A stitch in time saves nine. And the best way to retain good people is to hire correctly – and onboard them correctly.
The terrible cost of turnover
High turnover is like a cancer eating a company from within. It doesn’t show up directly in the P&L statements, but the effect is there, and it’s poison: The rule of thumb is that it costs businesses about one-fifth of a workers’ salary to replace that worker,
True, the replacement cost level is somewhat lower at lower pay levels: Even at jobs that pay less than $30,000 per year – entry level in most industries, these days, – it costs employers a median average of 16.1 percent of their annual pay to replace these workers. Across all professions, there was a substantial grouping in the 10 to 30 percent range. This is the fat part of the Bell Curve for most professions. However, for higher paid workers at the senior executive level, the replacement cost is an order of magnitude higher – as much as 213 percent.
As an HR professional, if you can find a way to substantially reduce employee turnover, you’ll be a hero.
Counting the Cost
As an HR pro, part of your job is selling the importance of HR to the head shed. After all, if you don’t do a good job selling your HR value proposition, your department is going to be on the chopping block during the next contraction – and you’re going to have a tougher time finding advancement in a department that’s not growing in responsibility, scope and funding.
Step one is selling the management/ownership on the concept that turnover is a problem with real costs – direct and indirect.
Step two is presenting a plan to help the company shed turnover – and turnover costs – in a substantial way.
Step three, of course, is the hard part, as the Underpants Gnomes will tell you.
Step four: Everybody profits!
Direct and Indirect Costs
The direct cost of turnover shows up in the cost of separation and in the cost of replacement.
Separation costs include but are not limited to:
- Severance pay
- Exit interview man-hours
- Legal fees/liability (for involuntary separation, disgruntled workers, etc.)
Replacement costs include:
- Sourcing expenses,
- Screening and interviewing costs, including the cost of screening and interviewing candidates that aren’t selected.
- Travel and relocation expense
- Drug and psychological testing processing
- Mandatory briefings and classes
- Fees or salary paid to the people giving these classes
Indirect costs include:
- Low morale and productivity in the days leading up to separation (Departing employees function at 50-75 percent of normal productivity)
- Overtime paid to other employees who have to pick up the slack
- Lost productivity of management dealing with the problem employee
- Loss of accounts or customers
Intangibles: Institutional knowledge walks out the door. Goodwill is lost as client relationships are weakened (clients are a lot more willing to tolerate human error when it’s someone they’ve been working with for years, versus the fourth person on their account this year!)
What You Can Do
If your turnover is running at or near industry standard levels, it’s probably too high. A concerted effort to reduce it should pay solid dividends to the company over time. What can HR pros do? First, ditch the ‘orientation’ model and adopt an onboarding process. Orientation isn’t enough in a competitive labor environment, because while it does help employees learn who’s who in the organization and where the office supplies are kept, it does nothing to tighten the cultural bond between the employee and the company.
Are you getting the right caliber of employee? Or are you a technology/Web 3.0 culture putting help wanted ads in the Sunday paper and getting people who don’t have the technical acumen? What about your recruiters/headhunters? Do their methods match your culture? Or is there a mismatch between your company culture and communication to prospective new hires.
Have you developed the tools to track your onboarding success or failure in certain areas? Is it sufficiently granular? That is, is it useful both by department/functional area and geographical location?
Here’s an example heat map, provided by Saratoga Research, to guide your efforts.
Note the power of this graphic: In a simple spreadsheet form, it provides enough information at a glance to alert busy and easily distracted senior executives to focus on problem areas and take action. Presenting information like this helps HR types get management ‘buy in’ to help you help them!
- Are you tracking ‘quality of hire’ data? What percentage of your hires are successful and outperforming at the end of one year? What are the trends over time?
- Is onboarding simply the responsibility of management? Or are new hires’ peers and even other entry-level staff also part of the process?
- Do new hires get a ‘football to run with’ early in their jobs? Or are they left out of projects, responsibility and opportunities to excel (consistent with their overall skill and experience level)?
- Are you promoting from within? Outside hires are hit-and-miss at best, at senior positions. As we note above, Harvard Business Review found that nearly half of them fail to stick after just 18 months.
- How fast can new employees get their first paychecks? Can you issue a check after the first week? Even if the normal cycle is two weeks.Finally, is HR a full partner in your operation or is it an afterthought? Does management seem to regard your function as a resource and partner or as overhead? What can you do to sell your department value proposition? (Answer: Keep providing your management information like the graphic above!)