Employee turnover is costly for businesses but often overlooked. The actual cost of turnover includes expenses related to hiring, onboarding, training and time spent with unfilled roles. Estimates put the cost at around 20-213% of an employee's annual salary depending on their skills. To accurately calculate turnover costs, businesses should consider factors in four main categories: costs due to employee departure, recruitment costs, training costs, and lost productivity costs. Reducing turnover requires minimizing costs when it happens through effective hiring and onboarding, as well as proactively retaining employees by focusing on their growth, impact, and feeling cared for. Optimization tools can help examine how policies might impact turnover while meeting operational needs.

1. The Cost of Employee
Turnover
How to Calculate It, Reduce It, and Save Your
Business Thousands

2. What’s the Real Cost of Employee Turnover?
Topic often discussed, but rarely acted upon
Difficult to put an exact number on it
People are becoming more important in business
Therefore, retention/turnover is more important

3. Why the Cost of
Turnover is Ignored The first step towards making
retention a priority is to quantify it.
“What gets measured, gets managed.”
- Peter Drucker

4. Actual Cost of Employee Turnover
Bottom line: it’s expensive
Center for American Progress (CAP) has estimated it at 213% annual salary for
high-skill employees; ~20% annual salary for employees earning $30-$75K
Josh Bersin suggests the true cost lies somewhere between tens of thousands of
dollars to 1.5-2.0X annual salary
Also makes the point employees are appreciating assets

5. Actual Cost of Employee Turnover
Maia Josebachvili calculates the ROI of an employee using the term “Employee
Lifetime Value”, which represents “the total net value over time that an employee
brings to an organization.”
In her case study, using a salesperson that earns $50K/yr (and generates
$50K/mo in revenue), better management yields a difference of $1.3M in net value
to the company over a three year period

6. Source: Greenhouse case study

7. Calculating Your Own Cost of Employee Turnover
Basic Equations
Cost of turnover = # departures x average cost of departures
Turnover rate = # departures / total # employees

8. Calculating Your Own Cost of Employee Turnover
Jack Altman proposes that we can calculate the cost of employee turnover by
examining four main buckets:
● Cost of hiring
● Cost of onboarding and training
● Cost of learning and development, and
● Cost of time with unfilled role

9. Calculating Your Own Cost of Employee Turnover
...which can be summarized in this equation:
Source: Jack Altman on employee turnover cost
(Hiring + Onboarding + Development + Unfilled Time)
X (Number Employees x Annual Turnover Percentage)
= Annual Cost of Turnover

10. Calculating Your Own Cost of Employee Turnover
We’ve summarized the list, and provided both the basic and advanced methods of
analysis in a spreadsheet for you to use here.
(The spreadsheet has full details for each section)

11. Factors to Consider for Advanced
Calculation

12. Bear with us here - these are all explained in detail in the spreadsheet.
We’d recommend you look at both, or read the full post here for explanation.

13. 1. Costs due to a person leaving
○ Cost of person filling in
○ Cost of lost productivity
○ Cost of exit interview
○ Cost of manager adjusting
○ Cost of training invested in employee
○ Impact on departmental productivity
○ Cost of severance and benefits
○ Cost of lost knowledge, skills and contacts
○ Cost of losing customers
○ Subtract cost of saved salary
These are adapted from the list by William Bliss.
Factors to Consider for Advanced Calculation

14. 2. Recruitment costs
○ Advertisements, referrals, recruitment agency
○ Cost of internal recruiter/HR person
○ Cost of other recruitment personnel
○ Cost of hiring process
○ Admin cost of handling resumes
○ Cost of drug screens, background check
○ Cost of pre-employment tests
Factors to Consider for Advanced Calculation

15. 3. Training costs
○ Cost of orientation
○ Cost of departmental training
○ Cost of person conducting training + materials
○ Cost of supervisory time spent reviewing work
Factors to Consider for Advanced Calculation

16. 4. Lost productivity costs
○ 4 weeks at 25% productivity
○ 8 weeks at 50% productivity
○ 8 weeks at 75% productivity
○ Cost of lost coworker/supervisor productivity
○ Cost of new employee mistakes
○ Cost of lost department productivity if person is manager
○ Impact cost on completion/delivery of critical project
○ Cost of reduced productivity if person lost key staff member for
management
Factors to Consider for Advanced Calculation

17. 5. New hire costs
○ Admin cost of bringing new person onboard
○ Expense of manager time reviewing work
Factors to Consider for Advanced Calculation

18. 6. Lost sales cost
○ Lost revenue for vacant time (sales rep)
○ Lost productivity percentages for lost revenue (sales rep)
○ Revenue lost per employee (non-sales person)
Factors to Consider for Advanced Calculation

19. Reducing the Cost of Employee
Turnover

20. Comes down to two main aspects:
1. Reducing the cost of turnover when it happens
2. Reducing turnover itself

21. Reducing the Cost of Employee Turnover When It
Happens
Maia Josebachvili does a good job summarizing the four main factors that
maximize the “Employee Lifetime Value”, which is another way of saying
“minimizing the cost of employee turnover.”
Generally:
1. Minimize time where employee is “cost” - hiring and onboarding
2. Maximize potential of employee through good management

22. Source: Maia Josebachvili on the ROI of investing in people

23. How to Maximize Those Four Inputs?

24. According to Maia:
“Onboarding: A good onboarding program accomplishes two goals: 1) It decreases the time it takes an
employee to become a fully contributing member, and 2) It significantly increases the likelihood that the
employee will stay with the company long-term.
Hiring: An excellent hire has a higher maximum output from the beginning, plus has the added network
effect of attracting and elevating other top performers.
Management & Development: Excellent management and development practices increase the value an
employee brings to the organization over time.
Management & Culture: A strong management practice and positive culture are directly correlated with
retention, which results in an increase in ELTV.”

25. Reducing Employee Turnover Itself

26. Jack Altman suggests focusing on “growth, impact, and care”
● Have conversations with employees about goals
● Give them more responsibility
● Help them acquire new skills to encourage growth
● Articulate a clear and purposeful company mission
● Build culture that shows care and appreciation

27. Our Views on Reducing Employee
Turnover

28. Main driver for employee turnover is quality-of-life, particularly in operations roles
and logistics businesses
Policies like guaranteed days off need to be carefully considered, as they can
impact the operations planning teams too
Optimization can maximize resources under quality-of-life constraints

29. You can solve scheduling and routing problems using the cost of turnover as part
of overall cost optimization
Optimization also allows concrete examination of what-if scenarios before
implementation, aiding in decisions about hiring, guaranteed days off, or other
perks

30. Good luck!
Please share with us if you
use the model!

31. leansystems.co
@leansystemsHQ
Full article on our blog about optimization!
leansystems.co/blog