Management Tip: Employee Turnover And Its Staggering Costs

Most managers complain of employee turnover problems, but very few do anything about it. Their indifference to employee turnover, however, can be very expensive. Let’s look at some evidence using hard empirical facts– not opinion–about how turnover costs companies millions of dollars each year.

In 1997 Gallup was asked by a large national retailer to measure the strength of their work environment.* This particular retailer had 37,000 employees over 300 stores with over 100 employees on average at each store. When conducting this project for the retailer, Gallup sent “confidential” surveys to all employees. Amazingly 75% of the employees replied giving Gallup information from over 28,000 employees! There were 12 key questions on each survey. Questions were about job satisfaction and the employees’ relationship with their immediate supervisor and feelings about the company.

Gallup dissected the data from the surveys to identify connections between individual store success (relating to sales and profit)comparing those findings with job satisfaction and employee turnover.

Stores that scored in the top 25% in employee satisfaction were on average about 5% over their sales budget for the year, while those stores scoring in the bottom 25% of employee satisfaction were on average 1% below sales budget. In real numbers, this represented a difference of approximately $104 million in company-wide sales due to turnover.

But that’s not the entire story: When comparing profit and loss figures among the two groups, the top 25% stores were 14% over their profit goals on average, where the bottom 25% stores were about 30% below their profit goals.

Of course the stores that were in the bottom 25% of employee satisfaction had worse turnover. Each store that was in the top 25% of satisfied employees retained on average, twelve more employees per year than the stores in the bottom 25%.

If you estimate that the wage of the average store employee at a mere $18,000, and that the cost of finding, hiring and training each new employee is 1.5 times the average salary (a very conservative estimate), then the cost to the company for the differing levels of retention between the “top 25%” and the “bottom 25%” stores is staggering. Here’s how it works out: $18,000 (average wage) x 1.5 (turnover cost) x 1,000 (total employees that turned over) = $27 million.

You can figure out how this would affect your business very easily as well. Let’s say that you turned over 10 employees over the past year… and that the average salary among them was $35,000. $35,000 x 10 x 1.5 = $525,000.

Despite this, most managers are flippant about losing people. The reasons they are indifferent about turnover are that most are unaware of how costly it is. Other reasons include lack of training on how to retain good employees, apathy toward the employees’ needs, and of course, not properly interviewing and screening to hire the right people in the first place.

The 1.5 turnover cost is very conservative. The cost doesn’t stop there by a long shot.

The average employee begins thinking about leaving from three to six months before he or she actually leaves. During this period of plotting out their “exit strategy” the employee’s productivity can drop up to 50% before they finally hand in their resignation. During this time, those employees that are dealing with customers in a sales or support function become indifferent to the customer’s needs. For example, phone calls aren’t returned promptly, follow up is lacking, billing errors escalate, and apologies to customers for mistakes are few and far between. And solutions to problems keep the customer waiting for answers. Even worse, excuses and “buck passing” are relayed to the customer, effectively washing the company and management’s dirty laundry in front of the customer.

If a receptionist is about to leave your company, that is bad news too. More voicemail transfers, rudeness and indifference can prevent new business with promising new prospects that are phoning for information.

The cost of turnover is very expensive. If your company doesn’t have an ongoing recruiting plan, then a vacant position can remain unfilled anywhere between three to six months. When a new person is hired, they are rarely self-sufficient on the first day of the job, so there’s more cost — especially if they are being trained and supported by co-workers and managers. Of course, there’s administrative processing costs for new employees that must be calculated as well.

Of course, most managers feel that “attrition is inevitable”… however that is not true. The manager’s role in turnover is paramount, but underplayed. It is estimated that 80% of employees leave a company because of their immediate supervisor!** As the saying goes “employees don’t leave companies, they leave their manager.”

And PR-wise, very few departed employees ever brag about the company they have departed do they? How many potential future employees have been turned off by an ex-employee’s feelings? The grapevine is much more effective than any hyperbolic ad in the employment section of the newspaper could ever be.

If you are take your car in to a auto dealer every six months for service, and each time you drive up there’s a new service manager to greet you, how does that make you feel as opposed to seeing the same service manager every time you need service? Turnover looks bad to customers, and undermines the relationship between a company and its customers.

The bottom line is that there is a strong relationship between employee satisfaction and customer satisfaction, and those that deny that fact are living in the dark ages. Customer satisfaction is key to retention of business.

In the early 90’s, The Harvard Business Review featured an article titled “Zero Defections” which revealed the impact of customer attrition. The study of a variety of firms across several industries concluded that the if a company could reduce its customer attrition rate by just 5%, profits could be increased from 50 to 100%.

Managers that want to start reducing their customer attrition could start with one easy step: Start treating your employees as customers first.

*First, Break All The Rules– What The World’s Greatest Managers Do Differently. Marcus Buckingham and Curt Coffman.

**The Challenge of Retaining Top Talent—The Workforce Attrition Crisis. B. Lynn Ware, Ph.D and Bruce Fern.

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