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What’s the Real Cost of Turnover?

It's one of the most important numbers — and hardest to peg down — in the life of an HR manager: The cost of turnover.

The numbers fluctuate ¬wildly, depending on who you ask. Some say it’s as low as 25 per cent of the departing person’s salary while others peg it as high as 200 per cent.

Donna Miller remembered the skepticism she felt — and met with — when trying to cite such numbers as head of HR for the Canadian side of a U.S.-based call centre.

“It was always a generic number, like 1.5 times the salary, and someone would say, ‘Well how did you get that?’ and it was ‘I don’t know; that’s what they say,’” said Miller.

She decided to pin down her own numbers by looking at the HR budget and what items would cost what amount, by going to the floor and asking people about the amount of extra work they had when someone left and by talking to managers about how long it takes for a new person to get fully up to speed.

Now President of Nexus Consulting, Miller is working on a tool to help businesses in the sector figure out what standard definition and methodology to use when calculating the rate and the costs of turnover.

For HR people, it’s not difficult to figure out what goes into the laundry list of factors to consider. The direct costs would include the time it takes to process the paperwork, to conduct the exit interview and to write the job ad.

Then there’s the cost of placing the ad, hiring a search firm, going through applications, interviewing candidates, conducting reference checks, conducting pre-employment tests and finalizing the contract — all involving not just the time and resources of the recruiting staff and their support staff, but that of the hiring manager as well.

Moving costs, signing bonuses or referral bonuses also need to go into the equation, as do costs related to onboarding such as orientation, training and new material and equipment.

The indirect costs are harder to quantify, but they can be substantial. These include the loss of productivity on the part of the outgoing employee, on the part of her colleagues who have to fill in once she’s gone and on the part of the new hire while he gets up to speed. There could also be a loss of productivity on the team or departmental level.

Besides productivity, “some organizations will think about what they’ve invested in the person in terms of training, knowledge and skills development that the person is now going to walk out the door with,” said David Sissons, Toronto-based vice-president of HR consulting firm Hay Group. “That’s a more difficult item to quantify because where do you begin — the last year, the last two years or the last five years?”

Also difficult to quantify are other intangibles such as the impact on the company’s reputation, customer satisfaction and sales and development opportunities, said George Hesketh, former manager of business analytics at Dublin, Calif.-based talent management firm Taleo.

Hesketh estimates the cost of turnover to be equal to the departing employee’s one-year salary.

At Hay Group, the number cited is 1.5 times the salary for a manager or professional, and half the salary for an hourly worker. However, when a senior-level person occupying a crucial role or a high performing sales person leaves, the costs can be as much as twice the salary, said Sissons.

The numbers coming from these and other similar HR consulting firms are considerably higher than those cited by specific industries. In a 2004 report, The Cost of Frontline Turnover in Long-term Care, labour economist Dorie Seavey found the direct costs of the loss of one front-line employee in a long-term care facility to be $2,500 US.

A 2000 study by Robert Pollin and Mark Brenner of hotel, retail and restaurant employees in Santa Monica, Calif., puts direct turnover costs at $2,090 US for non-managerial workers who earn an average hourly wage of $7.58 US. That’s about 13 per cent of their yearly pay of $15,766.

A 2002 study by Timothy Hinkin and Bruce Tracey of hotel employees in Miami and New York puts turnover costs at $1,332 US for room-service wait staff, $2,077 US for line cooks, $3,383 US for gift-shop clerks and $5,688 US for front-office associates.

Hinkin and Tracey, two professors at Cornell University in Ithaca, N.Y., released an update in 2006 that puts the loss of a front-desk employee at 30 per cent of the salary. In the same ballpark, the costs to replace a housekeeping attendant at a hotel in Alberta are 21 per cent of the attendant’s full-time salary (see BC's equivalent below).

Clearly one of the reasons these costs are so low is the relative ease with which people in these types of low-wage and low-complexity jobs are replaced. But that doesn’t account for the relatively low turnover costs compiled in high-skill industries such as information technology.

At Info-Tech, a London, Ont.,-based consulting firm, turnover costs are pegged at 30 to 50 per cent of salary. At the uppermost level, they’re 100 per cent of the salary, said senior research analyst Jennifer Perrier-Knox.

“If you’re talking about a highly skilled, senior-level person such as a chief information officer, it might take half a year to fill the position. There’s massive productivity impact during that time, and the interview process involves half a dozen people — not low-cost employees but HR and executives.”

Even then, Perrier-Knox would put the cost at one-time the salary.

The cost of turnover is notoriously difficult to pin down, said Jon Burton, former manager at PricewaterhouseCoopers Saratoga, a benchmarking firm in the San Francisco area. PwC Saratoga researchers once tried to compile the numbers and discovered not only were the numbers all over the place, but the sources for the numbers were just as hard to verify.

“It was a circle of ‘You said that’ and ‘No, we got that from you,’” said Burton in describing the confusion of attribution and cross-attribution that surrounded the topic. “That’s why I tell people that the best way to get at the cost ultimately is to do your own calculations, using estimates that are reasonable and credible, estimates that will pass muster with the leadership.”

This article is written by Uyen Vu. © Copyright Canadian HR Reporter, July 14, 2008, by permission of Carswell, Toronto, Ontario, 1-800-387-5164. Website: www.hrreporter.com.

DOING THE MATH

The Cost of Turnover for a Housekeeping Attendant

The following shows the cost of turnover for a housekeeping room attendant in BC earning $12* an hour, based on the assumption of two weeks' notice and two weeks' job vacancy.

*$12/hr used based on the Service Canada prevailing wage rates for light duty cleaner.  Average wage ranges from $11.95/hr to $12.59/hr, depending on region in BC. www.labourmarketinformation.ca

Termination costs

Separation processing (admin support)  0.5 hour @ $15/hr $7.50
Separation processing (management)  2 hours @ $25/hr $50
Exit interview (HR staff or consultant)  1 hour @ $25/hr $25
Accrued vacation   five days  $480

 

Vacancy/hiring costs

 

Temporary help (wages)  64 hours @ $12/hr $768
Writing job ad    $25
Running job ad    $75
Application screening  1.5 hours @ $25/hr $37.50
Interviewing 3 hours @ $25/hr $75
Reference check 1.5 hours @ $25/hr $40
Finalizing contract 0.5 hour @ $25/hr $12.50

 

Orientation and training

 

 

New hire processing 1 hour @ $15/hr $15
Orientation    2 hours @ $25/hr $50
Orientation materials     $5
Uniforms/equipment   $50
In-house training 12 hours @ $12/hr $144

 

  
Additional costs if hiring a temporary foreign worker

Return Airfare for the TFW (from Mexico or Philippines)   $1200 - $2500
3 months private health insurance premiums 3 months X $60/month  $180
Recruitment costs*   $1000 - $2500

     
*Recruitment costs vary depending on whether you go yourself or if you use a recruiter and how many people you hire. Costs include return airfare, hotel, per diems and possible placement fee if using a recruiting firm.

Indirect costs

Lost productivity of incumbent 32 hours X $12/hr $384
Lost productivity of co-workers 32 hours X $12/hr $384
Lost productivity of supervisor 18 hours X $13.50/hr $243
Lost productivity of new hire during first week 16 hours X $12/hr $192
Lost productivity of new hire in following two weeks 16 hours X $12/hr $192
Increased defects/operating errors   $50
Dissatisfied or lost customers during transition   $700

Total turnover costs

Total direct costs $1,859.50
Total indirect costs $2,145.00
Total turnover cost $4,004.50
Potential additional costs if hiring a TFW $2,380 - $5,180


 

Source: Finders & Keepers, published by Alberta Human Resources and Employment

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