Placing Dollar Costs on Turnover

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The first step is to choose a job for which current turnover most interferes with your organization's success. In other words, choose the job that when employees leave it, profits and productivity are hurt the most.

Then gather a team with representatives from finance and at least one subject matter expert for the job you are costing. CFOs must involve themselves from the beginning by either participating on this team or by sending a representative who carries their full confidence. Realize from the start that the person who must ultimately approve your cost team's work and sponsor it to the CEO is the CFO, so the CFO ultimately becomes the owner of this process.

CFO sponsorship is essential because CFOs are responsible for critical numbers. They bring authority such that their endorsement of a metric brings locked-in support from the CEO and the

executive team. All action steps related to costing turnover should be designed to ultimately gain the full and enthusiastic support from the CFO. Once your CFO learns the real costs of turnover and disengagement, he or she will become your strongest ally to implement the right solutions.

Begin your meeting by discussing this quote attributed to Albert Einstein: "Not everything that counts can be counted, and not everything that can be counted counts."

Based on Einstein's wise words, the key points for agreement are that (1) the team and costing model will be used to develop the closest possible cost for turnover, but there will be limitations, and (2) it is more important that executives agree to the cost than the cost is 100 percent accurate. Said another way, we will develop the best cost of turnover for the appointed job and ultimately all agree on the outcome.

Let's take that last point one step further. The data you develop from your costing process will be used for a long period of time when reporting turnover because all turnover reports from this time forward will include dollar values. These data will be changed only when you have reason to redo the cost analysis. So executives must all concur that the data you develop is right. One crack in the armor six months later in the form of an executive saying "I never really believed in those numbers" will invalidate your work.

Eleven data points are required for the turnover cost model. Seven data points are required to develop the direct costs for exiting the leaving employee and hiring one new employee in this job. Four additional data points are required to measure the lost productivity for both while that job is open and when the new hire is learning the job. In this example we will calculate the cost of losing one nurse. You will see that the cost estimates are extremely conservative.

The first set of these data points, as presented in the table, provides fundamental job information that will be applied later in the model.

Table. Data for Calculating the Cost of Turnover

1.      Nurses' annual average compensation and benefits: $75,000 ($312.50 per day based on 240 workdays per year)
2.      Annual average compensation and benefits for all positions: $60,000
3.      Projected nurse exits this year: 200
Next measure the hard dollars costs of exiting one nurse and hiring another:
4.      Separation costs such as exit interviews, administrative costs, separation pay: $100
5.      Vacancy costs such as temporary help and overtime: $2,000
6.      Average acquisition costs for one new hire such as advertising, agencies, employee referrals, travel, interviews, assessments, background checks, reference checks, physicals, bonuses, relocation: $2,900
7.      Placement costs such as new supplies, onboarding days, training days: $3,750 (based on no new supplies and two onboarding days and 10 training days @ $312.50 per day)
8.      Total direct costs: $11,750
Then calculate lost productivity:
9.      Annual revenue divided by the number of full-time equivalent (FTE) employees: estimate $240,000 based on Saratoga Institute data,* but replace with your company's actual data
10.  FTE workdays per year: 240 (also based on Saratoga Institute data, but insert your own number of workdays here if yours is different)
11.  Average workdays position open: 20 (for our example, but insert your own data here)
12.  50% workdays to total effectiveness: 10 (for our example, but insert your own data here; this is the number of workdays typical employees need after date of hire to become fundamentally proficient in their jobs, divided by two because they are partially productive each day on an increasing scale)
* Published by the Saratoga Institute circa 2006 and serves today as an appropriate conservative estimate.

We apply these data to calculate lost productivity this way:

  • We know the daily revenue for each full-time equivalent (FTE) employee in our example is $1,000, as annual revenue per FTE of $240,000 ÷ 240 workdays = $1,000.
  • We also know the daily revenue for nurses is $1,250, as nurses earn 25 percent more than average employees, calculated by comparing their $75,000 per year in salary and benefits versus an average of $60,000 per year for all employees.
  • From these data we can multiply each nurse's daily revenue value of $1,250 x the number of days the position is open (20), and we then know the lost productivity while the position is open ($25,000).
  • Using the same calculation for the lost productivity for the 10 days of ramp-up time while the new nurse is learning the job, there is additional lost productivity of $12,500.
 So the total gross lost productivity is $37,500.

  • Two values must be subtracted from the gross lost productivity to ensure accuracy:
    • The salary and benefits saved during the 20 days the job is open result in a credit of $6,250; this value is determined by multiplying the number of days the job is open (20) x the daily compensation rate ($312.50).
    • And the vacancy cost of $2,000 for temporary help and overtime must also be credited, as these dollars were invested to reduce the amount of lost productivity, and we have accounted for 100 percent of this lost productivity as though no investment was made to improve it.
So the resulting net lost productivity is $29,250.

By adding the direct costs and lost productivity, we learn the cost of losing one nurse:

Direct costs from line #8 in Table 4.1: $11,750
Lost productivity: $29,250
Total cost for losing one nurse: $41,000

Total Costs, Total Savings

 When we report results from this model, we add at the end the total cost of turnover for the year as well as the dollar values for reducing it. Recalling that if this organization will lose 200 nurses this year, the annual cost of nurse turnover is:

$41,000 x 200 = $8,200,000
The savings for reducing nurse turnover by 20 percent = $1,640,000
And the savings for reducing nurse turnover by 50 percent = $4,100,000

One other way to grab attention is to frame turnover costs for each working day. In this example, our hospital is losing $2,247 each day due to nurse turnover ($8,200,000 ÷ 365 days). Or to make the dollar cost of nurse turnover visible, CFOs can select a similarly priced piece of medical equipment and say, "Imagine if each day we all gathered together and sacrificed this piece of equipment, every day." Or to ask what would be the consequences to an employee who broke this piece of equipment just once by not following procedures.

Now all executives and managers are becoming aware of the full scope of turnover costs as well as improvement opportunities. And whereas the cost of losing one nurse equaling $41,000 might move them to act, more powerful is that they now know the annual cost of turnover exceeds $8 million and that they have a reasonable opportunity to recover greater than $1.5 million in the next 12 months.

Excerpted from Richard P. Finnegan, HR's Greatest Challenge: Driving the C-Suite to Improve Employee Engagement and Retention<https://store.shrm.org/hr-s-greatest-challenge-driving-the-c-suite-to-improve-employee-engagement-and-retention.html> (SHRM, 2015).

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