{"id":78,"date":"2014-08-18T16:06:34","date_gmt":"2014-08-18T16:06:34","guid":{"rendered":"https:\/\/courses.candelalearning.com\/hrmanagement1xmaster\/?post_type=chapter&p=78"},"modified":"2014-10-05T03:52:49","modified_gmt":"2014-10-05T03:52:49","slug":"7-1-the-costs-of-turnover","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/hrmanagement\/chapter\/7-1-the-costs-of-turnover\/","title":{"raw":"7.1 The Costs of Turnover","rendered":"7.1 The Costs of Turnover"},"content":{"raw":" \r\n
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7.1<\/span> The Costs of Turnover<\/h2>\r\n
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Learning Objectives<\/h3>\r\n
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  1. Be able identify the difference between direct and indirect turnover costs.<\/li>\r\n\t
  2. Describe some of the reasons why employees leave.<\/li>\r\n\t
  3. Explain the components of a retention plan.<\/li>\r\n<\/ol>\r\n<\/div>\r\nAccording to the book Keeping the People Who Keep You in Business<\/em> by Leigh Branham,Leigh Branham, Keeping the People Who Keep You in Business<\/em> (New York: American Management Association, 2000), 6.<\/span> the cost of losing an employee can range from 25 percent to 200 percent of that employee\u2019s salary. Some of the costs cited revolve around customer service disruption and loss of morale among other employees, burnout of other employees, and the costs of hiring someone new. Losing an employee is called turnover<\/span>Replacement of employees who are fired or quit. The term is normally expressed as a percentage: the ratio of the number of workers who had to be replaced in a given period to the average number of workers at the organization.<\/span><\/span>.\r\n\r\nThere are two types of turnover, voluntary turnover and involuntary turnover. Voluntary turnover<\/span>The type of turnover that is initiated by the employee for many different reasons.<\/span><\/span> is the type of turnover that is initiated by the employee for many different reasons. Voluntary turnover can be somewhat predicted and addressed in HR, the focus of this chapter. Involuntary turnover<\/span>Turnover in which the employee has no choice in his or her termination\u2014for example, employer-initiated due to nonperformance.<\/span><\/span> is where the employee has no choice in their termination\u2014for example, employer-initiated due to nonperformance. This is discussed further in Chapter 9 \"Successful Employee Communication\".\r\n\r\nIt has been suggested that replacement of an employee who is paid $8 per hour can range upwards of $4,000.Noel Paiement \u201cIt Will Cost You $4,000 to Replace Just One $8 per Hour Employee,\u201d Charity Village, July 13, 2009, accessed August 30, 2011, http:\/\/www.charityvillage.com\/cv\/research\/rhr50.html<\/a>.<\/span> Turnover can be calculated by\r\n\r\nseparations during the time period (month)\/total number of employees midmonth \u00d7 100 = the percentage of turnover.<\/span><\/span>\r\n\r\n \r\n\r\nFor example, let\u2019s assume there were three separations during the month of August and 115 employees midmonth. We can calculate turnover in this scenario by\r\n\r\n3\/115 \u00d7 100 = 2.6% turnover rate.<\/span><\/span>\r\n\r\n \r\n\r\nThis gives us the overall turnover rate for our organization. We may want to calculate turnover rates based on region or department to gather more specific data. For example, let\u2019s say of the three separations, two were in the accounting department. We have ten people in the accounting department. We can calculate that by\r\n\r\naccounting: 2\/10 \u00d7 100 = 20% turnover rate.<\/span><\/span>\r\n\r\nThe turnover rate in accounting is alarmingly high compared to our company turnover rate. There may be something happening in this department to cause unusual turnover. Some of the possible reasons are discussed in Section 7.1.1 \"Reasons for Voluntary Turnover\".\r\n
    \r\n\r\nFigure 7.1<\/span> United States Yearly Turnover Statistics, 2001\u201311\r\n\r\n\"\"<\/a>\r\n
    \r\n\r\nSource: Data from Bureau of Labor Statistics, \u201cJob Openings and Labor Turnover Survey,\u201d accessed August 11, 2011, http:\/\/www.bls.gov\/jlt\/#data<\/a>.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\nIn HR, we can separate the costs associated with turnover into indirect costs and direct costs. Direct turnover costs<\/span>Includes the cost of leaving, replacement costs, and transition costs.<\/span><\/span> include the cost of leaving, replacement costs, and transition costs, while indirect turnover costs<\/span>Includes the loss of production and reduced performance.<\/span><\/span> include the loss of production and reduced performance. The following are some examples of turnover costs:Carl. P. Maertz, Jr. and M. A. Campion, \u201c25 Years of Voluntary Turnover Research: A Review and Critique,\u201d in International Review of Industrial and Organizational Psychology<\/em>, vol. 13, ed. Cary L. Cooper and Ivan T. Robertson (London: John Wiley, 1998), 49\u201386.<\/span>\r\n
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    • Recruitment of replacements<\/li>\r\n\t
    • Administrative hiring costs<\/li>\r\n\t
    • Lost productivity associated with the time between the loss of the employee and hiring of replacement<\/li>\r\n\t
    • Lost productivity due to a new employee learning the job<\/li>\r\n\t
    • Lost productivity associated with coworkers helping the new employee<\/li>\r\n\t
    • Costs of training<\/li>\r\n\t
    • Costs associated with the employee\u2019s lack of motivation prior to leaving<\/li>\r\n\t
    • Sometimes, the costs of trade secrets and proprietary information shared by the employee who leaves<\/li>\r\n\t
    • Public relations costs<\/li>\r\n<\/ul>\r\nTo avoid these costs, development of retention plans is an important function of the HR strategic plan. Retention plans<\/span>A plan that outlines the strategies the organization will use to reduce turnover and address employee motivation.<\/span><\/span> outline the strategies the organization will use to reduce turnover and address employee motivation.\r\n
      \r\n\r\nTable 7.1<\/span> Turnover Costs\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Direct<\/th>\r\nIndirect<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
      Recruitment costs<\/td>\r\nLost knowledge<\/td>\r\n<\/tr>\r\n
      Advertising costs for new position<\/td>\r\nLoss of productivity while new employee is brought up to speed<\/td>\r\n<\/tr>\r\n
      Orientation and training of new employee<\/td>\r\nCost associated with lack of motivation prior to leaving<\/td>\r\n<\/tr>\r\n
      Severance costs<\/td>\r\nCost associated with loss of trade secrets<\/td>\r\n<\/tr>\r\n
      Testing costs<\/td>\r\n<\/tr>\r\n
      Time to interview new replacements<\/td>\r\n<\/tr>\r\n
      Time to recruit and train new hires<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n
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      Costs of Turnover in Hospitality<\/h3>\r\n