Guide to Turnover Costs: Definition and How To Calculate

Updated February 3, 2023

Effective retention of positive and motivated team members is vital for an organization's success in any industry. Keeping turnover costs low can help businesses improve their customer satisfaction rates and contribute to revenue growth. Understanding turnover cost and its impact can help you implement effective strategies and advance your career as a managing director or human resources manager.

In this article, we explain what turnover cost is, describe how to calculate it and discuss effective retention strategies to help you keep a company's costs low.

What is turnover cost?

Turnover cost is the expense of replacing people who leave an organization during a specified period. Most companies experience some staff turnover costs, but when a company has a high turnover rate, it can harm the business' net profit. A company with a low turnover rate can improve productivity and encourage a culture of trust.

Turnover costs related to replacing a person include tangible and intangible costs, which affect productivity and net profit. Overall costs may affect small to medium-sized businesses more, depending on the skill level of the team members and the reliability of the company's cash flow. Turnover costs also depend on whether the team member's recent performance was strong and their unique qualities. Examples of tangible and intangible turnover costs include:

Tangible turnover cost

When an organization replaces an individual, some tangible, or direct, turnover costs include:

  • Unemployment compensation

  • Advertisements for the position

  • Time to interview, screen and perform background checks for candidates

  • Pre-employment tests

  • Signing bonuses and relocation expenses

  • Time for orientation, onboarding and training of new staffers

Related: Q&A: What Is an Employee Turnover Rate?

Intangible turnover cost

Companies often can't account for or quantify intangible turnover costs, but they can significantly affect budgets. For example, a temporary staffing shortage may cause current team members to absorb additional responsibilities, which can slow productivity and growth plans for a business. Examples of intangible turnover costs include:

  • Productivity levels: The time it takes a company to fill a vacant position and the time for a new team member to complete their onboarding process affects the workload of existing staff. The transition period may stall current projects, slow factory production lines and delay product releases.

  • Training discrepancies: When skilled people with product and brand knowledge leave, a company may lose some intellectual capital, especially if the resignation is unexpected. This disruption can impact client relations, projects and productivity.

  • Team morale: When a respected team member leaves, it may lower team spirit and influence other staff members to follow. Some people may lose trust in management if they feel frustrated and resentful about the loss, which may cause the remaining staff to experience exhaustion from the additional workload during a transition period.

  • Company reputation: Companies with high turnover rates may develop a reputation for it and struggle to attract talented candidates. A reputation for high staff turnover also might attract candidates who have little interest in a long-term commitment, which can continue to disrupt productivity.

  • Customer retention: When a company has a turnover of staffers who have longstanding customer relationships, such as sales representatives or account executives, it may affect customer retention.

Related: Employee Retention vs. Turnover: What's the Difference?

How to calculate turnover cost

Turnover cost varies by industry, company and skill level. Human resource managers calculate the turnover rate and then apply that rate to calculate the turnover cost. Consider the following steps to help you calculate this figure:

1. Determine the period of measurement

You calculate the company turnover rate for a specific period or across several periods. A period of measurement may be a month, quarter, year or any other period you want to measure. Determining the period before starting your calculation helps ensure you get accurate, reliable results.

2. Compute the turnover rate

Next, try to determine the number of team members who left within the measurement period and the average number the company had during the period, which you can calculate by adding the initial number and the end number and dividing that result by 2. Here's the formula you can use to determine the turnover rate:

Turnover rate = (number of staffers who left / average number of staffers)

For example, if a company had an average of 200 team members during the year and 25 left, the turnover rate is 12.5%. Businesses often exclude temporary hires in this calculation because it can misrepresent the turnover rate.

Related: 9 Causes of High Employee Turnover and How To Prevent It

3. Calculate the average cost of a departure

The final figure before you can calculate turnover cost is the average cost of each person who left. To find this, you first add the expenses for each departure for a period. Once you have this total, you can divide total expenses by the number of departures and determine the average cost of one separation. These expenses may include all tangible and any measurable intangible costs.

4. Calculate turnover cost

The formula for turnover cost is:

Turnover cost: total number of staffers x turnover rate x average cost of departure

For example, if a company has 200 team members in the year, a turnover rate of 0.125 and an average cost per departure of $1,950, you can multiply these to get the turnover cost, which is $48,750.

Read more: How To Calculate Employee Turnover

Tips for lowering turnover costs

Effective retention strategies can help a company increase morale, improve customer appreciation, strengthen company culture and increase revenue, productivity and profitability. Some ways to improve retention include:

Offer a flexible working environment

A flexible working environment helps people achieve a better work-life balance and encourages greater work satisfaction, which can lead to lower turnover rates. When a business allows its staff members to have flexible working hours and a hybrid of work location choices, it can increase team engagement, improve loyalty and generate more revenue. Companies that ensure their teams take regular vacations and stay home when sick also may see an increase in productivity when they work.

Related: The Importance of Employee Loyalty and How To Improve It

Recognize and reward positive contributions

Recognition and reward for positive contributions in the workplace can show team appreciation and promote a supportive company culture. When a company treats its staff respectfully and acknowledges their successes, it often encourages active participation and engagement. Establishing a formal recognition program with peer-to-peer recognition opportunities may encourage team members to thank their colleagues for their positive contributions. A valued workforce can create a positive working environment and decrease turnover costs.

Related: How To Keep an Employee From Leaving (Plus Why It's Important)

Provide career development opportunities

Career development opportunities through training, educational seminars or tuition reimbursement may incentivize staff members to stay at a company. In-house training programs can give them goals to work toward and provide higher job satisfaction. When a company invests in career development, it may show that the business values individual efforts. Training may boost staff engagement, build team confidence and create a positive staff experience. Improving the skills of a workforce also can extend the team member life cycle and make an organization competitive because institutional knowledge remains in the company.

Related: 7 Tips To Improve Your Career Development

Promote well-being

A business that promotes well-being can create a productive environment and reduce turnover rates. Employers may benefit from equipping offices with natural light, quiet zones and ergonomic desks and chairs to improve well-being. Addressing the mental and physical wellness of team members may include investing in a wellness program, providing healthy snacks and offering child care or free gym memberships.

Related: 11 Benefits of Employee Retention (Plus Definition)

Enhance compensation and benefits packages

Higher compensation and enhanced benefits can greatly improve retention rates. Good compensation can show staff the company values their contribution, which may decrease the likelihood of top performers departing. Human resource managers commonly provide annual pay increases and implement bonus payments to improve their turnover rate. Competitive perks and discount packages also can help companies attract and retain candidates and lower their turnover costs.

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