Companies Need To Know The Dollar Cost Of Employee Turnover

I would roll my eyes when I heard that a company should know the cost of employee turnover. Okay, I thought, for a particular business the cost is $14.3 million. What would anyone ever do with that figure?

An economist wants something a bit different: How much would the cost increase if turnover worsened by one percentage point a year? How much would the cost fall if turnover were improved by one percentage point? Now we have data for a profit-maximizing decision: how much is it worth spending to improve turnover?

Turnover is generally considered bad, but McDonalds has built a business on high employee turnover. They have optimized their systems to train employees to do a good job and then leave in less than a year.

High turnover is not the right decision for every company, though. Costco believes that its low employee turnover is a great benefit.

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Whichever strategy a business pursues, it should always be looking for cheap ways to improve turnover. Take the local McDonalds, good at training workers. A person with six months on the job is still more productive than someone is the first month of work. If McDonald’s can get another month from its workers before they leave, then the productivity difference is huge.

Key to improving employee retention is knowing turnover costs. Before embarking on big programs, or even small programs, it’s worth knowing how much benefit will accrue. Those costs estimates need to be owned by operations managers and finance. Operations people will implement the changes in first-level supervision that will produce results. To motivate them, costs need to be something they have worked to understand rather than figures given to them by outsiders. Finance personnel need to believe the numbers and support spending money that will save even more money in turnover costs.

Employee turnover is not just an issue for the human resources department. Operating units feel the pain of turnover in productivity, product quality and customer service. But the calculations are difficult, so finance personnel are probably best qualified. I suggest a team incorporating people from HR, finance and operations. Where there are many other people employed, like maybe a sales department, someone familiar with those activities should contribute to the effort.