Speaking of Business: Lost productivity, sales effects of turnover costs

Q. Recently, a salesperson came into my office to show me how I could save thousands of dollars by merely reducing employee turnover. It looks and sounds almost too good. How’s this possible?

A. First, you must fully understand your cost of employee turnover, and how it is determined. When calculating this amount, you must look at all wages paid out, including hourly employees, salaried employees, vacant positions, temporary staff and management staff. It should be noted that the cost of time and lost productivity are no less important than the cost associated with paying cash to vendors for services such as advertising. These are all very real costs to employers. Some of the costs you need to include when calculating your costs of employee turnover are:

” Termination (firing or quitting).

” Recruitment.

” Training.

” Lost productivity.

” New hire.

” Lost sales.

When determining what termination will cost, you must calculate the expense of paying a temporary while the position is vacant, losing productivity time, conducting an exit interview, training time lost, loss of departmental productivity, making severance, continued benefits and unemployment insurance premiums — and possibly losing customers.

Recruitment costs will include such costs as advertising for the open position and time spent by other employees. For example, the internal recruiter, his assistant and the hiring department will all be spending additional time and, thus, additional money to replace a terminated employee.

Also, additional administrative duties including handling, processing and responding to a number of resumes have real costs. Finally, time and money will be spent on drug screens, educational backgrounds, criminal backgrounds and reference checks.

Training new employees also involves a big investment. You must look at the costs of orientation in terms of the new person’s salary and the cost of the person who conducts the orientation. Additionally, there are departmental training costs, as well as costs for supervisory time spent assigning, explaining and reviewing work assignments and output. This represents lost productivity of the supervisor. Consider the amount of time spent at four hours per week for at least six weeks.

Consider the fact that while the new employee is learning a new job, the company policies and practices, the result will be lost productivity. The following guidelines should help you calculate the cost of this lost productivity:

” Upon completion of whatever training is provided, the employee is contributing at a 40 percent productivity level for the first two-to-four weeks. The cost therefore is 60 percent of the new employee’s full salary during that time period.

” During weeks five to 12, the employee is contributing at a 65 percent productivity level. The cost is therefore 35 percent of full salary during that time period.

” During weeks 13 to 20, the employee is contributing at an 85 percent productivity level. The cost is therefore 15 percent of full salary during that time period.

” Figure also the cost of time spent as co-workers and supervisors bring the new employee “up to speed,” and the cost of mistakes the new employee makes during this honeymoon period.

New-hire costs include bringing the new person on board, putting them on the payroll, and establishing computer and security passwords. Additionally, there are more costs for establishing identification cards, business cards, internal and external publicity announcements, telephone hookups, e-mail accounts and credit-card accounts, or leasing other equipment such as cell phones, automobiles and pagers.

With regard to lost sales costs, consider the costs with both sales and nonsales staff:

” For sales staff, divide the budgeted revenue per sales territory into weekly amounts and multiply that amount for each week the territory is vacant, including training time. Also use the lost-productivity calculations above to calculate the lost sales until the sales representative is fully productive.

” For nonsales staff, calculate the revenue per employee by dividing total company revenue by the average number of employees in a given year. Whether an employee contributes directly or indirectly to the generation of revenue, their purpose is to provide some defined set of responsibilities that are necessary to the generation of revenue. Calculate the lost revenue by multiplying the number of weeks the position is vacant by the average weekly revenue per employee.

Calculating and adding all these costs, can easily reach $75,000 to replace a salaried individual earning $50,000 per year. As you can see, the costs and impact associated with an employee who leaves the company can be quite significant.

This is not to say that all turnovers should be eliminated. However, given the high cost and impact on running a business, a well-thought-out program designed to retain employees may easily pay for itself in a short period of time.

Greeley resident Russell Disberger is a founding member of Tekquity Ventures LLC, a Louisville-based specialty venture-capital firm investing in technology development and licensing. He can be reached at (303) 926-3990 or by e-mail, disberger@tekquity.com.

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