Employee turnover costs
Management must know the actual costs of hiring workers and the costs of employee turnover.

Costs of acquiring new employees

  • Advertising job vacancies
  • Payment to recruitment agency (headhunting, recruiting)
  • Business selections: CV screening, testing of job candidates, interviews, administrative costs, salaries of HR employees and managers who were engaged in the hiring process
  • Investing in employer branding in order to attract the highest quality candidates

When it comes to acquisition costs, they can be (depending on the expertise of those leaving and the market situation) very high. Managerial positions are often hired by employment agencies that provide talent search services. The commissions of the mentioned agencies range on average from 8% to 20% of the annual gross and salary of the employee they earn.

If the acquisition process takes place internally, the hours of work of the employee working on the tasks of recruitment and selection are calculated. If the company operates in several different cities, the recruiter will have to travel, so their travel expenses and per diems should be taken into account.

Costs of induction and training of new employees

  • Introduction to work and orientation
  • New employee training costs, from compulsory education (depending on the needs of the job) to mentoring programs
  • Lower productivity of the new employee until complete takeover of business activities

All employees are required to undergo certain training, for example in the field of occupational safety, and depending on the specifics of the workplace, sometimes much more is needed. Managers instead of dealing with some other jobs have to deal with new employees. All this should take into account the time of lost productivity, which is the time that runs from the moment the employee tells us that he is leaving the company until the arrival of a new employee or his full productivity.

In the period when a replacement is sought, someone has to take over the jobs of the employee who left, so some may have to be paid overtime, in case not everyone is already overworked. The vacancy needs to be advertised, and this can be a cost. If the required response of the candidate is not received in the first advertising, the advertising will have to be repeated. If you can’t close the position on your own even after repeated advertising, you will probably hire an employment agency.

Do you want to get an insight into the real reasons for the turnover of your employees? See how Improv3 can help you with that.

Employment

Employee departure costs

  • The cost of a non-engaged employee from the day he announced his departure to the day he left the company
  • Severance pay
  • Hours of work on administrative tasks (deleveraging, documentation, deregistration, handover of work and funds for work, etc.)
  • Exit interview
  • Problems in the work process due to the departure of employees

The cost of leaving depends on the reason for leaving. When employees leave voluntarily, they are significantly lower (only exit interview and general administrative costs) than when the organization undertakes activities to reduce the number of employees due to restructuring, lowering production volumes, etc.

Namely, if the workers were fired for economic or organizational reasons, it is possible that they will be paid severance pay, in accordance with the Labor Act or the internal acts of the employer. In more recent times, organizations are stimulating the departure of tempting severance pay to avoid dismissal and its negative consequences as well as negative social effects.

However, if 25 people voluntarily left a company last year and you needed to find a replacement, and the average number of employees in the previous year was 100, the fluctuation for last year in that company is 25% ((25/100) x100).

High fluctuation rate costs

There are four main reasons why the cost of a high fluctuation rate, ie one that is higher than a healthy rate of 15% (note: a healthy fluctuation rate varies by industry) represents a significant financial cost. These reasons are:

  • Efforts made to achieve business results that would allow the company to present itself as a desirable employer to potential candidates (the cost of obtaining candidates)
  • Time invested
  • Invested money and/or time for education and training of these employees in order to be more productive and successful, and by leaving they will use this knowledge with another employer
  • In the period of departure, the company depreciates (pays) the reduced productivity of outgoing employees and the cost of administration of departure (cost of departure)
Employee

In addition to the real costs of the employee leaving (the cost of paying compensation for unused vacation days, severance pay, the cost of advertising and selection for a new person) a large part of the total cost is indirect or opportunity costs such as reduced productivity of outgoing employees and poorer results in the initial month’s work of a new employee, insufficient use of knowledge acquired at training paid by the company to outgoing employees, time spent on finding and selecting a new employee, unnecessary overtime work due to the transfer of knowledge to a new employee, etc.

The total “loss” that the company generates from employee turnover for which it is necessary to find a replacement is calculated as follows:

  • Number of those who left the company and for whom it was necessary to find a replacement
  • Their average annual gross earnings
  • Average employee replacement ratio (1)

Retaining a quality employee saves costs in the amount of 1.5 annual gross salary of that employee, ie the company will pay for the departure of one employee and his replacement with the amount for which an additional 1.5 workers can be employed.

When we know how much the fluctuation is, we need to calculate how much it costs us. One of the relatively simple ways to calculate fluctuation costs is to multiply the number of those who left the company and needed to find a replacement by the average salary they received in the previous year multiplied by a certain coefficient.

How much we will determine depends on different studies, and it usually ranges from 1.5 to 2.5 (according to The Society of Human Resource Professionals – SHRM). In principle, the higher the salary, ie the more important the position, the harder it is to find a replacement, so the coefficient is higher.

For the purposes of our calculation, we will put the coefficient 1.75 and the average salary in the Republic of Croatia. The average monthly gross earnings per person in paid employment in legal entities in the Republic of Croatia for the period January – August 2019 amounted to 8,742 kunas (data from the CBS). If the average gross annual salary for the previous year was HRK 8,742, it turns out that a fluctuation of 25 percent on an annual basis from the example above, costs HRK 371,535.00.

The coefficient should cover all hidden costs that can be classified as fluctuation costs. These are the costs of administering those who leave as well as those who come. It is necessary to deregister, ie report, make a decision on termination of employment, ie sign an employment contract. According to some studies, a new employee achieves full productivity only after twelve weeks. The average time required for a position to close varies from three weeks to three months, depending on the position or ability of the recruiter. In some cases, the average time required to close a position is part of the formula for calculating fluctuation costs.

As you can see, the financial implications or the total cost associated with the departure of an employee leaving the company can be very significant. However, given the high cost of running a business, a well-designed retention program for the best employees, as well as a well-established retention system will pay for itself in a very short period of time.


Do you want to get an insight into the real reasons for the turnover of your employees? See how Improv3 can help you with that.

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