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The High Cost of Employee Turnover

Reducing employee turnover will increase your bottom line. (Photo by Matt Cardy/Getty Images)

I was employed as a personnel manager for a large San Diego firm for a number of years. That position afforded me the opportunity to observe first hand all the costs involved in employee turnover. Most people just assume that businesses hire and fire at will and that has little or no effect on the company or it’s profits. If an employee is hired then it increases company costs and if someone is fired that reduces their costs. That is a gross misconception of business reality. Both the hiring and firing of employees can result in several additional costs to the company reflecting heavily on the bottom line.

Hiring Costs and Company Risks

The decision to hire someone requires a lot of speculation and risk taking. There is certainly no guarantee that the employee you hire will work out. Are there qualified applicants available? What hourly rate will attract the best person and still allow programed profitability? What benefits can the company afford to offer? Will there need to be a probation period? If so, for how long? Should the employee be paid hourly or salaried? How and when can the employee receive a raise? Who will create the employee’s job description? Will this position require the cost of a background check or drug test? As you can see a lot of decision-making can go into the time and cost considerations of hiring someone.

Termination Costs to the Company

When a company downsizes or terminates an employee there are things companies can do to prepare for a reduced workforce. Jobs can be consolidated or eliminated. Automation or robotics might replace some workers. Improved efficiency can create a workforce reduction. Keep one thing in mind. Companies that have a high turnover of personnel will pay a higher unemployment premium to their state than those with a lower turnover. High turnover costs in many hidden ways.

It’s a different situation when an employee you need decides to leave and gives his or her two weeks notice. There are many costs involved in this scenario. Things like separation pay and required labor reports. Vacancy costs such as overtime and other work that others will have to absorb until a replacement can be found. Replacement costs such as ads, interview time, testing costs, and/or medical exams, background or drug tests. Don’t forget training costs before the new employee produces at the same level as the former. You’ll find a Sample Employee Turnover Cost Sheet and a Cost of Turnover Calculator Here

Some Final Thoughts

Employment should be a win-win for both the employer and employee. The employee agrees to trade his or her skills and expertise for an agreed upon amount of compensation. The company requires a level of competency from the employee to allow the company to serve their customers, and still be profitable enough to remain in business.

I have never worked for a company where the owners or managers didn’t have a very high regard and appreciation for their employees. The problem is, these same owners and managers seldom let the employees know about their respect and appreciation. It takes a little more than a Christmas bonus to say thank you to someone who keeps your doors open each day.

If you’re an owner who fails to recognize the value of your employees you need to make a new years resolution to end that practice today. Find some way to publicly show your appreciation for each employee, or team of employees, every six months minimum. Employees do all sorts of great things for your company you will never see or hear about. Good employees traditionally reduce lost business by 2-5% each year by their customer service and problem solving.

As a business owner it’s your personal responsibility to hire and retain the best possible employees and treat them accordingly. You should have a stack of qualified applicants who want to work for you rather than having to install speed bumps at the back door to slow people down from leaving.

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