A Turnover Cost Model That Works

Costing employee turnover is a job for finance professionals only, as they count the dollars in your company and speak with credibility. Besides, you’d rather they bought into the cost amounts than not, so let them determine the actual numbers.

For a model that works, go to www.TheRetentionFirm.com and click on “turnover cost calculator”. There you will find a model that separates costs into “direct” and “indirect”. The “indirect” costs are most important because this reports lost productivity which is usually the greater cost and the harder to measure.

The “direct” costs are those that easily come to mind…exit survey time, new hire interview time, drug tests, assessments, uniforms, maybe relocations…all of those good-by and hello activities that turnover produces.

The “indirect” model takes a simple approach to a complex issue. It asks that you divide your company’s annual revenues by your total number of FTEs and then divide that resulting amount by 240 which is the average number of workdays in a year. This tells you how much revenue an average employee contributes in a day and this number is indisputable. Then comes the one judgment part, where you are asked to determine whether the job for which you are calculating a cost is average or above or below average relative to producing revenue. Weight an average job a 1 meaning the daily contribution amount for that job doesn’t change. You might weight a sales job a 1.5 though, or a custodial job 7.

Once you’ve established the weight for the job you are measuring, the remaining steps are easy. Multiply your amount times the number of workdays the job is usually open as a result of turnover and you have the lost productivity while you search for a replacement. Then multiply your amount times the average of workdays the new hire is learning the job so you know the cost of “ramp up”, but cut that amount in half since the new hire is partially productive for each of those days.

Then add “direct” to “indirect” and you have a real turnover cost for each position. No model is perfect, of course, as we can never include the cost of lost team productivity, lost manager’s time, or turnover than leads to turnover. But the mathematical model presented is hard to question, and often produces an amount that causes top executives to take more action on retention.