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Employee Turnover: Is It Eating Your Profits?

TURNOVER is costly – just how costly? Research shows the cost of replacing a professional or managerial employee runs 1.5 to 3.0 times the annual salary. It can cost up to five times based on the intellectual capital – what a key person knows – when he or she walks out the door.

For example, to replace a $70,000 sales person with a large customer base can cost you $250,000. A $150,000 technical manager can ultimately cost $450,000 to replace. That’s no small pocket change. Therefore, in any business situation—growth, downturn, merger, or even stability—it makes business sense to retain your top talent.

Four Steps to Turn Around Employee Turnover

  1. Calculate the True Costs
    This includes the direct administration cost of recruitment (ads, background checks, assessments, paperwork plus the manager’s and HR’s time for interviewing, training, orientation) PLUS the indirect costs of performance differential (lost productivity, impact on customers, disruption to the team, lower morale and the lost ‘institutional wisdom’).
  1. Study the Demographics
    Lowering turnover requires probing into the details. For example:
  • Who is leaving (high performers or low performers, older versus younger people, recent hires or people with long tenure)?
  • What job categories or departments are experiencing the most turnover (production, systems analysts, sales, nursing staff)?
  • When are they leaving (after two weeks, six months, five years, or ten years)?
  • Where are they going (your competitor, another industry, back to school, out of town?)
  1. Focus Your Attention
    Not all turnover is equal. Simply looking at a turnover rate of 17% per annum does not tell the complete story. The loss of a top engineer with ten years of experience, strong customer contacts, and good relationships with suppliers is obviously more troubling than losing a filing clerk you hired a month ago. The cost of turnover is highest for jobs that have strategic, bottom line impact.
  1. Identify the Real Causes
    Start by identifying why people are staying and what you are doing that creates that desire to remain. Then find out what troubles people and would lessen their commitment to your organization.

Focus groups and employee surveys are effective ways to obtain real time employee feedback; to identify the ‘push’ and ‘pull’ drivers of employee engagement and to develop realistic solutions.

An Example:

In one company, a detailed analysis revealed that 30% of its IT and 40% of its MBA new hires were leaving in less than 36 months. It then estimated both the direct and indirect costs for these segments. And it came out to a whopping $1.5 million dollars.

Focus groups were conducted with current and departed IT / MBA employees. Compensation and benefits were not the key turnover drivers, but rather, the day-to-day work was not challenging. These young ‘bucks’ were bored and fearful of losing their edge. In addition, supervisors lacked basic management skills and were unable to state clearly performance expectations or provide meaningful feedback. Only then could solutions be developed to deal with the real causes of employee dissatisfaction.

Smart Moves Tip:

Employee turnover is an extraordinarily complex issue. There is no one magic bullet. What I have consistently found is: That it’s NOT the money. When someone leaves for ‘better opportunities’, what has happened is that certain dissatisfactions – like the ones above – caused the person to put out feelers or to become curious about recruiter calls or to start surfing the job boards. Be proactive – here are ways to keep your star performers.

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Marcia Zidle
Marcia Zidlehttp://www.smartmovescoach.com
Marcia Zidle, The Smart Moves Coach, is a national known board certified coach and keynote leadership speaker who guides organizations that are planning, or in the midst of, ambitious growth and change. As a career strategist, she works with professionals, managers and executives who want to build • shape • brand • change • vitalize their careers. She’s been selected by LinkedIn’s ProFinder as one of the best coaches for 2016!Her clients range from private owned businesses to mid-market companies to professional service firms to NGO’s. With 25 years of management, business consulting and international experience, she brings an expertise in executive and team leadership; employee engagement and innovation; personal and organization change; career building and development; emotional and social intelligence. Your Future Starts Now With Marcia!

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12 CONVERSATIONS

  1. Few industries have the high turnover rate that the hospitality industry suffers. It is not unusual to find that a hotel has a 65-80% turnover. Yes, it is expensive. Hiring the wrong people, inadequate training and inept management all play major roles.

    A fact that is too often ignored is that people don’t quit a job or a company. More often than not people quit a boss. Seldom is it about money alone.

    • Kenneth,
      So true about people not quitting a company but their boss. Now that the economy has picked up, I’m seeing lots of requests on LinkedIn Profinder for career coaching to find a better job (which many say is to get away from a bad boss).

  2. Our firm often measures the impact of an individual employee to the profitability of the organization. When there is churn, we look at the “force multipliers” of employees first to see if the churn is a good churn or a bad one. If higher force multipliers are leaving then we dig deeper into the root causes on why. And this is easy since to actually be able to measure each employee’s impact we can deeply analyze the cause-effect chain to get a solid answer.

    I don’t think there is any problem with churn as long as there are increasingly more good people staying and all the not so good people are leaving.

  3. The HR Manager for a software development company hired for talent for over two years and then stopped for two years because the two owners thought they could do a better job of selecting good Technical Support Analysts (TSA) than Sonja, their HR Manager. TSAs go to the customers’ workplace and identify the programming errors and then reprogram the software. 



    The owners felt too restricted by the talent selection process. After two years of doing it themselves they went to Sonja’s office and told her “We suck at this, start using the your talent method again, you are much more successful at hiring good TSAs than we are.” The owners could not duplicate her success rate, not bad for a HR Manager. Sonja took a risk when she first tried the talent selection process. 



    Employers over rely on interviews and qualifications. The goal should be to hire competent people, not necessarily the most competent, who will become successful employees. The best I can tell a resume never actually does any work. 



    Note, when Sonja first developed the TSA Performance Model the results did not make sense. After we discussed the job functions of a TSA she realized that TSAs did two different jobs; 


    1. The programming work (Technical TSAs) 



    2. Account Management (Account TSAs) 



    She then developed two TSA Performance Models, one for the Technical TSAs and one for the Account TSAs. Sonja was quite surprised to see that none of the top Technical TSAs were among the top Account TSAs and none of the top Account TSAs were among the top Technical TSAs. The two groups of top performers were easily identifiable as two distinct groups; job redesign and job reassignments followed.

  4. Hello Marcia,

    Just reread your column and thought you might like to see how to calculate the cost of replacing an employee.

    If you send me your email address, see may address below, I’ll send you a non-working copy of the Bliss-Gately Tool so you can see what costs go into replacing employees, see Part E below, of the seven parts of the cost of turnover. There is one working section of the Excel workbook, i.e., Performance Turnover, which is Dr. John Sullivan’s method to effectively evaluate employee turnover by manager; lower turnover is not always better than higher turnover.

    Part A – Costs Due to a Person Leaving
    Part B – Recruitment Costs
    Part C – Training Costs
    Part D – Lost Productivity Costs
    Part E – New Hire Cost
    Part F – Lost Sales Costs
    Part G – Extraordinary Cost

    Bob Gately
    [email protected]

    • Hi Bob, I am Mary Smith and I own a dental staffing company. We see quite a bit of employee turnover in certain offices and I would very much appreciate the Bliss-Gately tool you are referring to. It would be great to show my clients how much it is truly costing them for making impulsive bad hires. My email is [email protected]

  5. First, find out why there is employee turnover.

    Are you wanting the sizzle (irrelevant standards) so much you don’t care about the steak (performance)? They’ll sizzle out the door quickly since they won’t provide the steak.

    Are you rejecting people because they’re overqualified? Clearly you don’t give them a chance to grow, and you then punish them for your mistakes.

    Have you laid off ANY employees? Then don’t complain about employee turnover, hypocrites.

    • Bee, Thank you for your insights red employee turnover. Good point about rejecting people because they’re overqualified or don’t want ot pay for their expertise.

  6. Hello Marcia,

    The number one reason for employee turnover is the wrong people were hired for managerial positions which leads to poor hiring decisions.

    80% of employees self-report that they are not engaged.
    80% of managers are ill suited to effectively manage people.
    The two 80 percents are closely related.

    Employers keep hiring the wrong people to be their managers and then they wonder why they have so few engaged employees. Successful employees have all three of the following success predictors while unsuccessful employee lack one or two and usually it is Job Talent that they lack.
    1. Competence
    2. Cultural Fit
    3. Job Talent 



    Employers do a… 

    A. GREAT job of hiring competent employees, about 95%
    B. good job of hiring competent employees who fit the culture, about 70%
    C. POOR job of hiring competent employees who fit the culture and who have a talent for the job, about 20%

    Identifying the talent required for each job seems to be missing from talent and management discussions. If we ignore any of the three criteria, our workforce will be less successful with higher turnover than if we do not ignore any of the three criteria.
    1. Competence
    2. Cultural Fit
    3. Job Talent

    There are many factors to consider when hiring and managing talent but first we need to define talent unless “hiring talent” means “hiring employees.” Everyone wants to hire for and manage talent but if we can’t answer the five questions below with specificity, we can’t hire or manage talent effectively.
    1. How do we define talent?
    2. How do we measure talent?
    3. How do we know a candidate’s talent?
    4. How do we know what talent is required for each job?
    5. How do we match a candidate’s talent to the talent demanded by the job?

    Most managers cannot answer the five questions with specificity but the answers provide the framework for hiring successful employees and creating an engaged workforce.

    Talent is not found in resumes or interviews or background checks or college transcripts.

    Talent must be hired since it cannot be acquired or imparted after the hire.

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