Never overlook its costs

Thursday, May 31, 2007

When a company examines its fixed costs, expenses like payroll, rent and utilities naturally take center stage. Employee turnover, however, is often overlooked but should not be for a very simple reason: It can cost your company thousands of dollars a year. To see how, let's take it step by step. First, here are the direct costs a company incurs due to employee turnover:
* Candidate interviews
* Candidate screening and reference checking
* Employment advertising
* IT/security costs
* New hire processing, orientation and training
* Possible staff overtime
* Separation processing and pay if required
Indirect costs could be higher than the direct costs but are also harder to quantify. They include:
* Delay in services
* Dissatisfied customers
* Job errors
* Lost sales
* Reduced morale
* Reduced reputation
Some studies estimate that these direct and indirect costs can add up to 150% of an employee's annual compensation. For example, if an employee who earns $35,000 to $50,000 per year leaves your company, the turnover costs could be $75,000. The estimates for managerial and executive positions jump to 200% of annual salary. Those kinds of numbers don't do much for your bottom line.
This shows the value in creating an atmosphere that provides an opportunity for employee growth, satisfaction and, in turn, retention. To measure your performance toward this end, answer the following questions:
* Do you ask for employees' input and opinions and actually use some of their ideas?
* Is there a clear career path for key employees? Do you assist in their professional development? Do you encourage their community participation?
* Are annual performance appraisals an opportunity for an exchange of ideas? Does your company set goals for all employees?
* Do you have a formal orientation program to get that new employee started out right?
* Do you have an organized reward and recognition program?
Although I have also found it hard to believe, survey after survey shows that salary is not the top reason for employee satisfaction. Tangible rewards, thank yous and recognition are key. A formal rewards program could include naming an "employee of the month" or giving something as simple as car wash coupons, movie tickets or dining out certificates.
Remember, when it comes to retaining employees, it doesn't pay to be pennywise and pound foolish. Give recognition where recognition is due.
Joe Groden is president of JG Consulting. Reach him at or visit