Cost of Labor Turnover

The cost of labor turnover (Cost of Employee Turnover) is the cost that the company needs to pay to recruit new employees and train them to replace the previous employee who resigns. The cause of these costs is the employee resign, so it is sometimes called “costs of turnover”.  It also includes the cost that the company spends to motivate staff to prevent them from leaving. 

Most of the companies try very hard to keep the employees work for them as long as possible. The longer they work for the company, the lower the company spends. Even company needs to increase salary every year, but it is lower if compared to the turnover cost.

Cost of labor turnover separated into three:

Cost of labor Turnover

1. Hiring Cost

All costs that occur in order to recruit and bring new employees to work is called hiring cost. It is the fee which the company needs to pay for advertisement and recruitment agency if we engage with the third party. On the other hand, we still have some expenses in the process of selecting and testing candidates if we recruit by our internal team, which is the Human Resource department. Moreover, we need to bear with some more costs such as health checks, travel expenses, employee referral bonuses, etc.

Hence, the more candidates the company to recruit, the more expenses incurred within the company.

2. Training Cost

To ensure that new employees can perform work and meet the company’s standards, we need to invest with them by providing the training. We can provide internal training or hire external trainers to give specific training to our new staff. Both internal or external trainers, there always be cost incurs within the company. Besides of trainer’s cost, there are many other expenses such as material, rental, snack, etc.

3. Other Costs

There are some costs related to employee turnover, such as the cost of failure due to new employees. They have less experience and skill if we compare to existing employees. It will incur the cost such as slow working process and damage to the product during production. Moreover, we will lose the opportunity cost of a new product or new orders due to a lack of expert staff. The company may inure some cost due to the delay in work during the recruitment process.

The company will require to pay severance or bonus packages upon departure of employees, and this may vary from company to another.

How to calculate the Cost of Labor Turnover?

Labor turnover may increase some costs as below:

  • Hiring Cost
  • Training cost
  • Any severance or bonus packages upon departure
  • Loss in productivity due to less experience staffs
  • Errors during working

Formula of Cost of Labor Turnover:

Cost of Turnover per year = (Hiring Cost + Training Cost + Severance + Loss in Productivity) per staff * Number of staffs resign/per year

How Labor Turnover cost Impacts Company?

Staff turnover affects both financial and nonfinancial to the company. The company needs to increase hiring costs, training costs, and other costs as mention above to solve the problem due to staff resign. As the cost increase, more or less, it will impact business profit during the year.

If the employee is the key person who works closely with customers, he/she will be able to attract our existing clients to new company. It will be a problem when we do not have a strict policy on confidential information, and the employee can access this kind of data, the risk of damage will be huge. 

Some employees have a good communication within our company, so after their leaving, it will be a serious problem when they try to persuade more employees to go with them by revealing some attractive packages and good benefits in the new company. As a result, we will lose more employees.

In a company, there may be several products which are currently in development and will have potential hit when they go into the market. However, if the project manager decides to leave the company, it will be a problem for us. The trade secret has reached our competitor, or the product development will never complete.

Apart from the financial factor, staff turnover also harms the company’s reputation. With a high turnover rate, there will be a warning sign to new employees who want to join our company. Our company will be hard to recruit new talent employees when we reach a certain point.

How to Reduce Labor Turnover Costs?

Reducing turnover cost is to reduce the number of staff willing to leave the company. We do not recommend to reduce hiring costs, training costs, or other costs as it will impact us in the long run. To retain our staffs from leaving, we have to :

Reduce turnover costs
Understand the root cause of leaving Before consider any solution, we need to understand the problem first, why staff wants to resign. Do we provide a lower salary compared to the market and competitor? Is there any unusual problem with direct management? We should conduct an exit interview before staff leaving our company in order to gather this information. This interview is also a chance that we can negotiate with our staffs on their concerns and stop them from leaving.
Survey with our current staffs When we have some data regarding areas in which our ex-employees are not happy with us, we should conduct a formal survey to validate if they are really not satisfied too. The survey should be done in anonymous form which will encourage staff to express the real situation without fearing any consequence. In each question, there should be the answer which range from strong satisfy to strongly unsatisfied   (1 to 5 or 1 -10), it will easy to consolidate all answer and find out the improvement areas. The form should be included open questions where staff can put in other areas that they not happy with. So we will get more information on their concern which will benefit the next survey.
Compare salary range Salary is the most known reason for employees to leave the company especially the workers. We should conduct a regular survey with the market in same industry or with our competitor in order to ensure that our company is not paying under the market rate.
Conduct regular training With regular training, employees will improve their technical skill and they are motivated to continue working for the company as they are not left behind. It also a good reputation for our company to market as well as the new employees.