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Employee Turnover: Is It Eating Up Your Profits?

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Keeping the cost of doing business down, yet providing a quality product or service, is one of the most critical components of success for today’s leader. What many fail to realize is that employee turnover can represent a very substantial price tag to a company's productivity and its bottom line.

Turnover is costly – just how costly? Research studies have shown that the cost of replacing a professional or managerial employee runs 1.5 to 3.0 times his or her annual salary. And it can cost up to five times annual salary if you are looking at the intellectual capital – what a key person knows – when he or she walks out the door.

For example, to replace a $50,000 top notch sales person with a large customer base can cost you $171,500. And a $150,000 technical manager can ultimately cost $380,000 to replace. That’s no small pocket change.

Therefore, in almost any business situation —g rowth, downturn, merger, or even stability — it makes business sense to retain your best people. Here are four steps to get you started:

1. Calculate the True Costs.
   This includes the direct administration cost of recruitment (ads, background checks, assessments, paperwork plus the manager’s and HR’s time for interviewing, training, orientation) PLUS the indirect costs of performance differential (lost productivity, impact on customers, disruption to the team, lower morale and the lost institutional wisdom).
2. Study the Demographics.
   Understanding and conquering turnover requires probing into the details. For example: Who is leaving (high performers or low performers, older versus younger people, recent hires or people with long tenure)? What job categories or departments are experiencing the most turnover (production staff, systems analysts, salespeople, nursing staff)? When are they leaving (after two weeks, six months, five years, or ten years)? Where are they going (your competitor, another industry, back to school, out of town?)
3. Focus Your Attention.
   Not all turnover is equal. Simply looking at a turnover rate of 17% per annum does not tell the complete story. The loss of a top engineer with ten years of experience, strong customer contacts, and good relationships with suppliers is obviously more troubling than losing a filing clerk you hired a month ago.

Therefore, target key jobs that are critical to long-term company success. High priority positions are those that require extensive knowledge of customers, products or services, especially where there is a long learning curve. The cost of turnover is often highest for these strategic jobs.

4. Identify the Real Causes.
   First, you need to understand the current state of mind of your workforce. Start by identifying why people are staying and what you are doing that creates that desire to remain. Then find out what troubles people and would lessen their commitment to your organization.

Focus groups and employee surveys are effective ways to obtain real time employee feedback; to identify the ‘push’ and ‘pull’ drivers of employee satisfaction; and to develop realistic solutions.

Then, examine the data for the key reasons people stay and leave. Do further research on selected individuals or employee segments. The person who left because their spouse got a fantastic job in a different city may not be worth further exploration. But the outstanding performer who left for ‘better opportunities’ or ‘personal reasons’ may be worth a follow-up call, even a year or so after.

An Example
In one company, a detailed analysis revealed that 30% of its IT and 40% of its MBA new hires were leaving in less than 36 months. It then estimated both the direct and indirect costs for these segments. And it came out to a whopping $1.5 million dollars.

Focus groups were conducted with current and departed IT / MBA employees. Compensation and benefits were not the key turnover drivers, but rather, the day-to-day work was not challenging. These young ‘bucks’ were bored and fearful of losing their edge. In addition, supervisors lacked basic management skills and were unable to state clearly performance expectations or provide meaningful feedback. Only then could solutions be developed to deal with the real causes of employee dissatisfaction.

No One Magic Bullet
Employee retention is an extraordinarily complex issue. What I have consistently found is: That it’s NOT the money. When someone leaves for ‘better opportunities’, what has happened is that certain dissatisfactions - like the ones above - caused the person to put out feelers, or to become curious about recruiter calls, or to start surfing the job boards.

Make sure this is not happening with your key people - the most critical, difficult-to-replace, top-performers - because they are the ones you can least afford to lose.

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