How to calculate your employee turnover costs

Author: Harrison HR | Blog

Employee turnover costs can have a significant impact on your bottom line.

Depending on the size of your business, the total costs of replacing an employee varies from 30-150% of their salary.

This amount represents a substantial expense for any size business.

Calculating the direct costs of employee turnover is usually quite straightforward, but there are many indirect costs that need to be taken into consideration.

It’s incredibly important to understand your total employee turnover costs in order to effectively manage your HR expenses.

In this blog post, I will explain step-by-step how to calculate your direct, indirect and total employee turnover costs.

HR Outsourcing? Or in-House HR Manager?

Calculating your direct employee turnover costs

The first step is to calculate the employee’s total remuneration, the cost of benefits to the business and the value of associated on-costs.

To do so, follow this simple formula:

  • Start with employee remuneration (base wage/salary)
  • Add the value of employee benefits. For example:
    • Superannuation contributions
    • Company vehicle or car allowance
    • Other employer-supplied equipment such as mobile phones and laptops
    • Annual leave loading
  • Add the value of on-costs. For example:
    • Workers compensation premiums
    • Payroll taxCosts of advertising the vacancy
    • Fees paid to recruitment agencies
    • Fees paid to consultants for conducting tests, checking references, pre-employment medicals, etc
    • Termination payout amounts, such as pro rata long service leave and pay in lieu of notice
    • Temp agency fees

Calculating your indirect employee turnover costs

Determining your indirect costs can be difficult. The following is a list of broad factors that need to be taken into consideration.

Loss of productivity from other employees filling in for vacant position:

Where other employees perform part of the vacant job as well as their own jobs, use an estimate of one-third of each employee’s total remuneration cost.

In-house hiring costs:

Calculate the following:

  • Remuneration of employees involved in recruitment/screening/selection processes, e.g. HR/recruitment staff; line managers; administrative staff who make appointments, prepare and place advertisements, liaise with consultants, etc.
  • The amount of work time each of the above spends on the process
  • The amount of work time spent on screening applications and processing rejections
  • The amount of time spent attending interviews and debriefing afterwards (include the time of each interview panel member)
  • The amount of time spent verifying CV contents (eg qualifications), checking references, conducting tests, etc.

Training/induction costs:

Calculate the following:

  • Remuneration of employees involved in training and induction processes, eg trainers, line managers, ‘buddies’
  • The amount of work time each of the above spends on the process
  • Cost of training/induction resources and facilities, on a per employee basis

Termination administration costs:

These costs may include:

  • Pay Officers’ time to process termination pay
  • Exit Interviewer’s time
  • Time required for employee and line manager to complete paperwork, return and check employer’s property (such as security tags, vehicles, tools, uniforms, sales resources, etc.)
  • Miscellaneous administrative tasks such as closing off computer access.

Loss of productivity in early stages of employment:

New employees normally take some time before they become sufficiently familiar with their jobs to achieve 100% productivity.

The time period varies according to the job content and employee.

Using an estimate of 50% productivity until the required standard is reached, estimate the number of days required to reach 100% productivity multiplied by 50% of the employee’s daily total remuneration rate.

Some estimates will be quantifiable (e.g. changes in production or sales figures), but many will not.

Loss of productivity in final stages of employment:

This is harder to estimate, but the productivity of many (but not all) employees deteriorates while they are serving out their notice period.

For example, many are preoccupied with making new arrangements relating to a new job, and some attempt to ‘square the account’ if they have untaken sick leave or rostered days off owing to them.

There will also be time taken with exit interviews, farewell parties, etc.

To calculate this cost, you could attempt to estimate percentage loss of productivity based on your observations of past employees who resigned, and multiply the percentage by the employee’s daily total remuneration rate. Again, some estimates will be quantifiable (e.g. changes in production or sales figures), but many will not.

Offset - unpaid costs while job is vacant:

On the other hand, there may be some offsetting cost savings while the vacancy remains unfilled.

From the above costs you should deduct the employee’s remuneration for the number of days the job remains vacant.

Summary: calculating your TOTAL employee turnover costs

The total cost of turnover of one employee is as follows:

Total direct costs

PLUS total indirect costs

LESS Unpaid costs while job vacant

= Total cost of employee turnover

Here’s an example scenario:

Consider the following sample calculation.

Our sample calculation is based on a business with 50 employees and 20% annualised employee turnover - 10 resignations per year.

The full-time adult average weekly total earnings figures issued by the Australian Bureau of Statistics (for October 2018) was $1,586.20.

Adding 30% to this wage for the cost of employee benefits and on-costs amounts to $475.86, giving a total cost of $2,062.06.

Assuming turnover cost to be a year’s total remuneration for each employee, total annual cost of turnover for this business is $2,062.06 x 52 weeks x 10 employees.

That’s a total of $1,072,271.20 year.

As this example shows, it’s far better to invest a little in employee training and recognition than have to replace employees.

A strategic employee retention strategy that was able to reduce employee resignations from 20% to 10% per year would save the example business almost $500,000 per year, less the costs of implementing the strategy.

Anyone still think retention strategies are a waste of time, money and resources?

This should help justify organising those team BBQs, movie vouchers and training sessions.

HR Outsourcing? Or in-House HR Manager?

Need advice on reducing employee turnover costs for your business?

As this blog has explored, there are a plethora of costs associated with replacing employees.

A comprehensive HR Audit is often an important first step in reviewing your existing HR practices and setting up a framework for making improvements moving forward.

For more information about reducing your employee turnover costs with a strategic retention strategy, simply click here to request an obligation free 15 minute phone consult.

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