Why Employee Turnover is Limiting Your Company’s Profitability

Wednesday, May 29, 2013 - By: Greg Moran

Turnover hangs over the head of every HR manager and executive. The era of the “company man” is over, having given way to the dawn of serial corporate monogamy; the average man will hold 11.4 jobs and the average woman will hold 10.7 jobs in their lifetime.

High turnover rates affect many parts of a business, most notably employee morale and profitability. Whether workers are leaving on their volition or being laid off, turnover makes it difficult to maintain a corporate culture. The remaining employees often have to absorb additional duties and grow increasingly insecure about their own jobs. What’s more, the subsequent low morale tends to make employees less enthusiastic and productive, putting revenue at risk.

When an employee leaves a company after working there for several years, they also take with them valuable insight into the inner workings of that company, including technology resources and how business processes function. They’ve also developed the know-how to navigate the company’s policies and culture, including the management team hierarchy. A new employee, however, will need to develop this knowledge and skill set over time and, therefore, their productivity will be limited as they get up to speed. This lack of knowledge can derail the productivity of even the most capable team members, as they will likely be dependent on this process.

Productivity and profitability are directly affected when key employees are engaged in tasks that are not directly related with the successful operation of day-to-day business directives – such as the time investment traditionally associated with recruiting, hiring and training a new employee.

Yet, despite such paramount risks associated with turnover, there remains a substantial lack of HR activity to appropriately diagnose and address the issue. According to a recent survey of nearly 1,000 U.S. companies conducted by AMA Enterprise, a division of American Management Association, “We have found little agreement on what companies consider optimal annual turnover among their workforce. In fact, many managers may not even be sure of their turnover since only 42% have a formal process to determine it.” Within a 2012 report from CBS Money Watch, the Center for American Progress (CAP) drives home the cost of not knowing your company’s turnover: “For all jobs earning less than $50,000 per year, or more than 40 percent of U.S. jobs, the average cost of replacing an employee amounts to fully 20 percent of the person’s annual salary. While the costs of losing a ‘normal’ employee are high enough, losing an executive is astronomical — up to 213 percent of the employee’s salary.”

If you don’t know your company’s turnover rate – and the cost of that turnover – make it a point to find out.

High company turnover is costly and can have a noticeable negative effect on a company’s profitability. Investing in a science-based predictive assessment tool up front for pre hire testing can be incredibly helpful to companies looking to acquire the best talent with the strongest fit. Add in performance-based incentives, flexibility, as well as traditional benefits such as health care, holidays and vacation time, and both turnover and overall profitability will increase.

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