HR Impacts the Bottom Line by Managing Employee Turnover
In order to become strategic assets to their companies, HR departments need to focus on managing issues which directly affect the financial performance of the organization. Typically, many of the benefits provided by HR are not evident through strict quantitative analysis. One area where HR can show immediate strategic impact is in managing turnover rates.
What is Turnover?
Turnover is the voluntary resignation from employment. It excludes layoffs, position eliminations, nonwork related disabilities, retirement, and other employment events, which do not require a replacement worker to be hired.
Why is Turnover Important?
Turnover is important because when a company has to replace a worker, it costs money. Turnover costs include recruiting, training, and administrative costs. In addition, since it normally takes a new employee three to six months to come up to speed, there are productivity losses during the ramp up period. Turnover costs can be calculated based on specific company data; alternatively, a good rule of thumb is that turnover cost is approximately equal to 25% of an employee’s salary.
Turnover costs and rate have a high strategic impact. If a company’s turnover costs and rate are higher that of competitors, the company’s costs of doing business are higher. As a result, the company earns less profit on its goods or services. In short, the less turnover a company encounters, the better off it will be.
How Do You Calculate Resources?
There are a number of formulas people use to calculate turnover. Some simply take the number of voluntary terminations and divide that by year-end headcount. This approach is probably too simple since it does not accurately capture the replacement costs caused by employee turnover.
Another way to look at
turnover is to calculate net job flows. The formula for Net Job Flows
Net Jobs Flow = (Hires – Exits) / Total Number of Jobs
A better formula may be:
Turnover Ratio = Terminations / (Incumbents + New Hires)
Terminations – Termination of employment in the time period being analyzed not resulting from layoff, downsizing, non-work related disability, or retirement, and which normally requires hiring of a replacement employee.
Incumbents – Active employees as of the first day of the time period analyzed.
New Hires – Employees hired during the time period being analyzed.
How Do You Know if Turnover is Too High?
There are two data points one needs to assess in order to find an
appropriate turnover ratio. One is internal and other external.
First, one must look internally at the company’s historical data and observe the trend. If turnover is going up, possible explanations could be found in compensation differentials, management practices, or working environment.
However, to put company specific trends into context, you need to look at industry Turnover Ratios. Private surveys are generally better than free material from the government because they are more specific. There are many different vendors, which serve specific industries. Below is a table showing turnover percentages, published by the Department of Labor.
The government turnover rates have two shortcomings. First, they are fairly general. As a result, one may not be comparing apples to apples. Second, the government numbers include some numbers in turnover which may not require replacement workers. As a result, they may overstate turnover. If one can make an educated approximation of a discount factor to apply to the government rates, that should be a good benchmark.
The government numbers do provide a good means to assess turnover trends. For example, the chart below shows the U.S. trend in turnover through August 2003. If a company was trending up when the rest of the country was trending down, that might indicate a problem HR needs to analyze.
* The previous charts are from several years ago, but they show a general pattern that can be a basis for assessing particular turnover trends.
Build A Turnover Report In People-Trak
Using People-Trak’s HRIS Report Writer, one can build their own Turnover Report.
1. Define a report.
2. Build a query.
3. Run report and export to Excel.
4. Insert Count functions and derive ratio.
5. The Final Report.
The final report should look something like the following.
Turnover analysis is one of the things HR should be doing. It helps the company’s bottom line and it elevates HR to a more strategic function. Turnover analysis should be done on at least an annual basis. When using People-Trak HR Software to run an analysis, one should run a series of reports to get the annual data for the past few years. Keep an eye out for interesting trends.