How to calculate the real cost of employee turnover

Employee turnover is expensive. Losing valuable employees costs literally weeks of effort and tens of thousands of dollars per turnover event. HR Associations report turnover event cost is between 1 to 3 times the employee’s annual salary and includes the direct costs of recruiting, the direct costs of lost productivity, and the indirect costs of team performance disruption. We choose to use a more conservative cost factor of between 0.4 and 2 times the employee’s annual salary. To deal with turnover disruption it is clear that investing in your employee’s development and engagement to combat and manage turnover is not only cost justified, it’s a profit center that needs to be part of your strategic plan.

According to LinkedIn statistics here are some industry norms for turnover rates:
Technology (Software) 13.4%
Professional Services 11.4%
Oil & Energy 9.7%
Aero/Auto/Transport 9.6%
Healthcare & Pharmaceutical 9.4%

The real annual cost of employee turnover is shocking when compared with the short term cost of training and improving employee relations.

In the example below:
– the average salary is estimated to be: 50k per year
– the lost employees that had to be replaced is: 19
– the number of new employees to support growth is: 9
– the employee turnover ratio is below average at: 5.8%
– the cost of turnover for 19 lost employees is: $1,900,000.00

Here’s how to calculate your employee turnover ratio:

Employees at beginning of the year:      325
Employees at the end of the year:           334
Average number of employees in the year: (325 + 334) / 2 = 329.5

Number of new employees in the year:   28 (19 replace lost employees, 9 business growth employees)
Number of lost employees in the year:   19
In this example the turnover ratio is:        19 / 329.5 = 5.8%

Turnover ratio is calculated as the percentage of lost employees divided by the average number of employees in the year.

Here’s how to calculate your employee turnover cost:

Average employee salary with benefits: 50,000
Number of lost employees replaced: 19
Total turnover cost factor: 2
(HR Association: 1 to 3 times annual salary)
In this example the turnover cost is: 50,000 x 19 x 2 = $1,900,000.00

Our low average turnover cost factor:                   1.2
(Low average: 0.4 to 2 times the annual salary)
Low average example turnover cost is:                 50,000 x 19 x 1.2 = $1,140,000.00

Employee turnover cost is serious money caused by serious disruption. Everything you can do to mitigate this problem will pay short term as well as long term dividends.

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