How to Save Your Organisation Thousands to Millions of Dollars Per Year!
How much is your organisation spending on employee turnover? If your organisation has more than 10 employees, my guess would be thousands or even millions of dollars per year. In fact, the cost of turnover and replacing the employees who have left is probably one of the biggest, if not THE biggest cost to your business each year.
With over 15 years experience in the Human Resources and Training industries, I am still continuously surprised by the amount of CEO's and Senior Managers who have little understanding of the cost of employee turnover. Unfortunately many of the ones who do have an understanding of this cost are not pushing the HR team and business to drive strategies for change.
Why does this continue to happen? Mainly due to the fact that the cost of replacing employees is not a definitive equation and therefore it is not something that is usually tracked by organisations. There are so many intangible factors that make up the cost and because of this many small, medium and large organisations simply let the cost go on unnoticed and unaddressed year after year.
Let's break it all down and have a good look at exactly what turnover is costing your business:
AVERAGE YEARLY WAGE IN AUSTRALIA:
According to the Australian Bureau of Statistics (ABS) Average Weekly Earnings survey, recorded between May 2014 and May 2015, the average weekly earnings for a full-time adult is $1,545.60.
This is equal to a yearly wage of $80,371.20 and is the average taking into account the entry level positions through the senior management positions.
AVERAGE YEARLY TURNOVER IN AUSTRALIA:
The exact average figure for turnover in Australia is a little harder to work out:
An Australian Institute of Management (AIM) National Salary Survey in 2014 recorded a turnover rate of 12.2%. It is worth noting that this was covering 300 job roles and had a rather smallish response rate of 458 large companies only.
The Australian Workforce and Productivity Agency completed a Retail Workforce Study in March 2014 which showed, "the retail industry also has higher labour turnover compared with other industries: 21.7 per cent of employees have worked with their current employer for less than 12 months compared to the all-industries average of 18.2 per cent".
The ABS has a recorded turnover of 12.7% from 2013 - 2014, but no recording for 2015 as yet.
Research by Price Waterhouse Coopers places employee turnover in the first year at 23%.
Ultimately every organisation's turnover rate will be different. This will vary across job roles and industries for example; Hospitality and Retail tend to be typically higher as they have a lot of transient workers who work casually or on a part-time basis.
Generally turnover is calculated for the average organisation at anything between 10% - 20%.
AVERAGE COST TO REPLACE AN EMPLOYEE:
I have seen the cost estimated at anywhere from 30% - 400% of an employee's annual salary to replace them depending on who you ask and where you look. Some of these are a bit outlandish as generally the average costs are as follows:
Entry Level Positions - 50% of an employee's annual salary
Mid Level Positions - 100% of an employee's annual salary
Senior Level Positions - 150% of an employee's annual salary
What is this cost made up of you may ask? Mostly the cost is made up of recruitment and training costs, loss of time and productivity and how long a position is left vacant before a replacement starts. Let's break some of this down a bit more:
Depending on the recruitment processes that an organisation has, these costs can include:
Advertising Costs - from advertising online through to large feature ads in publications or online.
Internal Recruitment Costs - this is the time (based in salary) it takes for the internal recruitment process to occur and may involve the following:
Resume Screening - If 50 resumes are received, these will take a number of hours to review.
Phone Interview/Screening - Another couple of hours may be spent on phone screening the potential candidates and arranging an interview if suitable.
Initial Interview - Interviews normally take between 1 - 2 hours depending on the role. Times this by the amount of candidates you have to interview and the number of interviewers.
Second Interview - As per the initial interview, you may have 1 or more interviewers tied up for an hour or so per interview.
Reference Checking - Another couple of hours may be spent thoroughly reference checking the potential candidate/s.
Pre-Employment Checks - If there are any pre-employment checks such as medicals, police checks, psychometric testing, then the time taken to arrange and coordinate these also needs to be taken into account.
Pre-Employment Paperwork - Contracts and paperwork need to be arranged and sent to the individual prior to commencement.
External Recruitment Costs - Depending on the organisation, recruitment may be handled externally by a recruitment agency. If this is the case then there is a relatively high cost involved which involves a percentage of the person's salary being paid to the agency. This can be anything from around 10% - 30% on average depending on the amount of work carried out by the recruitment agency, the level of screening and interviewing and the level of the position being recruited for.
Training costs involved may include:
The cost of creating an induction program.
The time involved for the new employee to complete induction and orientation.
The time involved for the new employee to complete training associated with their role.
The time involved for a representative from the relevant business unit to train the new employee.
The time involved for the new employee to gain the necessary knowledge and skills to be able to complete the job without assistance.
Loss in Productivity:
Loss of productivity is normal. On average it would take most employees between 6 - 12 months before they are at full productivity. This includes actively looking for ways to improve the job/organisation, developing new ideas and working autonomously.
The loss in productivity of the role in question until the person is up-to-speed.
The loss in productivity of the person training the new employee.
Loss in Sales/Skills Whilst Position Remains Vacant:
If the position remains vacant for any length in time, then there will be potential lost sales, unhappy customers, loss in leads or relationships with other employees or businesses.
SO WHAT DOES TURNOVER REALLY COST?
Taking all of the above into account, I have done some adding up for you. The below tables show you the approximate cost of turnover for a range of organisation sizes and for a range of turnover percentages.
1. If we go for the average percentage being that it costs 100% of an employee's annual salary to replace them, then we get the below results:
2. If we go for a conservative view being that it costs 50% of an employee's annual salary to replace them, then we get the below results:
3. If we go for a more liberal view being that it costs 150% of an employee's annual salary to replace them, then we get the below results:
Some of you may be shocked by these figures as this might be the first time that you have actually considered these costs and what they are doing to your business.
Organisations with a small headcount are not in a position to be spending thousands to hundreds of thousands of dollars on recruitment every single year. Not to mention our larger organisations who are spending millions to hundreds of millions of dollars every single year.
Whilst it is almost impossible to reduce your annual turnover to nothing, can you imagine the savings to your business if you could cut turnover by just 5%? It is hard to really get a good concept of how much this could save you without seeing it in black and white. Here are some examples for you of the savings to be made if you can shave just 5% off your annual turnover:
A small sized organisation with 50 employees and a turnover rate of 20% could save anywhere from $100,464.00 to $301,392.00 per year depending on the roles being replaced.
A medium sized organisation with 500 employees and a turnover rate of 20% could save anywhere from $1,004,640.00 to $3,013,920.00 per year depending on the roles being replaced.
A large sized organisation with 2000 employees and a turnover rate of 20% could save anywhere from $4,018,560.00 to $12,055,680.00 per year depending on the roles being replaced.
What business irrelevant of size could pass up these savings? Imagine all of the other ways you could be putting this money to better use each year such as, staff incentives/bonuses, new products, renovations and upkeep and, marketing and promotion of your business.
There is a lot of research out there which shows a clear correlation between employee engagement and retention. Your HR team and Senior Management should be actively working on implementing strategies to improve employee engagement and hence reduce turnover.
PDI Solutions is available to assist you with employee engagement, talent management and training and development strategies which will assist you to reduce turnover.