How to calculate the cost of turnover

Let's dig in on some of the work being done to soften the cost of employee retention, give you some tools to calculate your attrition costs, and finally, we'll look at a few of the best ways to improve your employee retention.

Why Does Leadership So Often Ignore Employee Attrition Costs?

We've all heard it time and time again, but this Peter Drucker quote summarizes it succinctly.

"What gets measured, gets managed." - Peter Drucker

There is no more significant fear or pain as a manager or leader than losing talents, even more so when that person is a high performer or in a position that's challenging position to replace. When someone great leaves an organization, there's always an unexpected hole, no matter how much prep work or lead time is given. This also affects employee experience and can lead others to follow suit. 

Despite that awful feeling that is typically felt throughout the team and organization, only a few put in strategic plans to improve their retention.  

The quickest path to convincing leadership or management they have a problem they can't acknowledge is to lay out action plans and talk about it in dollars. Speak their language and offer a concrete benefit.

Why Is Employee Turnover Very Costly For Companies?

Let's Get Into the Cost Details...

There have been plenty of studies done to pinpoint the most accurate costs of employee churn. The results have varied, but one thing remains certain across all turnover cost studies: it's not cheap.

One study from the Center for American Progress (CAP) found that the cost of replacement was on average 213% of the annual salary for highly-skilled employees. Part of the variability comes into play when considering less expensive roles. Cost estimates for positions with salaries between $30-$75K are around 20% annual salary.

Above are the "good" stats. Josh Bersin, however, suggests that by looking at the lifetime costs (hiring, onboarding, L&D, institutional knowledge, training, and more), the actual costs are between tens of thousands of dollars to 1.5 or even 2.0x the entire annual salary. It's likely somewhere on the middle-high end of this spectrum. 

Bersin paints a clear picture as he lays it all on the table. There's hiring a replacement (other employee's time interviewing and tools), onboarding, lost productivity, cost/time of training, lost engagement, ramp-up time, and so more.

Those are only the obvious costs. The most exciting point Bersin makes is that employees, unlike most other assets, are appreciative ones. He goes on to say, "employees get more productive the longer they are at a company, learning the systems, products, and how to work together with their team."

Bersin's graphic perfectly shows the inflection point when an employee stops being a cost, provides a return, and eventually becomes extremely valuable.

In another vital study, Maia Josebachvili calculates the ROI of an employee using the metric "Employee Lifetime Value," which represents "the total net value over time that an employee brings to an organization."

Maia uses a sales executive earning $50K/yr (and generates $50K/mo in revenue). Maia argues that better "People Practices," which include better onboarding, engagement, and management, yields a difference of $1.3M in net value to the company over just three years.  

To realize this value is predicated on retaining the above example employee for just an extra year (3 instead of 2), which demonstrates how impactful retention can be. See this result in the following graph:

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Source: Greenhouse case study

Whichever way you prefer to determine the cost of employee turnover, the resulting cost is high.

So, how do you calculate the actual cost at your company?

Use This Equation To Calculate Your Employee Turnover Costs

Employee turnover cost is equal to the number of employees churned times the average cost of these churned employees, which is relatively straightforward.

Cost of turnover = # departures x average cost of departures

Your turnover rate is the number of departures divided by your total number of employees.

Turnover rate = # departures / total # employees

But how do you get to the average cost of employee departure?  There are a couple of options.

BASIC EMPLOYEE TURNOVER COSTS CALCULATION

Let's first try to get you a general idea of your employee turnover costs. Per Jack Altman, you can calculate basic turnover costs by examining four top-level buckets:

1. Cost of hiring
2. Cost of onboarding and training
3. Cost of learning and development, and
4. Cost of time with the unfilled role
   

These can be summarized in this equation:

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Source: Jack Altman on employee turnover cost

Like anything else, to get the real picture, digging a little deeper is required. Basic analysis is okay and will likely reveal costs are higher than expected, though it can be tough to come up with exact numbers unless we go into a little more detail.

DETAILED EMPLOYEE TURNOVER COSTS CALCULATION

To go a little deeper, let's inspect this article by William Bliss. It gives a much more exhaustive list of variables to consider and calculate more accurate costs. Below is the summarized list – feel free to use our inline calculator to see personalized costs for your organization.  

Here is the exhaustive list of factors you should consider:

COSTS DUE TO A PERSON LEAVING

• Get an idea of how much it'll cost to have team member(s) step in while the position is vacant – use overtime rates for existing employees or temp rates for part-timers.
• At a minimum, apply 50% compensation of the team member covering each week the role is vacant or 100% of the team member's salary if it's empty.
• Calculate the team member's cost of conducting the exit interview, any administrative expenses of stopping payroll & benefits, and time spent processing resigning employees.
• Please do your best to calculate the manager's time cost to understand and manage any work to be covered, plus the time it takes the manager to perform an exit interview.

• Be thorough in calculating training investment costs in departing employees – consider things like certifications, classes, trade shows, conferences, and more.
• Figure out how the halo effect will extend to a productivity loss of others and the relating cost.
• Add costs associated with severance and benefits for departing employees.
• Calculate the cost of loss of institutional knowledge, including any skills or contacts – you can use up to 50% of the role's annual compensation. Don't forget to add a 10% compounding increase to take into account appreciation.
• If the person leaving is related to customer acquisition, consider adding the cost of customers lost that the employee may take with them. If you feel there's a low likelihood of the customer leaving your organization, definitely consider the cost of retaining that customer.
• Lastly, don't forget to subtract the cost for the time the position is empty. 

RECRUITMENT COSTS

• A typical recruitment agency will cost anywhere from 15-30% of the position's annual compensation – including advertisement and any internal referral costs. 
• If your organization has internal recruiting, add in the recruiters time to create a new sourcing strategy, review inbound interest, prepare and conduct interviews (this step typically includes other team costs), reference check tools, and more – this can be up to 30-100 hours per position!
• Is there any travel required for your recruitment process? (setting up booths at job fairs and conferences, flights, booth material, and more)
• On top of the recruiter time spent preparing the interview, there are additional costs associated with immediate supervisor, managers, peers, direct teammates, and a selection committee to review, explain requirements, complete the interviews, and select the candidate of choice. More time may be required to do their sourcing if this is requested or desired -- we recommend adding another 30-100 hours of time cost.
• Is your team handling any of the resume review processes? If so, add around $1.50/resume to consider handling, processing, and responding to candidate resumes. 
• Likely your organization requires drug screens or educational and criminal background checks + reference checks. Add these additional costs per candidate checked.

TRAINING COSTS

• Has your company developed an orientation program around this role yet? If no, consider the upfront development costs for that + time. If yes, consider the time it takes the person(s) running orientation + the new hire's time to complete the orientation.
• Any specific training related to the department to develop the new hire as a percentage of the salary. 
• Are all training materials and personnel prepped for training the new hire? If yes, consider the time costs, and if not, consider the time + material creation costs.  
• Add any time spent distributing, explaining, and reviewing assignments or output from a supervisory perspective. We recommend adding at least 5-7hrs per week for a minimum of 8 weeks.

LOST PRODUCTIVITY COSTS - REPRESENT TIME IT TAKES EMPLOYEE TO BECOME FULLY PRODUCTIVE

• Add up to 75% of annual salary for at least 2-4 weeks as new hire operates at ~25% productivity.
• Add up to 50% of the annual salary for at least 5-12 weeks after the initial 2-4 week period.
• Add up to 25% of annual salary for at least 13-20 weeks after ramp up 5-12 week period.
• Add supervisory time spent and peer time spent helping to get the new hire up to speed. The more complex the role, the higher the costs here. 
• New hires make mistakes (that is not a bad thing but more the nature of growing into the role), but what are the costs of those mistakes? Add these in, too (these tend to happen up to 20 weeks from the time of hire).
• If the person that left was a manager, what are the costs associated with department or team productivity loss? Add these. 
• Was there a significant, big, or complex project in mid-delivery when the original person left? If so, consider the costs on completion of delivery and the time it'll take to make up for that loss. 
• Was the person that left a productivity add, such as an assistant or other key staff member? Consider the costs of productivity reduction of manager, director, VP, or C-Suite (whoever lost the key staff member). 

NEW HIRE COSTS

• Don't forget all the tooling costs and administrative costs such as putting the person on payroll, security setup, job material (i.e., IDs and business cards), computer, swag, software seats required, and more. 

LOST SALES COSTS

• Is the role associated with sales? If yes, divide budgeted revenue into weekly amounts, then multiply that by weeks position remains vacant + any training time required. 
• Don't forget to add lost productivity percentages against revenue to account for lost sales until the rep is entirely up to speed. 
• Is the role not associated with sales? If yes, try to find the position's loose revenue impact by taking the organization's total revenue and dividing it by the number of employees on average in a year. After you've landed on that number, multiply it by the number of weeks the position is empty by the average weekly revenue per employee. It's not perfect but gives you a rough idea. If you have a more straightforward calculation for determining the role's revenue impact, use that. 
  

The list of potential costs is long, and this is likely not completely exhaustive. One easy fact this uncovers is that it's expensive to lose talent. To do your rough calculations, we've created an inline calculator just below. Please share your results with us if you use the calculator or our sheet. We've also created a simple spreadsheet here (copy the sheet and plug-in your own numbers in the yellow fields) if you prefer to use this instead.

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How Do You Stop High Employee Turnover?

While you may not be able to stop it, you can reduce the costs.

Reducing costs associated with employee turnover can be easier if you know where to focus, there are two areas of focus to apply your effort: 

1. Find a way to reduce the turnover rate of your organization
2. When turnover does happen, reduce the impact

An effective Employee Exit Interview can help you better identify why people are leaving and create solutions around those reason.

WHEN TURNOVER DOES HAPPEN, REDUCE THE IMPACT

There are likely many factors and variables that play a role in minimizing turnover costs. However, Maia Josebachvili summarizes it down to only four primary factors that can maximize your ELTV "Employee Lifetime Value" – in other words, minimize the costs. 

The solution may seem obvious, but not many organizations practice these principles that well, if at all. The principles revolve around minimizing the period at which a new employee is a "cost" to the organization (i.e., Hiring and Onboarding) – and maximizing the productivity of the employee through alignment, L&D, and stable management.

The four primary factors that Maia identifies to increase ELTV are shown in the following image:

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Source: Maia Josebachvili on the ROI of investing in people

We can summarize Maia's method for maximizing these four primary levers as follows: 

1. Onboarding: Strong and efficient onboardings successfully target two goals: (a) The time it takes to contribute fully and productively to the organization is decreased and (b) Strong onboardings materially increase the likelihood of a voluntarily longer-term and happier employee.‍
2. Hiring: New talent that raises the bar has a halo effect on performance and tends to lift the performance of others around them – it can also lead to more efficient recruitment through network effects of attracting top talent.‍
3. Management & Development: This may seem obvious, but it's consistently the most significant challenge we always hear from other organizations and customers – developing and grooming new managers is tough, and hiring them can be just as hard. However, having excellent managers can increase the value of an employee by 1.5-2x over time. ‍
4. Management & Culture: Management and mostly lower management can often have an outsized impact on culture and shouldn't go unnoticed. Good leadership and an inclusive culture are at least correlated (if not causated) with retention.
   

These four levers may seem obvious but putting them into practice is often harder than it might seem on the surface. Don't neglect to spend time on these suggestions and revise as necessary.

REDUCE THE TURNOVER RATE OF YOUR ORGANIZATION

This step is undoubtedly the hardest of the two as it's the most out of your control of the two options. Jack Altman has three focus areas he suggests for creating an environment that is likely to reduce turnover: 

1. Growth
2. Impact
3. Care
   

Jack recommends organization's managers have conversations about goals, giving the employee more responsibility and autonomy – help employees acquire desired skills to promote growth. Be sure to develop a clear and meaningful company mission that employees can connect with, measurable and not merely aspirational. Finally, don't underestimate the value of creating a culture that recognizes hard work and shows real appreciation – this is where Assembly can help the most. 

Conclusion

As mentioned above, don't stop making improvements to your process. Like anything else, these programs can become outdated and stagnant. We recommend considering a quarterly or bi-annual program and process review.

Setting a goal to outline and map the costs associated with employee turnover can extend to helping the organization solve scheduling, process routing, and other operational bugs. After building a clear map of the costs, metrics, and variables – you are now capable of examining in greater detail whether you need to hire more, less, or what levers you might be able to pull here and there to reduce costs associated with employee turnover rather than speculate and make decisions that have little to no impact. 

We hope that we've shown anyone reading this how important it is to your organization's bottom line to reduce employee turnover and that losing talent is enough within your control that you should do something about it. Not only that you should do something about it, but that doing something about it is within your grasp and not as far-fetched as you might have previously thought.

What is the formula for turnover?

What costs are included in turnover?

What is the meaning of turnover cost?