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Recalibrating Turnover-Cost Calculators

Turnover can produce substantial savings in employee benefit programs.

June 2, 2005
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T urnover costs preoccupy many workforce management executives, but at SAS Institute, the vice president for human resources has little interest in them.

    "The recruitment and training expenses incurred in turnover are minimal," Jeff Chambers says. "We don’t focus on losing money; we focus on making money. We don’t measure turnover costs, but we know that retaining our critical employees saves us $50 million to $70 million a year in business productivity. We concentrate on getting products to market and selling solutions in C-level suites."

    Some companies rely on consultants’ estimates of turnover costs that range from 25 percent to 1,000 percent of annual salary for the position. In any other estimate of business costs, a range this wide would be unacceptable. Even the most common estimate of 150 percent of salary is wildly off for most positions. Some companies use an estimate of 25 percent for nonexempt positions, but open-position savings and the ability to hire at a lower pay rate may easily cancel out typical separation, vacancy and replacement costs.

    Other companies use the ubiquitous turnover cost calculators in an attempt to arrive at more exact numbers. These calculators provide input for up to 60 categories of financial costs related to turnover, but no inputs for financial gain. In what should be a standard cost/benefit analysis, only the cost side of the equation is completed.

    The point is to calculate for both sides of the equation and then manage turnover levels so that financial gains outweigh the losses. This means documenting all of the savings generated by turnover, including annual bonuses that are not paid, open-position savings, lower salary costs for the new hire, benefits savings and the value of any performance improvements that occur.

    Turnover can produce substantial savings in employee benefit programs, particularly when younger workers replace older workers. Generally, total benefit costs for older workers are 20 percent higher than for younger workers, according to Jamie Hale, senior consultant at Watson Wyatt. Most of the higher costs come from health care premiums, which are age-related.

    A Watson Wyatt analysis found that for each year that the average workforce age at a company is above the aggregate average, health benefit costs increase 2 percent above trend. For example, if trend is rising 10 percent a year and the company’s average workforce age increases by one year above the aggregate average, that company’s cost will increase by 2 percent above trend, or 12 percent.

    A cost calculator recalibrated to include savings and benefits from turnover would include these basic elements:
 

TURNOVER CALCULATOR COMPONENTS
Costs Benefits
Separation costs
Severance pay, administrative costs
Separation savings
Annual bonus not paid
Vacancy costs
Additional overtime, temporary help
Vacancy savings
Open-position savings from salary and benefits not paid
Replacement costs
Recruiting, testing
Replacement savings
Lower salary and benefit costs for new hire
Training costs New skills gained without additional training
Performance costs
Productivity loss during vacancy and transition
Performance benefits
Productivity gain from higher performance, better skills match, new ideas

Workforce Management, June 2005, p. 37 --Subscribe Now!

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