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September 26th, 2017

Replacing Employees Costs Big Dollars

The cost of employee turnover is alarming for many businesses. The latest statistic available from the  Employment Policy Foundation suggests the average cost of turnover to employers is $13,355 per full-time private-sector employee replaced. Keep in mind, this study was done several years ago so chances are this figure has risen considerably. Still it is enough to be troubling.

An important question: How do you come up with a realistic figure for turnover costs in your business? Here’s an example,

A. Annual pay for the position, $18,000
B. Annual benefits, taxes and
insurance cost for the position, $ 5,400
C. Total pay, benefits, taxes, insurance (A plus B), $23,400
D.
 Percent of first year that new employee is unproductive, 25 percent
E. Cost of unproductive time (C times D ), $5,850
F.
 Recruiting costs (such as advertising), $500
G. Management cost to recruit, interview, train, supervise new employee (first year hours[50]times hourly management rate, $50, $2,500
Estimated turnover cost
(E plus F plus G)………………..$ 8,850

Using this figure, calculate what this could mean for a business with 100 employees and a turnover rate of just five percent a year. Such an employer would replace five employees at an

average replacement cost of $13,355… for a total replacement cost of $66,775.

Now imagine if this business had a turnover rate of 20 percent. The employer would have a total replacement cost of $267,100 ($13,355 times 20).

How did the Employment Policy Foundation calculate turnover costs and arrive at the average $13,355 figure?
The Washington, DC-based research group included the price of recruiting new applicants, selecting replacements, training new employees, and lost productivity expenses caused by departing staff members and incurred by new employees.

The result pegs the turnover costs at an average of 25 percent of an employee’s annual income.

But an “average” turnover cost can be misleading. The Foundation’s study breaks the costs down by industry, to get a clearer picture.

Average Turnover by

Industry
Information industry $18,615
Financial activities $17,315
Professional business services $14,975
Construction $13,935
Manufacturing $13,880
Education $13,020
Other services $11,975
Trade/ transportation $11,820
Leisure/ hospitality $6,495

 

“The loss of productivity during position vacancy and the diminished productivity during a new employee’s transition period are significant aspects of the total cost of turnover,” according to the Foundation’s President, Ed Potter. “Companies that are able to reduce their turnover rate have a significant competitive edge.”

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