Budgeting For Employee Turnover

Employee turnover is often considered as among the most important numbers that should be given attention by any business owner.

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Employee turnover is often considered as among the most important numbers that should be given attention by any business owner. One reason for this is because it is also the most difficult to peg down as the numbers fluctuate easily, depending on who you ask. Some business owners say that it is as low as 25% of the salary of the departing employee, while others also say that it can shoot up to as high as 200%!

Factors Involved

For the HR staff, figuring out the list of factors that should be considered in budgeting for employee turnover is not that difficult. The actual costs would often include the time that is usually consumed in processing paperwork, conducting the exit interview, and writing the job advertisement.

Other costs involved in the process may have something to do with placing the ad, hiring a search agency, going through employee applications, interviewing potential candidates, performing reference checks, conducting some pre-employment tests, as well as finalizing the work contract. All of these involve, not just time and resources on the part of the recruitment staff, but also of the hiring manager.

Then you also have to factor in other costs such as the moving costs, sign-up bonuses, referral bonuses, as well as other onboarding costs such as those used for orientation, training, new equipment and material.

Indirect Costs Identified

Aside from the so-called ‘direct costs’ that should be paid attention when budgeting employee turnover, there are also the so-called ‘indirect costs’ involved. These costs are quite difficult to pinpoint, though they can still be substantial. These costs include productivity loss on the part of the leaving employee. This is in relation on the part of the colleagues who need to fill in the needed tasks once the employee is gone. The new person who will serve as replacement should also be given enough time to pick up speed. There may also be some loss of productivity involved on the entire level of operations.

Aside from productivity, some businesses may think about what they have invested in an outgoing employee in terms of training, skills and knowledge development. This item is more difficult to identify and quantify because there is no specific point in which you can start counting. Another thing which may be difficult to quantify are intangible factors including the impact on the reputation of the company, customer satisfaction, as well as other development opportunities.

How Can Turnover Cost Much?

Some of the primary, direct costs of turnover are easy to measure. For example, when looking into putting up a new job ad to invite applicants in, how much does a single ad cost? How much do you have to pay for a recruiter? How much is required to complete credit or police checks? How much time did the recruitment team have to spend on interviewing and reviewing applicants?

On the other hand, you should not close your eyes on the almost-hidden costs. Aside from the ones mentioned earlier, you may also want to think about the learning curve after hiring, the actual costs involved for errors, additional overtime, as well as the time of employees and managers spent in coaching and training a new employee. For those with front line roles, there are expected opportunities for revenue lost because of missed upselling, lost sales, as well as compromised levels of customer service.

Why the Need to Track Turnover

Regardless of the expected turnover percentage, it is recommended to track it in regular intervals, whether monthly or quarterly. Employee turnover cost may vary depending on the industry. Just like all other metrics, you also have to compare yourself to your peers. In Canada, the annual turnover average is around 7.2%, though this is an aggregate across all industries.

Quite unsurprisingly, retail turnover is quite high. On the other end of the scale, you may expect unionized work settings to have very low turnover. At times, they only have 1%. In general, corporate environments usually have less than 5% of employee turnover.

The Healthy Budget for Turnover

Under this consideration, there are a number of factors that should also be considered. For example, if the employees leaving your company are not the strong or high-achieving employees, then you may expect a turnover cost which may not be extremely troublesome. In fact, leaving employees of this nature can even save you to the cost involved in terminating them, as well as the potential cost of errors that they could be making for your business.

However, if the employees leaving your organization are the ones who are considered as key contributors, or highly skilled individuals, then the turnover rate, as well as the components of the succession plan may become more of a hassle. These types of departures are the ones that may cost a lot.

How Turnover May Affect Your Company

For one, a turnover directly translates to spending money out of your company budget on non-core activities. This money could have been better spent on a number of other productive activities for your organization. A high turnover rate may divert your HR team from the strategic role, thus resulting in a high number of transactional activities for both the payroll and HR teams.

These transactional activities include data entry, paper work, and others. While they may be required to complete the tasks at hand, they add very little value to your business in the long run. One reason for this is because they easily eat up the available time of your staff, time which could have been spent on other productive work.

The solutions involved in reducing employee turnover may take some time. This also involves budgeting for employee turnover in a much reasonable way possible. As you work towards refining your recruitment practices, why not take the time in focusing on keeping your highly skilled, top performing employees. In the long run, reducing turnover will then result to an improvement in your company profitability. This is something that will be beneficial to all involved.

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