the new employee’s depressed productivity while he or she is learning, and the time coworkers spend guiding him or her. The combined effect of those factors can easily cost 150 percent or more of the departing person’s salary. 29 At Ernst
& Young, this is the cost to fill a position vacated by a young auditor. 30 In fact, Merck & Company, the pharmaceutical giant, found that, depending on the job, turnover costs were 1.5 to 2.5 times the annual salary paid. 31
In terms of process, there are opportunities in this area for enterprising managers to make significant bottom-line contributions to their organizations.
Organizational budgeting practices sometimes provide a natural opportunity to use the costs of employee turnover as part of a broader framework to demon- strate tangible economic payoffs from effective management practices. Thus,
when line managers complain that they cannot keep positions filled or that they cannot get enough people to join as new hires, that is a prime opportunity to elevate the conversation. How? By tying the fully loaded turnover costs among pivotal employees to the ability of the organization to achieve its long- term strategic objectives.