Did a long-time employee just hand in their 2-week notice?
Are you worried about how fast you’ll be able to find a reliable replacement?
Hiring the right people is extremely important for every business owner. That’s because staff are the most important resource in any company. Replacing an employee can cost significant money, time, and effort.
To avoid making an expensive and frustrating hiring mistake, you need a way to evaluate your company’s turnover data.
In this post, I explain some facts about turnover, why it relates to organizational risk, and how to calculate the total annual cost of adding new staff.
What is Turnover?
Turnover is another way of saying “we’re replacing an old employee with a new one.”
This can happen in two ways: Voluntary and Involuntary.
This is an Employee-initiated resignation from the role. The employee may be leaving for a positive reason (better opportunity, relocation, more pay), or for negative reasons (they are burned out, overworked, feel unappreciated).
This is a Company-initiated termination of the employee from their role. This usually happens when the employee fails to follow the company policies, has high or unexcused absences, poor job performance, or cannot meet the expectation in their job role. But involuntary turnover can also occur when the employee has done nothing wrong: a layoff, demotion, or reduced work hours.
How is Turnover Tied to Risk?
Strategic risk involves the many vulnerabilities that could keep a business from succeeding. I explained why Onboarding and Offboarding processes are so important in making risk intelligent decisions. For more on this, check out What You Can Do to Boost Risk Intelligence After Losing Staff.
Another way to decrease the chance of harmful outcomes is to understand and accept the 5 risk roles of a leader. They are:
- Determine strategic goals
- Recognize blind spots
- Accurately gauge problems
- Move projects forward
- Create high-yield systems
- Design effective processes
- Identify work requirements
- Select, train, and retain people
- Establish boundaries
- Regulate and measure risks
Managing staff is one of these 5 Risk Roles. To be an effective Staffer, you need to:
- Know what actions are needed to reach your company’s goals
- Develop Standards and Guidelines that delineate clear boundaries
- Identify the work requirements that achieve your strategic objectives
- Select, train, and retain people
The official term for managing staff is called “Human RESOURCES,” and I think this is a good reminder of just how valuable people are to the success of your business.
Losing a staff member, whether by their choice or yours, is not a fun experience. But like any other difficult business decision, you will have a lot more success by viewing the turnover experience with an investigative perspective.
One of the areas to investigate is
“How do we calculate the cost of turnover?”
The Turnover Formula
Let’s take a look at a mathematical formula we can use to calculate the cost of turnover.
While there are many ways to look at turnover data, I like the formula introduced by Jack Altman, CEO and Co-Founder of Lattice, a performance management software platform. Jack wrote article in the Huffington Post with his formula for calculating staff turnover.
Here it is:
(Hiring + Onboarding + Development/Training + Unfilled Time)
x (Number of Employees x Annual Turnover Percentage)
= Annual Cost of Turnover
As you can see, this is a 4-step process.
- Start by finding the Annual Turnover Percentage (Number of employee separations in a year, divided by the average number of employees during the year).
- Next, add together the costs of Hiring, Onboarding, Development/Training, and Unfilled Time.
- Then we take the Number of Employees at year-end, and multiply it by the Annual Turnover Percentage (calculated in #1).
- Finally, we multiply the top line (sum of Hiring, Onboarding, Development/Training, and Unfilled Time) by the bottom line (Number of Employees x Annual Turnover Percentage).
This will give you the total that your turnover costs you in a year.
An Example Using the Formula
Company Q is a service business owned and operated by Jane. She employs a staff of 15 people. Last year, Jane had to fire a support staffer in May (annual salary: $35,000). In June, their long-time Office Manager resigned (annual salary: $55,000). Jane and her assistant scrambled to replace both positions within a month.
Let’s use the formula to find out how much Jane can expect to spend on annual turnover costs.
In this example, Company Q had 2 “separations” (one voluntary and one involuntary).
So we take 2 and divide it by the average of 15 employees (15 employees at the end of the year, minus 2 turnovers, plus 2 hires). The total of 2/15 is 0.13, or 13%.
Now we start with an estimate the costs of
- Hiring two people ($6000),
- Onboarding ($2000),
- Development and training ($8000), and
- Unfilled Time (1 month at $35,0000 a year = $673; 1 month at $55,000 a year = $1057; total Unfilled Time is $1730).
When we add $6000 + $2000 + $8000 + 1730, the total is $17,730.
Next, we take the Number of Employees (15) and multiply it by 13% (see step 1), which gives us 1.95.
Finally, we take the top line, $17,730 (see step 2), and multiply it by the second line, 1.95 (see step 3). That gives us an Annual Cost of Turnover of $34,573.50.
One thing this formula does not take into consideration is the overall picture of how the organization is doing. The above formula is helpful, but it only give us a small window into the rest of the story.
Business owners who want to dig more deeply into the reasons for turnover can ask Devil’s Advocate questions like these:
- What is the profit margin by service, by month, and by customer type?
- What is our operational efficiency? How much time, effort, and resources do we waste on “leaky” internal processes?
- What was the annual total sales? What was our net profit?
- How does our Accounts Receivables look? How often do we collect payment upfront?
- What is our debt load? Are we positioned for growth, or at risk of negative cashflow?
- What’s our total cost for overhead and personnel?
By asking probing questions like these, you will be able to identify additional vulnerabilities lurking in your company. You’ll be able to distinguish which actions are moving the needle toward your strategic goals.
In the process, you may also discover that a single number, such as the turnover figure, is not enough. The outcomes are resulting from a combination of root causes.
In the example above, Company Q’s annual turnover cost is just under $35,000. But that is just the starting point. The loss of an employee comes at a much higher cost, which I will talk about in my next post, How to Estimate the Qualitative Loss From Staff Turnover.
What is your experience with turnover—either as a business owner, manager, or employee? How do you wish it had gone differently?
Interested in hearing how you can reverse a toxic workplace? Find out more here.
Grace LaConte is a business consultant, writer, workplace equity strategist, and the founder of LaConte Consulting. Her risk management tools are used around the globe, and she has successfully reversed toxic work environments for clients in the healthcare and non-profit fields. Grace specializes in lactation law compliance & policy development, reducing staff turnover after maternity leave, and creating a participatory work culture.