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As someone said, it depends on the industry/field. Bear in mind that new employees are more likely to make mistakes that more experienced people are able to avoid. A brand new landscape architect technician gets sent out into the field to work on a project because some jerk supervisor keeps running people off. Said newbie starts digging a trench but doesn't know where to dig, so he pops a water pipe and causes water damage to someone's property. The company saved money on wages but had to pay out more to settle for damages due to someone's inexperience. That's textbook cost of turnover. We're not even talking about worker protection, which can get really expensive if constant turnover leads to a green work force.
As someone said, it depends on the industry/field. Bear in mind that new employees are more likely to make mistakes that more experienced people are able to avoid. A brand new landscape architect technician gets sent out into the field to work on a project because some jerk supervisor keeps running people off. Said newbie starts digging a trench but doesn't know where to dig, so he pops a water pipe and causes water damage to someone's property. The company saved money on wages but had to pay out more to settle for damages due to someone's inexperience. That's textbook cost of turnover. We're not even talking about worker protection, which can get really expensive if constant turnover leads to a green work force.
Fair enough. The reason I asked is because I heard a manager saying they "waste" millions of dollars a year because of high turnover and they were trying to figure out how they can keep employees. I was thinking to myself that they would still be paying out those same millions of dollars if employees stayed, they'd just be paying them out to tenured people instead of new people. I kind of get what you guys are saying about mistakes, possible settlements, efficiency, and production. I just see it as a bigger problem in the minds of management than in reality.
Say you hire a new employee for $35,000. For his first 2-4 weeks he is pretty much useless. He is being trained in by someone else, who is sacrificing her own productive time to get him up to speed. Let's say that together these two employees achieve 50% of the productivity level that the trainer could do if she was on her own and not burdened with the new guy. Now he starts flying free, but for several months he is still not up to the level of the experienced employees. Let's generously say that his next 5 months he averages 60% of the productivity of an experienced worker. By 6 months he is up to 90% of his seasoned colleagues. Then around 9 months in he begins to become disgruntled. He is not happy, so his mind wanders. Productivity dips back down to 75% as he struggles to stay engaged, ducks out for interviews, and just generally has one foot out the door. He move on at the one year mark, and the process starts all over. His year with the company was only about 62% productive (-50% for the first month, 60% for the next 5 months, 90% for 3 months, and 75% for 3 months). To keep things simple, let's imagine that full productivity is represented by 100 units of work per month. With New Guy's efficiency rate, they are paying him $47 per unit of work.
If the above institution treated their employees well and had low turnover, our new guy would have averaged about 66% efficiency in his first year (same math as above, except he doesn't drop down to 75% efficiency if he is still happy at work). Lets say that his next year averages 95% efficiency as he nears complete mastery of his work. By year 3 he is at 100%, where he remains until he receives a significant promotion around year 5. His first 5 years average out to about 93% efficiency.
According to salary.com, the average raise among workers who receive increases is between 3 and 5 percent per year. Let's go right down the middle and say that our worker gets a 4% raise every year. Year 1 is still at 35K. Year 2 brings him to $36,400. Year 3 is $37,856. Year 4 is $39,371. And year 5 is $40,945. In his first 5 years, they have paid him a total of $189,572. With his 5-year productivity rate, his cost to the company is $33.98 per unit of work--MUCH cheaper than the worker with the 1-year tenure.
The above also ignores the costs of actually recruiting new talent. No one's time is without cost, and it takes time (and therefore money) to write job descriptions, post them (usually to paid sites), do phone screens, pull the manager away from her work to conduct interviews, process new-hire paperwork, etc. etc. etc.
Ah, this makes sense. The cost of the trainer and the trainees/0 production crossed my mind. But unless it's a sales job or a job that directly impacts bottom line, I just find it hard to believe that keeping say... 100 employees around that perform well and get raises each year is less expensive than replacing all 100 employees every few months at their starting hourly wage.
But it may affect the bottom line because experienced employees know their jobs better, can develop a rapport with customers/clients, and can more efficiently do what needs to be done instead of having to stop every half hour to ask the supervisor a question. Long term employees can also move into supervision and management. They can also let you know how the company can do its job better/cheaper/more efficiently. A manager wants consistency, a smooth moving operation and employees that require little direct supervision -- you can't get that with chronic short term employees -- so it is worth the money to keep them around and to pay them more money.
As others have said, a lot of this depends on the industry. Generally speaking, the more skilled the positions involved, the more "waste" there is in turnover. Fast food jobs run pretty much the way the OP suggested--there's very little concern about turnover, because it's cheap and easy to hire and train new people.
On the other hand, where I work, it can cost $10,000 to hire a new person, without taking into account any loss of productivity. In a national search, where several candidates are brought in for in-person interviews usually over two or three days, the bulk of the expense is in the airfare and accommodations.
The two days worth of interviewing also involves probably 40 man-hours of work on the part of interviewers (in addition to the round of formal interviews, there will also be a job talk attended by a couple dozen individuals and various meet-and-greets). This is after however many hours spent going over applications and the initial round of Skype interviews. And THEN there's the training and at least a year for the individual to get up to full productivity.
And don't forget any gaps between when the previous person leaves and the new person is hired--either it's a dead loss, productivity-wise, or you're paying for some sort of temp.
Fair enough. The reason I asked is because I heard a manager saying they "waste" millions of dollars a year because of high turnover and they were trying to figure out how they can keep employees. I was thinking to myself that they would still be paying out those same millions of dollars if employees stayed, they'd just be paying them out to tenured people instead of new people. I kind of get what you guys are saying about mistakes, possible settlements, efficiency, and production. I just see it as a bigger problem in the minds of management than in reality.
My previous post addressed the visible, direct costs associated with turnover. What's less visible, though, is what others have already talked about, which is the lack of productivity. If you have new employees, then others are going to have to do more work in terms of training, which means they'll be spending less time doing what they're supposed to be doing. This can have several consequences. One scenario is that there's just perpetual loss of production. Another, more worrisome possibility is that the best producers get tired of the company and move on, which exacerbates the lack of productivity even further. Worse, maybe middle managers managers who are responsible for training and supervising performance decide they can't handle the extra workload, so they leave as well. Before long, you've got a workforce that's new and untrained, and lacking people who can provide the training to boot.
Where I work, our employees receive formal classroom training for most of their first sixteen weeks on the job, and transition to learning by classroom and job experience for the remainder of their first two years. There is a lot of technical and specific knowledge that has to be taught, practiced, and mastered. Our latest group which was hired had a starting salary of about $50K a year roughly, and was 18 people large.
So really, the "cost" of a new hire is all the costs associated with recruitment, $100K in salary, benefits (health, etc), cost of the trainers and materials, and productivity which takes forever to ramp up.
High turnover would be extremely costly (losing half that class after two years would sink seven figures of investment in them instantly).
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