It is not uncommon for an organization to experience employee turnover if workers feel disgruntled. For instance, an employee who earns a lower wage may resign from an organization and seek employment in another organization, hoping to negotiate better payment terms.
Although most employees usually have genuine reasons for leaving their organizations, the truth is that a high employee turnover yields a negative backlash for the organization in question.
Read on to understand employee turnover and how to calculate employee turnover expenses in an organization.
What Is Employee Turnover Cost?
The turnover cost in an organization refers to the expenses you’ll incur to hire and train a suitable replacement following an employee’s exit.
Employee turnover varies across organizations since each organization has a unique workforce and salary scale, among other factors.
Regardless of its value, you should always track your employee turnover cost to manage your business expenses effectively. A higher employee turnover rate translates to a higher turnover cost because if you lose an employee, you may spend between 30-150% of the former employee’s annual salary to find a suitable replacement.
Employee turnover cost consists of direct and indirect expenses on the organization. Most expenses will arise from recruitment, on boarding, and training of the new worker.
Below are the key elements of an employee’s turnover cost:
- Pre-departure costs.
- Departure costs.
- Costs incurred when the position is open.
- Replacement costs.
- Offset costs.
Calculating Employee Turnover Cost
Many financial experts have developed online turnover calculators to help organizations determine expenses associated with hiring new staff. You can access an employee turnover calculator from an approved human resource organization or financial institution. Simply fill out the required fields and obtain an annual tally of your organization’s employee turnover.
Besides using an employee turnover calculator, you can obtain the cost directly using a simple formula as follows;
Employee turnover cost= (Total direct costs + Total indirect Costs)-Unpaid costs
Calculating the Total Direct Costs
Finding direct costs is usually straightforward. Simply find a summation of the employee’s base remuneration, benefits, and ongoing costs.
Benefits include items such as;
- Annual leave allowances.
- Car allowances.
- Individual contributions.
Ongoing costs include items such as;
- Workers’ compensation premiums.
- Expenses paid to recruitment agencies.
- Costs incurred in advertising the vacant position.
Calculating the Total Indirect Costs
Unlike direct costs, finding an employee’s indirect cost is usually not straightforward. However, the following broad overhead costs constitute an employee’s indirect costs;
Loss of Productivity from Other Employees
If you temporarily deployed an employee to fill the vacant post, you might find the loss incurred by calculating a third of the employee’s remuneration cost.
House Hiring Expenses
Here, consider the expenses incurred by employees involved in the hiring process if you’re not contracting a recruitment agency.
The major in-house hiring costs include;
- Remuneration of each in-house employee involved in the process.
- Time spent on scrutinizing applications.
- Time spent interviewing applicants.
- Time spent verifying applicants’ qualifications.
Training Costs
Each new employee requires significant induction to integrate with the organization’s practices and way of doing work.
In estimating training costs, consider factors such as;
- The cost of facilities used.
- The remuneration of workers involved in the training.
Termination Costs
When terminating an employee’s service, you may incur substantial administrative costs, including shutting down computer access and retrieving the company’s property under the employee’s possession, such as cars, tools, and uniforms.
Loss of Productivity
An employee’s exit may lead to a loss of productivity in two main ways.
First, the employee in transit may be preoccupied with their new appointment that their productivity deteriorates as they exit.
A simple way to calculate the loss is to evaluate the loss you incurred from similar exits in the past and multiply it by the employee’s daily wage.
Similarly, when you bring a replacement, the new employee will take time to adjust to the new work environment. Assuming 50% productivity, you can multiply the percentage by the days required to attain maximum productivity and the employee’s daily wage.
Unpaid Offset Costs
You’ll often incur expenses while the vacancy remains unfilled. An easier way to determine unpaid offset costs is by deducting the employee’s wage for the vacant post days.
