Employee Retention Strategies—Your Guide for the Best Employee Retention Strategies to Retain Your Best Employees
What Percentage Should Employee Replacement Costs Be?
Ross Blake, “The Employee Retention Manager”
It happened again last week.
A reporter for a medical products journal asked me, “What percentage of operating costs should employee replacement costs be?”
Of course, we often like to use formulas or percentages to gauge where we ought to be compared with other businesses and organizations.
I responded by saying, “Instead of asking this question, there are three other questions I’d rather have you ask because they’re more relevant, and will give you a much better picture of what’s happening in an organization.”
The first question is, “What is your employee turnover rate?”
You can calculate this by dividing the number of employees who’ve left during a given period of time by the number of employees you started with.
For example, if you had 80 employees at the beginning of the year, and 13 have left, your year-to-date turnover rate is 16.25% (13 divided by 80=0.1625).
Depending on your business or industry, this can vary substantially. The fast food restaurant industry has reported annual turnover rates as high as 270%; however, research I conducted about paralegal turnover in Erie, PA, amounted to only 2% annually.
The second key question is, “What is turnover costing you?”
Calculating this in dollars gives you a monetary amount in addition to a turnover percentage; you can now begin to understand how much of a problem and cost turnover is-or isn’t-in your organization.
There are a number of formulas to use to calculate employee turnover costs. You can easily do this by going to the free turnover cost calculator on my web site, www.EmployeeRetentionManager.com.
You may find some variance in turnover costs depending on whose system you use. One of the things I like to suggest to clients is that they reduce the turnover costs they’ve calculated by 25% if they think they’re too high, and then see if the new number is still substantial. Most of the time, it is.
The third key question is, “What consequences is turnover causing in your organization?”
This question is a bit more subjective than the preceding two, but no less important.
Aside from monetary costs, turnover can have other significant consequences, including:
1) The loss of expertise to finish existing projects and compete for new ones.
2) Loss of customers or reductions in customer orders. (A very strong correlation exists between high employee retention, high customer retention, and high corporate profitability).
3) Increased quality errors, mistakes, delayed orders, even accidents.
4) Disgruntled employees who must take on more tasks and responsibilities until replacements are hired, and who may also consider leaving, compounding your problem.
5) Large amounts of administrative time to recruit, interview, hire, orient, and train new employees who likely won’t be as productive as the employees they replaced for a number of weeks or months.
Make a list of the consequences like these which occur in your organization, and estimate their overall impact: small, medium, or substantial.
With answers to all three of these questions, you’ll have a much better idea of what turnover is costing and doing to your organization-instead of considering a percentage about how much to incur in employee replacement costs.
And, after calculating answers to these questions, you’ll be able to answer this very important fourth one: “Is turnover costing us too much or not?”
