How Effective Employee Feedback Helps Managers
It's not enough to be a good manager—you must continuously learn how to be better.
Employee turnover cost is talked about so frequently but rarely acted upon, typically for the reason that many in leadership...
Employee turnover cost is talked about so frequently but rarely acted upon, typically for the reason that many in leadership find it to be something either not totally within their control (only partially right), and it's more abstract than talking about adding revenue.
As industry after industry moves closer to a knowledge worker workforce, people become increasingly important to competitive advantage. Employee attrition and conversation around retention must play a leading role in leadership and management strategy.
Let's dig in on some of the work being done to soften the cost of employee retention, give you some tools to calculate your attrition costs, and finally, we'll look at a few of the best ways to improve your employee retention.
We've all heard it time and time again, but this Peter Drucker quote summarizes it succinctly.
"What gets measured, gets managed." - Peter Drucker
There is no more significant fear or pain as a manager or leader than losing your talent, even more so when that person is a high performer or a challenging position to replace. When someone great leaves an organization, there's always an unexpected hole, no matter how much prep work or lead time is given. Many non-leaders will also feel the loss and, if managed poorly, can lead others to follow suit.
Despite that awful feeling that is felt throughout the team and organization depending on the company's size and the role's position, so few take the necessary steps to improve their retention.
The quickest path to convincing leadership or management they have a problem they need to deal with is to talk about it in dollars. Speak their language and offer a concrete benefit.
There have been plenty of studies done to pinpoint the most accurate costs of employee churn. The results have varied, but one thing remains certain across all turnover cost studies: it's not cheap.
One study from the Center for American Progress (CAP) found that the cost of replacement was on average 213% of their annual salary for highly-skilled employees. Part of the variability comes into play when considering less expensive roles. Cost estimates for positions with salaries between $30-$75K are around 20% annual salary.
Above are the "good" stats. Josh Bersin, however, suggests that by looking at the lifetime costs (hiring, onboarding, L&D, institutional knowledge, training, and more), the actual costs are between tens of thousands of dollars to 1.5 or even 2.0x the entire annual salary. It's likely somewhere on the middle-high end of this spectrum.
Bersin paints a clear picture as he lays it all on the table. There's hiring a replacement (other employee's time interviewing and tools), onboarding, lost productivity, cost/time of training, lost engagement, ramp-up time, and so more.
Those are only the obvious costs. The most exciting point Bersin makes is that employees, unlike most other assets, are appreciative ones. He goes on to say, "employees get more productive the longer they are at a company, learning the systems, products, and how to work together with their team."
Bersin's graphic perfectly shows the inflection point when an employee stops being a cost, provides a return, and eventually becomes extremely valuable.
In another vital study, Maia Josebachvili calculates the ROI of an employee using the metric "Employee Lifetime Value," which represents "the total net value over time that an employee brings to an organization."
Maia uses a sales executive earning $50K/yr (and generates $50K/mo in revenue). Maia argues that better "People Practices," which include better onboarding, engagement, and management, yields a difference of $1.3M in net value to the company over just three years.
To realize this value is predicated on retaining the above example employee for just an extra year (3 instead of 2), which demonstrates how impactful retention can be. See this result in the following graph:
Source: Greenhouse case study
Whichever way you prefer to determine the cost of employee turnover, the resulting cost is high. How do you calculate the actual cost at your company?
Employee turnover cost is equal to the number of employees churned times the average cost of these churned employees, which is relatively straightforward.
Cost of turnover = # departures x average cost of departures
Your turnover rate is the number of departures divided by your total number of employees.
Turnover rate = # departures / total # employees
But how do you get to the average cost of employee departure? There are a couple of options.
Let's first try to get you a general idea of your employee turnover costs. Per Jack Altman, you can calculate basic turnover costs by examining four top-level buckets:
These can be summarized in this equation:
Like anything else, to get the real picture, digging a little deeper is required. Basic analysis is okay and will likely reveal costs are higher than expected, though it can be tough to come up with exact numbers unless we go into a little more detail.
To go a little deeper, let's inspect this article by William Bliss. It gives a much more exhaustive list of variables to consider and calculate more accurate costs. Below is the summarized list – feel free to use our inline calculator to see personalized costs for your organization.
Here is the exhaustive list of factors you should consider:
COSTS DUE TO A PERSON LEAVING
LOST PRODUCTIVITY COSTS - REPRESENT TIME IT TAKES EMPLOYEE TO BECOME FULLY PRODUCTIVE
NEW HIRE COSTS
LOST SALES COSTS
The list of potential costs is long, and this is likely not completely exhaustive. One easy fact this uncovers is that it's expensive to lose talent. To do your rough calculations, we've created an inline calculator just below. Please share your results with us if you use the calculator or our sheet. We've also created a simple spreadsheet here (copy the sheet and plug-in your own numbers in the yellow fields) if you prefer to use this instead.
Reducing costs associated with employee turnover can be easier if you know where to focus, there are two areas of focus to apply your effort:
An effective Employee Exit Interview can help you better identify why people are leaving and create solutions around those reason.
There are likely many factors and variables that play a role in minimizing turnover costs. However, Maia Josebachvili summarizes it down to only four primary factors that can maximize your ELTV "Employee Lifetime Value" – in other words, minimize the costs.
The solution may seem obvious, but not many organizations practice these principles that well, if at all. The principles revolve around minimizing the period at which a new employee is a "cost" to the organization (i.e., Hiring and Onboarding) – and maximizing the productivity of the employee through alignment, L&D, and stable management.
The four primary factors that Maia identifies to increase ELTV are shown in the following image:
We can summarize Maia's method for maximizing these four primary levers as follows:
These four levers may seem obvious but putting them into practice is often harder than it might seem on the surface. Don't neglect to spend time on these suggestions and revise as necessary.
This step is undoubtedly the hardest of the two as it's the most out of your control of the two options. Jack Altman has three focus areas he suggests for creating an environment that is likely to reduce turnover:
Jack recommends organization's managers have conversations about goals, giving the employee more responsibility and autonomy – help employees acquire desired skills to promote growth. Be sure to develop a clear and meaningful company mission that employees can connect with, measurable and not merely aspirational. Finally, don't underestimate the value of creating a culture that recognizes hard work and shows real appreciation – this is where Assembly can help the most.
As mentioned above, don't stop making improvements to your process. Like anything else, these programs can become outdated and stagnant. We recommend considering a quarterly or bi-annual program and process review.
Setting a goal to outline and map the costs associated with employee turnover can extend to helping the organization solve scheduling, process routing, and other operational bugs. After building a clear map of the costs, metrics, and variables – you are now capable of examining in greater detail whether you need to hire more, less, or what levers you might be able to pull here and there to reduce costs associated with employee turnover rather than speculate and make decisions that have little to no impact.
We hope that we've shown anyone reading this how important it is to your organization's bottom line to reduce employee turnover and that losing talent is enough within your control that you should do something about it. Not only that you should do something about it, but that doing something about it is within your grasp and not as far-fetched as you might have previously thought.
It's not enough to be a good manager—you must continuously learn how to be better.