BOTTOM LINE:
Reducing your voluntary turnover rate by 3% can result in cost savings ranging from $135,000 (association with 50 employees) to $540,000 (association with 200 employees), and that’s not just once—that’s every year. Plus, the median voluntary turnover rate among nonprofits is 13%, so you could probably save even more if you work at it. Why wouldn’t you try to capture those savings?
THE DETAILS:
[Note: this post is part of a series that will soon become an ebook.]
Employee turnover is inevitable. Sometimes you ask employees to leave (involuntary turnover), and sometimes employees decide to leave you (voluntary turnover). It’s the latter that hurts the most, by the way, because there was no planning for it, and you often end up losing people that you really wanted to stay.
The reason turnover “hurts” is because it costs you money and time. That part is also inevitable. There is no version of turnover where someone quits, and you already have a new person hired who is already up to speed on everything. It doesn’t work that way. Someone gives notice, and at that point you start a recruiting process (time and money). Before the new person is hired, existing employees must cover the functions of that role (time), and even after the new person is hired, it takes a while before they are fully up to speed (time). Then, depending on the role, you may need to provide training to the new hire as part of onboarding (time and money). Are you getting the time and money part?
So, how much time and money? Let’s start with the money part:
- Hiring process (placing ads, doing background checks, and for senior positions, retaining a search firm). This can be many thousands of dollars per position.
- Onboarding and training (this varies by position; one study estimated it at between 16% and 20% of a salary goes into this cost category).
- Severance pay
- Temps (to cover the departing employees work)
All that is cash out the door, though I think that pales in comparison with the indirect and opportunity costs:
- Direct productivity losses. This is probably the biggest category. Direct productivity losses refer to people who must cover for the departing employee, and that means they can’t do their jobs as effectively as before. According to a survey by Robert Half, 39% of HR managers cited missed deadlines as a significant negative impact of employee turnover. You cannot be 100% productive when you’re several people down. Organizational results will suffer when you’re not productive
- Indirect productivity losses. This refers to all the time people both inside and outside of HR must spend on the recruiting, hiring, and onboarding processes. This is the other area where people get taken away from their regular jobs, and this becomes very painful when turnover gets too high.
- Knowledge/skill loss. When people leave, they take specialized knowledge and skills with them. Yes, your new hires will ideally replace a lot of that, but it’s unlikely they can replace it all. You’ll have to find other ways to fill the gap (i.e., existing staff will train them, or you’ll have to rely on the direct costs of training/temps mentioned above).
- Unrealized potential. This is a big category, but it has an asterisk next to it, because they are setbacks that you “might” incur. Still, it needs to be a part of your turnover cost plan. This includes customer service/relationship disruption (when customer-facing employees leave), employer brand damage (if word gets out about your high turnover and people think twice about working there), and opportunity costs (revenue generating activities that “could” have happened if people hadn’t been spending time on recruiting, onboarding, etc.).
So what does that all add up to? It’s not a simple calculation, particularly on the indirect cost and lost revenue side, but the Society for Human Resource Management estimates that the cost of turnover ranges between 90% and 200% of an employee’s salary.
The midpoint of that range is 145%. I usually go slightly below that for generic cost estimates (125%), but you should choose one based on what level of staff tend to be the ones turning over.
So here is your annual voluntary turnover cost calculation:
(number that quit in the last 12 months) x (average salary) x (1.25).
In this post I used that formula to show that the annual turnover costs of an association with 100 employees was more than $1 million. The formula converts time/productivity into dollars, so remember that you won’t see all of those dollars walk out the door as cash, but when you are evaluating organizational potential and impact, the figure is very helpful.
But here’s why this is such a big deal. That $1 million figure is based on assumed voluntary turnover rate of 13% (which is the median among nonprofits, according to SHRM). Let’s assume that the lowest you’ll get your voluntary turnover rate is about 4% per year, and a very high turnover rate would be 30% (I’ve seen higher and lower, believe me, but let’s not use extremes in this example). That means the range of voluntary turnover costs for that 100-person association is approximately $360,000 to $2.25 million, every year.
That’s huge, and that shows you just how much of an impact a reduction (or increase) in voluntary turnover can generate for an association. Just reducing your voluntary turnover rate by 3% would have the following annual impacts (based on the size of your organization):
- 50 Employees: $135,000 in savings each year
- 75 Employees: $202,000 in savings each year
- 100 Employees: $270,000 in savings each year
- 150 Employees: $405,000 in savings each year
- 200 employees: $540,000 in savings each year
That’s just a three percent drop, as in 10 people quitting last year, instead of 13 (for the 100-person staff). Remember to increase those figures if you think you pay more than the median salary in the nonprofit world. Why would you not make every effort to capture those savings?
If your voluntary turnover rate is below 6%, then you are in the top 25% in the nonprofit world, and if you’re down below 3% you’re in the elite. If you’re not, then you have work to do, which will be the subject of the next post.