Term Paper on "Effects of Employee Turnover"

Term Paper 6 pages (1782 words) Sources: 8 Style: APA

[EXCERPT] . . . .

Direct and Indirect Costs Associated With Employee Turnover

Direct And Indirect Costs Associated

with employee turnover

The objective of this work is to research and examine the effects of employee turnover on an organization to include costs in terms of financial as well as costs associated with customer retention.

Retention of employees is an issue that organizations face possibly now more than ever in history. The costs that are associated with employee turnover include costs associated with recruiting and training costs but as well are costs associated with problems related to customer retention. The overall voluntary turnover of employees in the United States increased to 23.4% annually during 2006. The following chart labeled Figure 1 shows the Annual U.S. Voluntary Turnover by Industry for September 2005 through August 2006.

Annual U.S. Voluntary Turnover by Industry

Source: Nobscott Corporation

Costs Associated with Employee Turnover

The Missouri Small business Development Center report entitled: "Reducing Employee Turnover" states employee turnover costs include: (1) recruitment; (2) selection; and (3) training of new people." (2002) Indirect costs include: (1) increased workloads; (2) overtime expenses for coworkers; and (3) reduced productivity associate with low employee morale." (Missouri Small Business Development Center, 2002) Estimated costs vary however; the estimated range is stated to be: "...as low as a few hundred dollars to as high as four times the annual salary of the employee." (Ibid) Estimations stated due to employee turnover replacement is the amount equal to one-third of the salary of the employee being replaced which at a minimum wage salary would total $3,700 in replacement costs.

II. Causes of Employee Turnover

There are various potential causes for employee turnover. Some of the reasons employees leave the organization include but are not limited to the following:

Area economic conditions

Labor market conditions

Non-competitive compensation

High stress

Working conditions

Monotony

Poor supervision

Poor fit between employee and the job

Inadequate training

Poor communication

Organizational practices (Missouri Small Business Development Center, 2002)

III. Comprehensive Cost Calculation

The work of William G. Bliss is a comprehensive checklist of costs associated with employee turnover. Bliss states that "these calculations will easily reach 150% of the employee's annual compensation figure. The cost will be significantly higher (200% to 250% of annual compensation) for managerial and sales positions." (Bliss, 2007) Bliss says when making the assumption that the salary (average) is $50,000 per year then the cost of turnover would be $75,000 for each employee who leaves the organization. For a company that is mid-sized with a 10% rate of turnover annually, the annual cost of turnover total $7.5 million. (Bliss, 2007; paraphrased) the necessary calculations to include in determining the actual costs of the individual who leaves the organization are listed in the following section of this report entitled "Calculation of Losses Associated with Employee Turnover."

IV. Calculation of Losses Associated with Employee Turnover

Cost of employee leaving:

Calculate:

The costs of the individual who fills in the vacant position (temporary or existing employee overtime).

Cost of loss productivity at 50% (minimum) of the individual's compensation plus benefits costs for every week the position is vacant.

Loss productivity at 100%

1) the cost of the exit interview (including the time of individual conducting the interview); (2) the time of the individual leaving; (3) the administrative costs of stopping payroll; (4) benefit deductions; (5) benefit enrollments; (6) COBRA notification and administration; (7) cost of various forms needed to process the individual who resigns.

The cost of the manager "who has to understand what work remains, and how to cover that work until a replacement is found and the cost of the manager who conducts their own version of the employee exit interview;

The costs of training the organization has invested in the employee leaving include: (1) internal training; (2) external programs/academic education; and (3) licenses and certifications,

The impact on departmental productivity and the costs of discussion among staff relating to the resignation incident;

The cost of severance and benefits continuation (when eligible);

The cost of lost knowledge, skills, and contacts that the individual is taking with them as they leave the organization. (50% of the individual's annual salary for one year plus 10% for each additional year of service)

The costs associated with unemployment insurance premiums (including time spent for unemployment hearing preparation and cost of third party representative);

Cost of loosing customers that will follow the employee or cost to retain customers; (Bliss, 2007; paraphrased)

Costs Associated with Recruitment

Calculate:

Cost of advertising ($200 to $5,000)

Agency costs (20-30% of annual compensation)

Costs of internal recruiter's time to comprehend the position requirements, develop and implement a sourcing strategy, review candidate's backgrounds, prepare for interviews, conduct interviews, prepare candidate assessments, conduct reference checks, make the employment offer and notify unsuccessful candidates. (30 to 100 hours per position)

The cost of a recruiter's assistant (20 plus hours in basic level review of resumes, development of candidate interview schedules, making travel arrangements for out of town candidates)

Cost of hiring department (time to review and explain position requirements and review candidates background, conduction of interviews, discussion of assessments and selection of finalist. (All of this will total at least 100 hours total time)

Administrative cost of handling, processing and responding to average number of resumes ($1.50 per resume)

Number of hours spent by the internal recruiter interviewing internal candidates plus the time those candidates area away from their jobs for interviews;

Cost of drug screens, educational and criminal background checks and other reference checks (calculate number of times per position)

Cost of various candidate pre-employment tests in assessing candidates' skills, abilities, aptitude, attitude, values and behaviors. (Bliss, 2007; paraphrased)

Costs Associated with Training

Calculate:

Orientation costs;

Cost of Departmental training

Cost of person or persons conducting interviews;

Cost of person or persons conducting training;

Cost of training materials (company/product manuals, computer/technology equipment)

Cost of supervisor's time spent in making assignments, giving explanations, making review of work assignments (7 hours per week for 8 weeks) (Bliss, 2007; paraphrased)

Lost Productivity Costs

The employee will likely only contribute at a 25% level of productivity for the first few weeks therefore; the organization must calculate 75% of the employee's salary for at least two to four weeks of their new employment. During weeks, five through twelve the employee will likely contribute at a 50% level of productivity requiring the organization calculate 50% of the individual's salary for that period. During the thirteenth through the twentieth week, the employee will likely contribute at a 75% level of productivity requiring the organization to calculate 25% of the individual's salary for that period. The costs of supervisor and coworker productivity will also be calculated in these costs as well as will the impact cost related to project "completion of delivery"(Bliss, 2007) in which the employee leaving the company was a "key participant." (Bliss, 2007) Finally, in this area of cost calculation the productivity reduction of the manager who has lost an assistant or "key staff member" will have to be calculated into the costs associated with employee turnover. (Bliss, 2007; paraphrased)

Costs Associated with New Hires

The cost of bringing the new person into the organization, the cost of adding the person on the payroll, institute computer and security identification and passwords, business card costs, publicity announcements (externally and internally), cost of telephone hookups, cost of establishing email accounts, cost of credit card account establishment, leasing of equipment (cell phones, pagers, automobiles) and the cost of the manager's time spent with the new employee. (Bliss, 2007; paraphrased)

Sales- Lost Costs

Bliss states to calculate this category one should: (1) "For sales staff, divide the budgeted revenue per sales territory into weekly amounts and multiply that amount for each week the territory is vacant, including training time. Also, use the lost productivity calculations above to calculate the lost sales until the sales representative is fully productive. Can also be used for telemarketing and inside sales representatives; and (2) for non-sales staff, calculate the revenue per employee by dividing total company revenue by the average number of employees in a given year. Whether an employee contributes directly or indirectly to the generation of revenue, their purpose is to provide some defined set of responsibilities that are necessary to the generation of revenue. Calculate the lost revenue by multiplying the number of weeks the position is vacant." (Bliss, 2007)

V. Strategies for Avoiding Employee Turnover

The work of Berger and Berger (2004) states that strategies for the organization avoiding employee turnover include:

1) Identifying, selecting and cultivating 'Superkeepers' (employees whom the organization cannot afford to lose);

2) Finding, developing, and positioning highly qualified backups for key positions; and 3) Allocating resources to employees based on their contribution (actual and/or potential) to the organization excellence." (Berger and Berger, 2004)

In a 1994, Cornell University 'Key Workplace' document entitled; "The Impact of Recruitment, Selection, Promotion, and Compensation Policies and Practices on the Glass Ceiling" states that: "Mentoring programs have been found to alleviate turnover problems, as well as low morale; with little to no extra… READ MORE

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