Many surveys say that the number one issue facing business is finding and keeping good employees. Nationally, the average annual employee turnover rate for all companies is 12 percent. In our 1996 Wisconsin study, we found that 75 percent of the demand for new employees is simply to replace workers who have left the company.*

The good news is that there are many proven methods to help you do a better job of finding and keeping good employees. The bad news is well known to every manager who has ever suggested increasing employee training, developing formal job descriptions, implementing exit interviews for departing employees, or establishing more rigorous search and screen procedures. They all cost money.

Employee turnover (replacing employees) also costs money. We all know that. We also know better systems and training can help us find better employees and keep the good ones. The dilemma is knowing how much to spend to ensure you’re getting an adequate return on your investment in people. The following worksheet is a start. It will help you calculate the cost of employee turnover for your company. Knowing the cost of losing and then replacing an employee will help you determine how much you can afford to invest in keeping them. It will also help you analyze whether your investment in keeping your employees is adding to your bottom line.

The accompanying worksheet was adapted from formulas developed by Wayne Cascio (see Costing Human Resources, PWS-Kent, 1991) and H.L. Smith and W.E. Watkins (see"Managing Manpower Turnover Costs" in Personnel Administrator, vol. 23 #4, 1978). Smith and Watkins identified three major cost categories: separation costs, replacement costs, and training costs. Cascio added a category to include the performance differential between the employee who leaves, and the replacement. We’ve added another category, vacancy costs, to account for the added costs/savings realized while the position is vacant.

Separation costs include:

the costs incurred for exit interviews;

administrative functions related to termination;

separation/severance pay; and any increase in unemployment compensation.

Vacancy costs include the net cost/savings incurred due to increased overtime or temporary employees needed to complete the tasks of the vacant position.

Replacement costs include the cost of:

attracting applicants;

entrance interviews;

testing;

travel/moving expenses;