How to Calculate the Real Cost of Employee Turnover

When you hear people talk about the cost of employee turnover the numbers are often vague and non-specific. It’s hard to put a real number on something that has so many indirect effects. The numbers you do see are typically scary, but how can you define what that number is in your organization? 

If your goal is to reduce employee turnover, how do you create a budget? How do show your return on investment for increased retention? Intuitively, we all recognize the importance of retaining quality people, but the challenge is putting an accurate number on it.

If you look, there are loads of calculators online to help you calculate the cost of employee turnover. For example, here and here. But most of these only look at the direct costs to recruit a new employee and some basic productivity costs. These are important, but they don’t tell the whole story.

There are five key areas to look at when trying to determine the real cost of turnover for your organization:

1. Costs due to a person leaving
2. Recruitment/New hire costs
3. Lost productivity costs
4. Lost sales cost
5. Training costs

Here’s a summary of some things to look for in each area:

Costs due to a person leaving

• Salary for the person filling in
• Lost productivity for each week a role is vacant
• Administrative costs (payroll, benefits, exit interview)
• Lost productivity for a manager who must accommodate
• Cost of training invested
• Any severance or benefits continuation

Recruitment/new hire costs

• Ad costs
• Internal recruiters time
• Fees for external recruiter
• Time spent by manager/department developing position requirements
• Cost of any screening tests (behavioural, drug, skills)
• Administrative costs to bring the new employee on board
• Cost of manager’s time in onboarding

Lost productivity costs

• Lower initial productivity of a new employee (operating at 25% for 2-4 weeks, gradually climbing to 100% in about 20 weeks)
• Time spent by manager/colleagues bringing the new employee up to speed
• Any costs associated with delayed projects the departing employee was involved in

Lost sales costs

• For sales staff, divide the budgeted revenue per sales territory into weekly amounts and multiply that amount for each week the territory is vacant, including training time. 

• For non-sales staff, calculate the revenue per employee by dividing total company revenue by the average number of employees in a given year. 

Cost of training

• Cost of orientation (new person’s salary+ the person who conducts the orientation + cost of materials.
• Cost of departmental training (use same model as above)
• Cost of supervisory time spent in assigning, explaining and reviewing work assignments and output. This represents lost productivity of the supervisor. 

You can get as detailed or as general as you want with these elements. The key thing to keep in mind is that there is much more to consider than the direct recruiting costs. When you factor it all in, it makes for a compelling case to use the tools and resources up front to make sure you are hiring the right candidate.

What about you? How do you calculate the cost of turnover in your organization?