Source: Don Alexander, Founder, GeneCoda
Many articles I’ve recently reviewed about employee turnover describe various methods to calculate the unplanned turnover costs of an organization. For example, a study from the Center for American Progress cites figures that range from 16% of annual earnings for jobs paying $30k or less up to 213% for very highly paid jobs and those at senior or executive levels.
Greg Willard wrote an article “How to Really Calculate the Cost of Employee Turnover” for ERE that offered a compelling series of steps to consider in employee turnover costing and Dr. John Sullivan’s “Cost of Vacancy Formulas for Recruiting and Retention Managers” offers sage advice including brand image and other aspects of turnover which may be challenging to quantify. Other articles leverage revenue assumptions which are valid but may not account for pre-revenue companies.
“Too often, companies only look at the cost of turnover through the lens of obvious direct costs and ignore the hidden costs that are the real drivers of unnecessary expense to an organization when talent leaves,” observes John Campbell, Founder of Talent Outcomes LLC, a human capital consulting business that helps small to mid-size companies create effective people strategies to help ensure the success of their business strategy.
Campbell’s experience leading HR and Talent Management functions of large organizations across a diverse spectrum of industries has give him first-hand understanding of the critical impact turnover can have on the bottom-line of a business.
“Turnover has an incredible domino effect on costs within companies, costs that can grow exponentially as you look at the impact of just one person leaving a role for which there is no internal ready-now backfill. Understanding the complete picture should be at the top of every CFO’s priorities for controlling costs. The best way to do this is through an honest accounting of the indirect expenses incurred…those things that involve things such as time, lost productivity, lost sales, lost IP, etc.,” explains Campbell. “Having a line of sight into the true cost is incredibly powerful data that can be used to build a business case for programs designed to help enhance leadership competencies and drive employee engagement, which are directly correlated with decreased turnover.”
Contemplating that a turnover calculator estimator would be valuable to our clients, we next turned to Google to search online or excel based employee turnover calculators and found several. While the baseline information seemed reasonable for a quick estimate, some of the formula’s used seemed rather simplistic and others used aggregated formulas whose inputs were difficult to substantiate so we set about creating our own.
What are the differences we incorporated from what we found online?
- Our calculator offers guidance for data entry but makes only two commonly held assumptions outside of your own data. One is the model is based on an 8-hour workday and the second is the rate of a temporary or contract worker is assumed to be 1.5X the departing employee’s hourly rate (salary only).
- Our analysis accounts for costing line items of individuals that are involved in the interview and orientation process as well as the time spent by each individual*
- Our calculator accounts for the use of temporary or contractor based interim services while the position is being filled.
- Our calculator incorporates the potential for relocation costs and sign on bonuses which are more common for higher level positions.
- Our calculator asks a final “catch-all” question which may need to be separately calculated. “Extraordinary costs not otherwise factored”. This dollar figure accounts for any unique costing to the position that is not previously addressed.
- Our calculator populates a database in which we will use iterative, real data to produce guidance reports for our clients, in the future.
What are the drawbacks?
- When you do the calculation, buckle up – you’ll likely be stunned.
- Some will challenge the fundamental assumptions. Accuracy and education are our goals so we welcome your critique.
- Additional “soft costs” such as turnover’s potential brand damage are difficult to measure and are not factored into our equation. Therefore, this calculator should be viewed as a minimum cost of turnover.
Please click the following button to begin the Employee Turnover Cost Calculator. It may be best to use a desktop or laptop with this tool.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 130 companies throughout the region.