Calculating the cost of employee turnover can be simple or complicated – it depends on how much detail the organization wants to go into. In general, a middle-of-the-road approach works best for most small businesses. Clearly, the cost of replacing a CEO is not the same as that of replacing an assembly line worker. Thus, each position has a unique cost associated with it, and, in the best of circumstances, the organization should create a formula for every position. Herein, we will describe the categories of costs that need to be considered to create the formulas. We will not create any formulas because they are usually somewhat unique to each organization (although some generalizations would probably hold true for the Early Learning-Child Care (ELCC) Industry). However, using the categories described, readers can create formulas for themselves.
Estimates suggest that the cost of turnover of any given employee can range anywhere between 90 – 200% of the employee’s annual salary. Thus, if an employee makes $13/hour (approximately $27,040/year), then the cost of replacement is between $24,336 and $54,080. This sounds excessive, and for many centers it might be, however these calculations were not designed for the ELCC industry. Nevertheless, the underlying message should be clear – turnover can be expensive, especially if it is the voluntary-dysfunctional-avoidable or voluntary-dysfunctional unavoidable type.
What contributes to such high turnover rates? When someone leaves, there are usually separation costs and replacement costs. Separation costs consist of Tangible (Direct) and Intangible (Indirect). Let’s examine these separately.
SEPARATION COSTS – TANGIBLE
HR Staff Time: This includes time to process the exit, conduct an exit interview (you should be doing this!) and Director time. In many centers, there may not be an “HR Staff” member, and the Director/Owner will take care of the exit process. Nevertheless, time is still spent.
Costs for Covering Employee Shifts: This includes overtime of other staff members or time for Assistant Director/Director to fill in.
Accrued Time Off – This may not be a cost in many centers because if you leave you lose accrued time off. However, some centers may offer this benefit.
SEPARATION COSTS – INTANGIBLE
Loss of Organizational Memory: Employees who have been at their position for a while have a lot of experience in making that position successful. A lot of that success is due to his/her knowledge of how things work at that specific organization. When such people leave, they take with them all of this organizational memory. This loss can be mitigated if the organization has robust processes in place that are efficient and well documented.
Team Work Disruption: Self-explanatory
Loss of Productivity: This is more critical in manufacturing where a worker on an assembly line who leaves can bring the whole assembly line to a halt. However, in the Early Education-Child Care Industry, this is less of a problem.
Contagion: This is a frequent problem. Usually, there are groups of friends at a Center and when one of them leaves, the person leaving might convince one or more of his/her friends to leave also. Thus, one person leaving then leads to multiple exits – which can compound the loss to the organization.
HR Staff Time: When there is a vacancy, the work needs to be done and this void is filled by other teachers or management. In either case, there are costs such as overtime for teachers or management time that is taken away from administrative issues.
Manager Time: It is very time consuming to review resumes, schedule interviews, conduct the interviews, and go through the hiring/selection process. This takes a significant amount of time out of the manager’s schedule – time he/she should be spending running and improving operations.
Recruitment Cost: This includes cost of advertising (quite expensive), employment agency fees (if used), hiring inducements (sign on bonuses, etc.), and referral bonuses.
Selection Cost: This is usually not a major cost in the Early Learning-Child Care Industry. However, a lot times, candidates are asked to do a “working interview”, which takes up the teacher’s time in that classroom.
Orientation – Training Cost: Once a new employee is selected, he/she needs to be oriented and trained. Depending on the position and the complexity of the responsibilities, this could be a quick one or two-day process, or it could last many months. Such orientation and training can be very expensive as it is a significant time commitment for current teachers and management.
Cost of Lower Quality Service: When there is a vacancy, the person filling in may not be familiar with the positions duties and his/her performance is usually suboptimal. The same problem occurs when a new employee is being oriented and trained. During these transition times, parents can react to the decreased quality of service by withdrawing, or lodging a complaint, or writing a negative review on Google or other social media.
ANALYSIS: It should be clear by now that no one formula can work for every center to determine the cost of turnover. The costs, as described above, depend on the type of position, type of center, the operations of the center and how they are organized, etc. Each center would need to review the costs described above, and then for each position at their center, decide what cost is associated with each category. This is not a precise science, especially when it comes to estimating intangible costs. However, if done diligently, it is a very useful exercise, and it can provide a reasonable dollar number for how much should be spent to retain any given person in any given position.
Allen, DG, Bryant, P. Managing Employee Turnover – Dispelling Myths and Fostering Evidence-based Retention Strategies. 2012. Business Expert Press, LLC.