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Costs of employee turnover

Article  in  Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis · December 2013

DOI: 10.11118/actaun201361072071

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ACTA UNIVERSITATIS AGRICULTURAE ET SILVICULTURAE MENDELIANAE BRUNENSIS

Volume LXI 228 Number 7, 2013

http://dx.doi.org/10.11118/actaun201361072071

COSTS OF EMPLOYEE TURNOVER

Jiří Duda, Lenka Žůrková

Received: April 11, 2013

Abstract

DUDA JIŘÍ, ŽŮRKOVÁ LENKA: Costs of employee turnover. Acta Universitatis Agriculturae
et Silviculturae Mendelianae Brunensis, 2013, LXI, No. 7, pp. 2071–2075

The aim of this paper is to establish a general methodology for calculating the costs incurred by
employee turnover. This paper deals with identification of costs incurred by the departure of an
employee, and does not deal with the cost of recruitment of a new employee. Economic calculations
are adjusted to the tax policy in the Czech Republic. The costs of employee turnover (according to
Bliss, 2012) include the costs of substitution of the unoccupied position, costs of conducting the exit
interview and termination of the contract. The cost of an executive’s time to understand the causes of
leaving and costs of the leaving employee’s training were also determined. Important factors in the
costs of employee turnover also include the loss of knowledge and possibly also a loss of customers.
Costs of lost employee and department productiveness represent an important part of the costs
of employee turnover, as well. For all of these costs there have been proposed general calculations
formulas.

Bliss, costs, employee turnover

In each company, the employee turnover is a part MATERIALS AND METHODS

of the human resources management. Basically, this The aim of this study was to develop a general
phenomenon is rather important because without methodology how to calculate costs resulting from
it, the performance of people could stagnate and the and associated with the employee turnover. The
competitiveness of the company could be gradually authors tried to develop mathematical formulas
reduced or even lost. However, a high degree of staff enabling to calculate these costs so that they could
fluctuation is not desirable due to the fact that it is be used by employers and companies when defining
associated with relatively high costs. Many authors total costs related to the staff fluctuation. The general
(e.g. Frech, 1986; Milkovich and Bourdeau, 1993; methodology was based on classification of costs
Dvořáková, 2004; Armstrong, 2007; d’Ambrosová, published by Bliss (2012).
2009) define the employee turnover as a loss of This paper deals only with the identification of
people and/or the percentage of staff replacement costs associated with the departure of employees;
within a given time interval. According to Reiß costs of recruitment and training of new employees
(2008), Ongori (2007), Shahnawaz (2009) and Koubek are not discussed. Calculations are adapted to
(2007), the employee turnover can be expressed as principles of taxation policy of the Czech Republic.
the ratio between the total movements of employees The so-called super gross salary involves the basic
in and out of the organisation. The Saratoga Institute gross income and standard contributions, i.e. social
(Branham, 2009) estimates that average costs and health contributions paid by the employer; at
associated with the loss of one employee are equal present it equals to 34 % of the assessment base.
to his/her annual salary. According to Bliss (2012),
the average costs associated with the departure of
an employee represent as much as 150 % of his/her RESULTS AND DISCUSSION
annual income. A practical example of employee turnover costs
calculation was presented by Bliss (2012) who
classified the costs as follows:

2071
2072 Jiří Duda, Lenka Žůrková

Costs induced by the employee’s leaving: between the employee’s leaving and the entering of
• A temporary compensation of lost performance a selected substitute (emergence) worker because
(working output) at the vacant working position there is a rule that the longer the period for which
(by means of overtime work of the existing staff, the leaving employee is not replaced, the higher
employment of temporary and/or part-time the costs associated with and resulting from the
workers etc.); employee turnover.
• Loss of labour productivity (related either to the A vacancy can be filled in the following two ways:
vacant working position and/or the adaptation i) By overtime work of current employees; in this
process of a new employee); case the costs associated with the performance
• Performing an exit interview and termination of of the labour output (CPLO) consist of super
employee’s job contract (including working time of gross salary of the leaving employee (SE), wage
both personnel officer and the leaving employee, supplements paid for overtime work (OW, in
administrative activities both in electronic and %), and time interval elapsing to the moment of
written form, wage settlement including bonuses finding a substitute (t),
and employee’s benefits as well as other activities
associated with and necessary to terminate the CPLO = SE × (1 + OW) × t,
employment contract);
ii) By hiring of temporary workers; in this case
• Manager’s time that is necessary to understand the costs associated with the performance of
causes of the leaving employee’s leaving and also the labour output (CPLO) consist of super gross
the time necessary for taking adequate preventive salary of the leaving employee (SE), time interval
measures; elapsing to the moment of finding a substitute
• Company’s expenditures and costs associated with (t), commission paid to the employment agency
education and training of the leaving employee; (CPA), and costs associated with and resulting
• Loss of the overall labour productivity; this from the training of temporary workers (CTTW),
concerns above all calculation of effects of lost
work performance of the leaving employee (e.g. CPLO = SE × t + CPA + CTTW.
due to breaching of agreed termination dates etc.);
• Loss of the know – how, skills and contacts of the
Loss of productivity as related to the labour
leaving employee;
output of the leaving employee
• Loss of customers and/or costs associated with
efforts to retain them. In case that there is a time gap between the
employee’s departure and the moment of entering
When following costs resulting from and
of a selected substitute worker to the vacancy (the
associated with the employee’s leaving it is necessary
calculation involves also a temporary substitution
to take into account if this leaving was planned or
of the labour output), it is necessary to involve
not. In case of an unplanned leaving, the company
costs of lost productivity twice (once because of the
must also consider extra costs resulting from such
temporary substitution and once due to the entering
a precocious leaving without the replacement of
of a new employee). According to Murtagh (2003)
the leaving employee (see the aforementioned need
a lower labour productivity of a new employee
of a temporary substitution of labour output in the
represents approximately 25 % of the work
vacant job/working position). In contradistinction
performance of a normal worker within the period
to all other aforementioned costs, these expenses
of the first four weeks and in the course of the fih
need not be to involved into the calculation of costs
to eight week it increases to 50 %. A full (100 %)
resulting from the employee’s leaving (i.e. due to
working performance is usually reached as late as
staff turnover).
aer twelve weeks.
A temporary substitution of the labour output The relationship existing between an expected
in the vacant working position labour output of a substitute and his/her
experiences is illustrated in Tab. I.
When calculating costs associated with Costs associated with the loss of employee’s
a temporary substitution of the labour output it productivity (CLEP) are equal to the employee’s
is necessary to estimate the time interval elapsing

I: Loss of labour productivity in the course of a new employee’s adaptation process

Parameter Efficiency of the labour output Loss of labour productivity
1st month 2nd month 3rd month 1st month 2nd month 3rd month
Overtime work 75 % 100% 100% 25% 0% 0%
Hiring of a substitute 25% 50% 75% 75% 50% 25%
Hiring of a new employee 25% 50% 75% 75% 50% 25%
Vacancy 0% 0% 0% 100% 100% 100%
Source: Murtagh (2003), modified by authors
 Costs of employee turnover 2073

average labour output (OE) multiplied by the Manager’s time

percentage loss of productivity (LP) existing Manager’s time spent for understanding and
in individual stages of the adaptation process, explanation of causes of employee’s leaving as well
time interval elapsing till the moment of finding as a decision how to solve this problem is another
a substitute (t), and duration of the adaptation kind of costs identified by Bliss (2012). In costs
process of a new employee (tAP). associated with the turnover of employees, this time
is reflected in the form of manager’s labour costs.
CLEP = (OE × LP × t)+ (OE × LP × tAP).
The calculation of overall costs relating to manager’s
The average labour output of the employee (OE) time (CtM) involves average time spent for the exit
is calculated as the share of the added value created interview with the leaving employee (tEI), average
by the company within the given fiscal period (AV) time spent in discussions with personnel officer
per one employee, i.e. the added value divided by about causes and possible solutions of this loss (tD),
the average number of company employees in the wages fund of employees (WF), and manager’s super
period (NE). gross salary (SM).

AV (t EI  t D )
OE  . CtM   SM .
SE WF

In case that the employee decides to leave the

Loss of productivity in the whole company company, managers should try to reveal the causes
department of his/her resignation. According to Branham
Costs resulting from the loss of productivity of the (2009), managers mentioned that the main reason
whole department (CLDP) can be estimated on the of employees turnover were wages (and/or a better
base of the average department’s labour output (OD), offer of jobs from the side of competitors). Similar
coefficient of dependence (c), and the time interval reasons were mentioned also by Buchtová (2002)
elapsing till the moment of finding a substitute (t). and Robinson (2008). Branham (2009) identified
Also in this case it is necessary to involve costs of more than 57 reasons of a voluntary resignation
lost productivity twice (once due to the temporary of employees and he summarised them into 7
substitution and once due to the new employee categorise. Smith (2012) identified altogether ten the
because the loss of productivity within his/her most frequent causes of a voluntary turnover.
adaptation period is 50 %). This consideration
Performing of the exit interview, settlement
is based on percentages of labour efficiency as
and finishing of job contract
distributed within the whole process of adaptation
(i.e. 25 % in the first month, 50 % in the second, and Costs relating to the termination of employment
75 % in the third one). (CTE) involve the time of personnel officer spent
for the exit interview with the leaving employee
CLDP = (OD × c × t)+ (OD × c × tAP) × 50 %. (tEI), time of the leaving employee (tE), time spent
for carrying out written and electronic forms
The average labour output of the company of administrative steps associated with the job
department (OD) can be calculated on the base of the termination (tAS), single costs of wage settlement
added value created by the company within a given (CWS), wages fund (WF), super gross salary of the
fiscal period per one employee and multiplied by leaving employee (SE), and super gross salary of the
the average number of workers in the department personnel officer (SPO).
under study (ND).
(t EI  t AS ) t
OD = OE × ND. CTE   SPO  E  SE  CWS .
WF WF
The coefficient of dependence (c) characterises the
The time of the leaving employee (tE) may consist
rate of necessity of the employee’s labour output, on
of time spent for the exit interview, time spent
which the working activities of other team members
for the acquisition of a certificate about his/her
are dependent. The coefficient of dependence (c) can
liabilities issued in the form of the exit certificate,
be calculated as the percentage share of the leaving
and time spent for the exit health examination.
employee in the department (1/ ND) exponentiated
Costs of wage settlement (CWS) consist of average
by the share of the difference between the average
compensation money (CM) and of average bonuses
number of employees in the department (ND) and
(B) that were paid to employees per year divided by
the number of people dependent directly on the
the average annual number of employees (NE).
work results of the leaving employee (d – estimated
subjectively) and the average number of employees CM  B
in the department under study (ND). CWS  .
NE
ND d
 1  ND
. The right to receive compensation money have
c  
 ND  those employees who were either dismissed by the
2074 Jiří Duda, Lenka Žůrková

employer or finished their employment on the base Loss of leaving employee’s knowledge, skills
of an agreement due to organisational changes; this and contacts
compensation represents one to three average wages Costs associated with the loss of knowledge,
(Labour Code 2012). skill and contact of the leaving employee (CKS) are
estimated on the base of the annual super gross
Investments into the education and training of
salary (SE) and the number of years the employee
the leaving employee
spent in the organisation (Y). Percentages were
Investments into the education and training of mentioned by Bliss (2012).
the leaving employee (CI) can be estimated on the
base of share of total annual investments into the CKS = 50% × SE + 10% × Y × SE.
education and training of employees (I) divided by
the average annual number of employees (NE).

I
CI  .
NE

SUMMARY
Fluctuation of employees represents a frequent and permanent problem in many companies. A high
rate of employee turnover is an undesirable phenomenon in each company. This concerns not only
departures of skilled employees but also the recruitment and hiring new ones because these people
need certain time to learn about and to adopt processes that are established and quite common in
their new workplace. The turnover of employees is associated with and results in a lot of costs. The
aim of this paper was to elaborate a general methodology of calculation of costs resulting from this
phenomenon. The authors tried to identify only costs resulting from the loss of an employee; they
did not analyse costs associated with the recruitment of new employees. According to Bliss (2012),
costs resulting from the loss (leaving) of an employee involve expenses resulting from the temporary
substitution of the leaving employee and compensation of the labour output performed in the vacant
job/working position, costs necessary for the performance of the exit interview, and those associated
with the termination of job contract. The author of this paper also formulated equations enabling
to estimate the value of manager’s time required for understanding and explanation of causes of
employee’s departure and money spent for the education of the leaving employee. Another important
part of costs associated with the employee turnover is related to the loss of their knowledge and, last
but not least, also costs associated with a decrease in productivity of both the employee and his/her
department. For the estimation of all these costs and expenses, the authors elaborated and suggested
a detailed set of general mathematical formulas/equations. These economic calculations are adapted
to and take into account the current taxation policy of the Czech government. Overall costs associated
with the employee turnover may be as much as 1.5 – fold higher than the average annual wage of the
leaving employee.

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Address
Ing. Jiří Duda, Ph.D., Ing. Lenka Žůrková, Department of Management, Mendel University in Brno,
Zemědělská 1, 613 00 Brno, Czech Republic, e-mail: [email protected]

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