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Human Capital Risk Series: The High Cost of Turnover

byLowers & Associates | October 19, 2016

Employees who leave, for any reason, and must be replaced create both a cost and an opportunity for employers. The costs can be quite high as it takes time to source, onboard, and train a new employee, the organization must absorb a certain amount of lost productivity in the transition from one employee to another, and there are often many other sources of ‘cost’ related to the loss of one employee and hiring of another.

In a widely-cited result from a Society of Human Resource Management study, employers can expect to spend 6 to 9 months’ salary equivalent acquiring and training a new employee. The costs increase disproportionately the higher the level of the position, so that a replacing a manager might actually cost more than a year’s salary equivalent.

Because of the high cost of turnover, it is a human capital risk that requires assessment and mitigation.

Every HR manager knows it takes a lot of time and money to recruit, evaluate, choose, and train a new employee. But beyond this, there are a group of workforce features that can impact the financial performance of the operating unit where a turnover occurs. A SHRM-financed study found that turnover of a single employee would hurt performance by almost 5%, and a manager turnover cost about 6%. The authors conclude:

The findings and methodology in this research help HR managers better appreciate and estimate the costs…of turnover…they underscore that turnover represents a form of financial risk. …talent is the single greatest cost for many firms, therefore it is imperative that HR Managers align the management of talent to business outcomes that contribute to competitive advantage.

How to Mitigate the Risks of Turnover

There are steps an organization and HR, in particular, can take to mitigate turnover risk. As in all risk management efforts, prevention is more important—and less costly—than cure.

1. Use pre-employment screening to help ensure the employee you hire is a good fit for the position.

The cost of background screening is tiny compared to the cost of turnover. Even if you design a comprehensive screening package for a managerial position, the long run cost difference between a good fit and a poor fit from productivity, workforce quality and stability is enormous.

The background screening program can be adjusted to mitigate for risks in various hiring environments. For example, in higher volume positions (typically more routine jobs), boosting the number of evaluations improves your odds of finding good candidates. If you hire for the same or very similar positions repetitively, you can improve the screening methods and effectiveness by monitoring employee performance over time. And do not forget to evaluate existing employees for new positions:  they already know a lot about your organization.

2. Take workforce morale seriously.

Unhappy employees are more likely to leave. Every employee is one among many, and the social “health” of the group can have big effects on turnover. The culture of the organization is a critical element in workforce morale that takes time and persistence to improve, but once a supportive work environment is established, it is one of the strongest barriers to costly turnover.

  • Successful big companies explicitly fast track their most promising employees. Training, experience and responsibility are lavished on these people. Smaller organizations can emulate these programs.
  • Mentoring is a powerful one-to-one tactic to help important employees solve work-related problems before they get too personal, leading to a turnover.
  • Remember that organizational culture flows from the top down. Top managers have to be able to articulate the kind of behavior they want, and then demonstrate it.

3. When someone does leave, find out why.

Exit interviews are critical for every organization when a turnover does occur. This moment is a golden opportunity to learn something important about your organization that can help improve retention and performance.

No organization will ever totally eliminate turnover. According to the Bureau of Labor Statistics, turnover in July 2016 was 3.4%. But the individual employer who can reduce the rate of turnover wins in two ways: he or she avoids the costs of a new hire, and improves the productivity of the organization due to a well-trained, happy employee.



Lowers & Associates provides comprehensive enterprise risk management solutions to organizations operating in high-risk, highly-regulated environments and organizations that value risk mitigation.
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