Separated Employees: The Hidden Factor Driving Your Labor Costs

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

Separated Employees: The Hidden Factor Driving Your Labor Costs

It’s been said that it’s a lot easier to keep the customers you have than it is to find new ones. The same can be said for employees.

Even corporate giants struggle with turnover. For example, last month General Motors announced that its human-resources chief had left the company “for personal reasons” after just eight months on the job. I can only imagine the egg on the face of that corporate recruiter.

One of the most critical success components for companies of every size is the ability to keep the cost of doing business to a minimum. Yet most companies struggle to accurately quantify the substantial cost associated with employee turnover. Left untreated it can quickly erode your bottom-line.

Measuring the Cost of Employee Turnover

Imagine if you could quantify with a fair degree of accuracy what your company spends on the following each year:

Hard Costs

  • Administrative cost of processing separations
  • Recruitment costs
  • Advertising costs
  • Time spent training & orientating new staff

Soft Costs

  • Knowledge loss
  • Lack of motivation for “lame duck” employees
  • Productivity losses as other employees cover vacant positions
  • Loss of trade secrets
  • Customer disruption

The larger, corporate giants have crunched their numbers long enough for us to know these standardized replacement costs:

  • Entry-level employees cost 30 to 50% of annual salary
  • Mid-level employees can cost upward of 150% of annual salary
  • Highly specialized employees, up to 400% of annual salary

If those numbers seem high, consider some of the drastic measures employers are taking to entrench employees:

Free Tuition:
With a 70% annual turnover rate, the hospitality industry announced last month plans for a two-year pilot to foot the bill for hotel-industry workers to get online associate’s degrees and cover much of the cost of bachelor degrees.

Fertility Benefits:
66% of employers, including corporate giants like American Express, Foursquare, and Pinterest, Inc. plan to offer fertility benefits by 2019, either for the first time, or as a significant expansion of existing fertility benefits.

Employer-Delivered Education:
Major employers like CVS Health Corp., Novelis, IBM, Aon PLC and JPMorgan Chase & Co. offer in house-education programs to better meet the needs of employee and employer, over traditional college degree programs.

These are exceptional and costly examples of attraction and retention strategies large employers are using to entrench employees, but smaller companies need not be discouraged. There are a number of low to no-investment strategies companies can employ to stabilize their workforce.

The Age of Analytics

At Employer Benefits and Advice, we have developed a Turnover Impact Report comparable to what corporate giants have had available to them for years via their expensive consulting teams.

The difference is, our cost-effective methodology can be applied to organizations of 50 employees up to several thousand.

This report delivers for employers specific data relative to company turnover, costs and occurrence using the following format.

Turnover Impact Report

  • Separates voluntary from involuntary resignations
  • Calculates your turnover rate as a whole, in a particular area, or in a specific employee segment
  • Quantifies the annual cost of the turnover identified above using both hard and soft costs associated with separations
  • Classifies resignations in terms of A, B or C employees
  • Benchmarks company turnover rate against industry rate

Findings

  • Identifies factors driving separations at the company level
  • Identifies factors driving separations at the industry level
  • Evaluates current retention strategies and delivers a company-specific scorecard

Recommendations

  • Addresses nature of factors driving voluntary and involuntary separations
  • Proposes retention strategies to reduce separations in categories as follows:
  1. No cost to the company
  2. Minimal cost to the company
  3. Moderate cost to the company
  4. High cost to the company
  • Identify ROI indicators

Results

  • 6 -12 month follow up
  • Report on savings in cost and time
  • Measure ROI
  • Identify productivity gains
  • Ongoing monitoring of ROI indicators

The True Cost of Doing Business

A certain amount of turnover is expected in any company, and might I go as far as to say welcomed. Let’s face it, some employees you’re happy to see go!

But employers who operate in historically high-turnover industries such as hospitality and retail, or employ a large number of part-time or unskilled labor are quick to simply accept a high churn-and-burn rate as just another cost of doing business.

Implementing even just one strategy to improve employee retention can significantly improve your bottom line.

You Can’t Manage What You Don’t Measure

Being in business is like having your own wagon team in a race against other teams. Each wagon is racing toward the finish line, competing for market share, brand recognition, and optimum profitability. If you’re constantly replacing horses you’re inevitably going to fall behind.

The good news is that when it comes to shrinking the cost of doing business, the expense associated with staff turnover can be the lowest of all hanging fruit, provided it’s being measured.

Our Turnover Impact Report has been carefully developed to not only measure the true cost of employee turnover, but identify where the greatest opportunities for savings exist and offer executives the strategies and tactics they need to improve in this area.

Managers often see pay increases as the first solution to turnover. Rarely is that the case. Without accurately diagnosing and addressing the problem the end result can be a spike in costs with no improvement in retention.

Capturing Turnover Costs in the Budget

If you would like to determine what turnover is costing your company, and discuss ways to cut those costs, contact me at 602-903-4047 or email me at [email protected].