How much is turnover costing your company?

Fred WhittleseyConscious Compensation: The Impact Compensation Blog, Pay and Performance: The Compensation Blog

 

Fred Whittlesey
Compensation Venture Group, SPC

 

Since the 1980s there has been an empirically validated methodology for calculating employee turnover cost. The concept of human resource accounting, created by Eric Flamholtz, Professor at UCLA Anderson business school, includes detailed approaches for determining these costs.

I had the honor, as an MBA student, of working with Dr. Flamholtz on studies of turnover cost of engineers in US Naval Weapons Stations, stockbrokers in a major Wall Street firm, and insurance agents in a large Midwest insurance company.

Now, a new study of an additional aspect of turnover cost has been published in the Academy of Management Journal (Volume 59, Number 3, June 2016), “A Two –Phase Longitudinal Model of a Turnover Event: Disruption, Recovery Rates, and Moderators of Collective Performance.” A study of 524 branches of a US bank shows “a turnover event leads to an immediate and negative change in branch-level performance” and “branches recover more slowly after losing an employee than they do after losing a manager.”

Human resource accounting models provide a detailed approach to calculating the individual-specific costs of turnover. This new research confirms that the effect of a terminating employee has a performance impact on the immediate work group’s financial performance as well.

Human resource accounting is a reaction to the field of financial accounting’s failure to recognize the value of people on financial statements. Yet, the Financial Accounting Standards Board continues to allow such arcane concepts as “goodwill” and require that some assets be “marked to market” to reflect current value while others, like land, are shown at historical cost. This is why so many companies use “non-GAAP” performance measures in incentive compensation plans.

Human resource accounting may represent the ultimate non-GAAP approach to understanding the financial impact of talent flows in and out of an organization. It is a blend of cost accounting, corporate finance, and economics. While ignored by both FASB’s GAAP and IFRS, more companies are accepting this approach as one lens through which to view the cost-benefit of employee-related costs.

I presented in 2006 at the WorldatWork Annual Conference “The Real Meaning of ROI for HR” which was awarded a “best of conference” designation, and “The New ROI of Executive Pay” at the Conference the following year.

A turnover cost “calculator” currently being promoted by an online compensation data company returns a flat cost of 20% of salary, no matter what data is input, and fails to consider the empirical findings about employee turnover cost. Losing a salesperson is more costly, relative to their total compensation, than losing an order processing clerk. Losing the CFO is much more costly than losing an accounts payable clerk. As the new AOM study shows, losing a manager is more costly than losing a non-management employee in the same work unit. But this data company’s model would lead you to believe that the cost of turnover is always 20% of salary.

I can tell you this is a lot more complicated than multiplying salary times a fixed number like 20%. For some jobs, it’s more like 200% to 500%. And if a company thinks it is saving 10% of payroll by keeping pay levels lower, the cost of pay-related turnover is anywhere from 10 to 50 times that amount. Not a good ROI.

So how much is turnover costing your company? There’s an app for that but the solution not a simplistic online “tool” but rather a well-defined and validated process that has been used by many progressive organizations and is continuously validated by academic research. But the online tool is free, and you get what you pay for.