The Real Cost of Turnover

We all know, intuitively, that turnover is bad: it’s hard to find good hires, it takes effort to train them, it takes time for them to build up the same productivity as an established contributors–and I’m only talking about the tangible issues here, not the morale hit when the team members have to pick up the slack, or the customer satisfaction trough as customers have to contend with less senior contacts. So I thought it would be interesting to compute the cost of turnover.

I will use the following assumptions to build the model, but of course you can adapt it to your specific situation.

  • team size: 100 h/c
  • average compensation: $80,000
  • replacement cost (internal and external costs for recruiting, interviewing, relocating): 30% of yearly compensation.
  • onboarding period (at 0% productivity): 1 month
  • rampup period : 6 months
  • rampup  productivity:  50% (using a flat rate for simplicity’s sake;of course in reality it’s more of a ramp)

The formula is as follows:

turnover rate * team size * average compensation * (replacement rate + onboarding/12 + rampup*productivity/12)

Using the assumptions above, we get the following results:

  • For 10% turnover .1*100*80k*(.3+1/12+6*.5/12) = $506,666
  • For 50% turnover .5*100*80k*(.3+1/12+6*.5/12)  = $2,533,333
  • For 100% turnover: 1*100*80k*(.3+1/12+6*.5/12) = $5,066,666

Can you think of other, more profitable investments you could make with $5m? Turnover is a huge financial burden: hire well, train well, manage well to retain your staff.

(If you are curious of the details, the cost per new hire is $50,667 or about 63% of the yearly compensation. Some industry experts think it’s more than 100% of yearly compensation, so I am using conservative numbers.)

One final note: never hesitate to take performance management action: yes, it is costly to find and train a replacement, but if a team member is not performing despite appropriate coaching, the hit on quality, morale, and customer experience is just too great!

What’s your turnover rate and what do you do to keep it low?

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