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How to calculate employee turnover cost



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A large part of employee turnover is connected to bad hiring decisions.

SHRM estimates average annual employee turnover rates to be around 19%. For a 200-employee-sized business, that’s 38 departures every year. In compensation terms, the real cost of employee turnover can be up to five times the position’s annual compensation, depending on the type of role, location, etc.

By calculating reasonable estimates for expenses like employee annual salary and daily cost of covering vacancy (see screenshot below), that 200-employee business would spend $638,324 in avoidable costs. Why largely avoidable? Because much of turnover is due to bad hiring decisions.

Avoid bad hiring decisions to avoid employee turnover cost.

When calculating employee turnover cost, there are several data points you’ll need to calculate to accurately account for the lost productivity of the open position (including lost productivity of those covering for the position), as well as for recruiting and talent acquisition expenses, onboarding and orientation costs, and new-hire ramp-up time.

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What data is needed to accurately calculate cost of employee turnover?

  • Daily rate of departed employee’s salary plus benefits
  • Number of days the position will remain open before you can fill it
  • Daily rate of manager’s salary who is responsible for recruiting and screening applicants
  • Estimated cost of advertising for the open position
  • Estimated hours spent on screening resumes
  • Estimated hours spent interviewing, including phone screens and think of all people involved
  • Cost to conduct a background check
  • Daily rate of hiring manager or trainer’s annual salary
  • Total days hiring manager or trainer will spend with new employee
  • Number of working days in the new hire’s first 3 months (the onboarding and ramp-up period)

Total employee turnover cost can be broken down into these 5 cost calculations:

1. Benchmark Employee Cost – The total departed employee’s compensation (salary and benefits). You can break this data into daily and monthly rates to accurately prorate across the time the position remains open.

2. Vacant Position Coverage Cost – The number of days the position remains empty multiplied by the daily rate provided in your benchmark costs. This is essentially how much it is costing your company to cover the position. And, since it is likely being covered by other resources, this cost is caused by offsetting other priorities that are likely getting sidelined to fill the void.

3. Cost to Fill the Vacant Position – The total cost associated with all talent acquisition – advertising, screening, and selection. This includes the consideration for the HR and/or hiring manager’s salary, advertising costs, assessments, testing, and/or background checks, and the cost of all time spent by employees involved in the interviewing process.

4. Onboarding & Orientation Costs – The cost of all time spent by a trainer and/or the hiring manager to onboard and get a new hire up to speed.

5. Productivity Ramp-up Cost – The cost associated with a new employee ramping up and learning the ropes. This is usually calculated based on a 60- to 90-day period where the new hire is doing more learning than producing. The new hire’s daily salary and benefits expense is often used here.

How to accurately calculate annual employee turnover cost

Employee turnover cost is calculated with the following equation: (Vacant position coverage cost + cost to fill the vacant position + onboarding and orientation costs + productivity ramp-up cost) x number of employees lost in that position in a given year x 12 = your annual turnover rate.

The below screenshot shows how a 200-person company with a 19% employee turnover rate and a conservative $50,000 annual employee salary incurs an estimated turnover cost of $638,324 annually.

turnover costs-1.jpg

Before calculating the cost of employee turnover, analyze your hiring process and reflect on its strengths and weaknesses. A large part of turnover can be connected to poor hiring practices. Only then can you incorporate the proper data and calculations to produce the most accurate turnover cost.

Join 10,000 companies solving the most complex people problems with PI.

Hire the right people, inspire their best work, design dream teams, and sustain engagement for the long haul.

Maverick

Drew is a PI Certified Partner, and the Founder & CEO of Lever Talent.

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