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What is employee turnover is really costing your organisation?

Our people are our biggest asset. For many, this may simply sound like management speak. But as HR professionals, you know better than anyone that a company’s worth is determined by its’ ability to produce results and drive growth. And this largely comes down to your people.

But when it comes to convincing senior management of that value, this can be harder than it looks.

5 minutes

Posted 28/03/2022

How much does turnover actually cost?

Some board members will only listen to information that relates back to profitability. This is especially true where HR reports directly to the Chief Financial Officer or equivalent.  So how does the cost of employee turnover actually impact a business?

It has been estimated the real cost of recruitment in Australia can be upwards of 50 per cent of a person’s salary. So every time a position is vacated, you’re having to spend half their salary just to fill it again.

However, this figure doesn’t consider the actual cycle of ‘turning an employee over’. It doesn’t take into account the cost of lost productivity from the previous employee, and the cost of getting the replacement up to full productivity.

So while the precise costs are difficult to put a number on, there’s no doubt that retaining or retraining staff is often a much more cost-effective solution than replacing.

 

How to calculate your employee turnover rate

Calculating your average employee turnover rate is pretty easy. Once you’ve selected a group of employees to measure, here’s what you need to do:

  1. Work out your average head count
  2. Add up your total number of leavers
  3. Divide your leavers by your average head count
  4. Multiply this figure by 100

The number you can now see is your average employee turnover rate for this group of people. You can work this out over a month, for your monthly turnover rate, or a year, for your annual turnover rate. Whatever period you’re using, make sure you apply it to both the average head count, and the number of leavers.

 

What is the average turnover rate?

Now that you have your percentage, let’s benchmark this against the national average.

According to this report by the AI Group, the average employee turnover rate is around 8.5%. But what does this mean for you? Does it mean that any number above 8% is bad, and any number below is good?

Not necessarily.

Again, a lot of this is down to industry and job role. In the AI Group report, we can see that some industries have a much higher turnover rate on average – such as hospitality which has a turnover average of 17%. We also see that some have a much lower turnover rate on average – the public administration industry has just an 5.3% turnover rate.

Beyond this, there’s the question of what is “good” and what is “bad”. The number is not as important as the actual cost to your business operations. But that’s another calculation for another day.

 

How to make the case to your executive board

Making the case for a new retention initiative can be a challenge. But there are plenty of good tips to help you make your case compelling, and get your voice heard.

Here are four strategies you can employ to make the case for reducing employee turnover:

  1. Find case studies. Look for stories from other companies respected by your board, and show them that successful businesses work hard to keep turnover low. See the case study below for an example.

  2. Run the numbers. Put together a quick financial model on what the cost of turnover is actually doing to your business bottom line.

  3. Put your solution into context. Sometimes your proposed solution seems big and scary to your board. But if you can contextualise the cost of what you’re proposing, in terms of the benefits you’ll achieve using points 1 and 2 above, then you’ll strengthen your chances.

  4. Get the legal green light. If your solution requires a big business change, run it past your legal team if you can. Showing that there is minimal risk to your business case can be the reassurance your board members need.

How one HR professional saved her company over $175,000 by cutting turnover

Jennifer Griffiths is now the head of HR for Circle IT, but she actually fell into HR after starting her career in operations. And actually, it was her work reducing turnover that helped propel her into such an influential position within her organisation.

Jennifer had noticed that a lot of employees were leaving and she wanted to do something about it.

By launching an employee survey and finding out exactly why people were heading for the door in droves, Jennifer was able to make big business changes that reduced employee turnover from 54% to 15%. In the end, employees were happier – and so were senior management. After all, later evaluation revealed that Jennifer’s efforts had saved her company more than $175,000!