We as HR personnels does not feel the need of calculating the cost of lose of an employee, which is an essential part if you really want to prove that HR is not only a support function but also an integral par of any organisation.
Read this to believe it, implementation- I leave it to your choice. :shock:
Loss of an employee is expensive to a company but the question that is often asked is, "How much does it cost?" Based on the past company records, it’s a lot more than you think! Most financial statements provide little analytical data regarding turnover. This is because most companies do not realise the amount of indirect investment made when an employee leaves.
Therefore, this area of manageable expense is often overlooked in the quest to make the Balance Sheet look better. An analysis of the costs and causes of employee turnover can lead to reducing these expenses and thereby having a positive impact on profits.
Before making an analysis of the costs and causes of employee turnover, addressing a few of these concerns might help.
What’s the employee turnover rate in your organisation/department? What should it be?
What does it cost to hire a new employee? How long do they take to start performing as per the company’s expectations?
How much money are you losing when an employee leaves? How much can be saved?
What are your costs in terms of legal exposure, taxes, and opportunity costs?
What impact does employee turnover have on customer satisfaction and repeat and referral business?
Cost incurred on employee turnover is the most wasteful expenditure in any organisation. There are a few cases wherein the employer has control over why the employee is leaving the organisation. To implement the most appropriate turnover reduction strategies, management needs to identify the cause for turnover.
Turnover can be categorised as voluntary and involuntary.
Voluntary: It occurs when an employee leaves the organisation out of his own choice due to various reasons. These may include poor job feedback, job dissatisfaction, performance problems and lack of career advancements.
Involuntary: It occurs when an employee is discharged or terminated.
The management can easily identify the reasons for employee separations from the company by reviewing exit interviews.
Cost of turnover if calculated helps companies review their retention policies more objectively. However, there are many tangible and intangible components involved in the calculation of these costs.
While computing the cost of turnover-the cost of vacancy, cost of hire and opportunity cost needs to be computed.
Cost of Vacancy
The components to be computed while calculating the cost of vacancy are: Hampered Product Development and lost Productivity
Impact on teams
Increased stress among existing employees due to over work
Increased effort and time from the Management to juggle the day-to-day activities
Customer Impacts
Loss of Competitive Advantage
Lower performance by new hires
Loss of productive time by new hires
A "break in the dike" of one vacancy might cause the whole team to leave
Many new hires might have to be replaced within 6 months, essentially stretching the length of the vacancy
Cost of Hire
The components of cost of hire are, the cost of:
Hire against anticipated rate of hiring need
Time to fill
Quality of Hiring
Priority of Hiring to Priority of Need
Immediate Hiring Need Vs Strategic Hiring Plan
Training and Assimilation Costs
The following intangibles need to be considered:
Are you hiring the same type of people this year like the previous one
Are these hires at the same level
Is the market strong or weak
Are you looking for people with generic or industry specific skills
How urgent is the need to hire
How successful was last year’s recruitment programme
The computation formula
Separation Costs
Cost of exit interviewer's time+ cost of a terminating employee's time+ cost of administrative functions related to termination+ separation pay = Total
Vacancy cost
Cost of additional overtime+ cost of additional temporary help (optional) - wages and benefits saved due to the vacancy= Total
Replacement cost: …………
Cost of {Attracting applicants+ preliminary interviews+ Testing+ Travel expenses+ Pre-employment administrative expenses+ Medical examination+ Acquisition and dissemination of information.} = Total.
Training costs:
Cost of company literature + formal training costs + informal training costs= Total
Performance differential:
Cost of the Differential in performance costs/benefits (this can be either positive or negative)
TOTAL TURNOVER COSTS PER EMPLOYEE = separation cost +replacement cost+ (+or-) vacancy cost + training cost+ (+or-) performance differential.
The Performance differential quotient calculates in financial terms the difference in productivity between the replacements and replaced. Separation, replacement and training are all net costs of a new hire. Vacancy cost and performance differential quotient can either be a saving or a cost. For example, if overtime costs are less than the replaced employee’s earning, a vacancy savings occurs. Similarly, if the new employee's performance surpasses the predecessor, a net performance benefit results.
Only tangible costs are included while the intangible costs are often more than the quantifiable costs. A few intangible costs are: the uncompensated increased workloads, stress and tension, declining employee morale and decreased productivity. These costs are real, yet, difficult, if not impossible to compute.
Using this method of costing, fact-based decision can be made for adopting retention strategies. If a retention strategy helps to retain 10 employees and the turnover cost is less than the cost incurred on retention, then a HR manager needs to consider the intangibles before abandoning it.
This costing can help HR managers make fact based budgetary allocations for retention strategies by forecasting the prospective turnover costs.
From India, Delhi
113Read this to believe it, implementation- I leave it to your choice. :shock:
Loss of an employee is expensive to a company but the question that is often asked is, "How much does it cost?" Based on the past company records, it’s a lot more than you think! Most financial statements provide little analytical data regarding turnover. This is because most companies do not realise the amount of indirect investment made when an employee leaves.
Therefore, this area of manageable expense is often overlooked in the quest to make the Balance Sheet look better. An analysis of the costs and causes of employee turnover can lead to reducing these expenses and thereby having a positive impact on profits.
Before making an analysis of the costs and causes of employee turnover, addressing a few of these concerns might help.
What’s the employee turnover rate in your organisation/department? What should it be?
What does it cost to hire a new employee? How long do they take to start performing as per the company’s expectations?
How much money are you losing when an employee leaves? How much can be saved?
What are your costs in terms of legal exposure, taxes, and opportunity costs?
What impact does employee turnover have on customer satisfaction and repeat and referral business?
Cost incurred on employee turnover is the most wasteful expenditure in any organisation. There are a few cases wherein the employer has control over why the employee is leaving the organisation. To implement the most appropriate turnover reduction strategies, management needs to identify the cause for turnover.
Turnover can be categorised as voluntary and involuntary.
Voluntary: It occurs when an employee leaves the organisation out of his own choice due to various reasons. These may include poor job feedback, job dissatisfaction, performance problems and lack of career advancements.
Involuntary: It occurs when an employee is discharged or terminated.
The management can easily identify the reasons for employee separations from the company by reviewing exit interviews.
Cost of turnover if calculated helps companies review their retention policies more objectively. However, there are many tangible and intangible components involved in the calculation of these costs.
While computing the cost of turnover-the cost of vacancy, cost of hire and opportunity cost needs to be computed.
Cost of Vacancy
The components to be computed while calculating the cost of vacancy are: Hampered Product Development and lost Productivity
Impact on teams
Increased stress among existing employees due to over work
Increased effort and time from the Management to juggle the day-to-day activities
Customer Impacts
Loss of Competitive Advantage
Lower performance by new hires
Loss of productive time by new hires
A "break in the dike" of one vacancy might cause the whole team to leave
Many new hires might have to be replaced within 6 months, essentially stretching the length of the vacancy
Cost of Hire
The components of cost of hire are, the cost of:
Hire against anticipated rate of hiring need
Time to fill
Quality of Hiring
Priority of Hiring to Priority of Need
Immediate Hiring Need Vs Strategic Hiring Plan
Training and Assimilation Costs
The following intangibles need to be considered:
Are you hiring the same type of people this year like the previous one
Are these hires at the same level
Is the market strong or weak
Are you looking for people with generic or industry specific skills
How urgent is the need to hire
How successful was last year’s recruitment programme
The computation formula
Separation Costs
Cost of exit interviewer's time+ cost of a terminating employee's time+ cost of administrative functions related to termination+ separation pay = Total
Vacancy cost
Cost of additional overtime+ cost of additional temporary help (optional) - wages and benefits saved due to the vacancy= Total
Replacement cost: …………
Cost of {Attracting applicants+ preliminary interviews+ Testing+ Travel expenses+ Pre-employment administrative expenses+ Medical examination+ Acquisition and dissemination of information.} = Total.
Training costs:
Cost of company literature + formal training costs + informal training costs= Total
Performance differential:
Cost of the Differential in performance costs/benefits (this can be either positive or negative)
TOTAL TURNOVER COSTS PER EMPLOYEE = separation cost +replacement cost+ (+or-) vacancy cost + training cost+ (+or-) performance differential.
The Performance differential quotient calculates in financial terms the difference in productivity between the replacements and replaced. Separation, replacement and training are all net costs of a new hire. Vacancy cost and performance differential quotient can either be a saving or a cost. For example, if overtime costs are less than the replaced employee’s earning, a vacancy savings occurs. Similarly, if the new employee's performance surpasses the predecessor, a net performance benefit results.
Only tangible costs are included while the intangible costs are often more than the quantifiable costs. A few intangible costs are: the uncompensated increased workloads, stress and tension, declining employee morale and decreased productivity. These costs are real, yet, difficult, if not impossible to compute.
Using this method of costing, fact-based decision can be made for adopting retention strategies. If a retention strategy helps to retain 10 employees and the turnover cost is less than the cost incurred on retention, then a HR manager needs to consider the intangibles before abandoning it.
This costing can help HR managers make fact based budgetary allocations for retention strategies by forecasting the prospective turnover costs.
From India, Delhi
Hi Archana Very informative article. I was looking for this info :D and I posted one query also long time back but no reply. Thanks for sharing this with us. Regards Sujata
From India, Faridabad
From India, Faridabad
some one tell me how should prepare for giving the exam of ICWA for any sem Please guide me how can i ready to face this exam
From India, Delhi
From India, Delhi
Excellent detailed inputs...it covers almost every aspect of th cost...even I feel Hr's role is crucial to identify these costs and more important is the convincing this to the functions/ departments so that thy also realise the imporance of tangibls as well as intangibles...
Infact, data is something which really gives weightage to the many such concepts which for others looks like almost subjective things and get negelected at times...
Thanks for such wonderful knowledge sharing.
From India, Mumbai
Infact, data is something which really gives weightage to the many such concepts which for others looks like almost subjective things and get negelected at times...
Thanks for such wonderful knowledge sharing.
From India, Mumbai
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