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Employee Turnover Costs and The Importance of the First Year

We've all heard of employee turnover, and how we should avoid it. Let's see why, and dig into the importance of an employees first year at a company.

Unfortunately, employee turnover is a part of most employee lifecycles. Whether it’s reflective of the company, or the journey of the employee, it’s relatively common across most industries. This is particularly true for millennial employees as they move through their careers. According to the U.S Bureau of Labor Statistics, the industries with the highest employee turnover rates in the U.S. include Manufacturing, Retail Trade, Transportation, Warehousing, and Utilities, Professional and Business Services, Healthcare and Social Assistance, Accommodation, and Food Services, and Security. Generally, organizations battle to keep employee turnover low, and employee retention high… but why?

Why Care about Employee Turnover

Employee turnover is one of the most underestimated and understudied costs of operation. It can negatively impact both the short and long-term success of your business.  Therefore, it’s amazing how few organizations are even aware of the costs that they are incurring due to high turnover. Surveys have shown that only 17% of organizations are aware of the direct employee turnover costs. When it comes to indirect costs, that number drops to 9%. If you want some real-life figures, Gallup estimates that U.S businesses lose a trillion dollars every year due to voluntary employee turnover.

In traditional calculations of employee turnover costs, employers take into account the costs of:

·         Hiring and firing

·         Recruiting

·         Interviewing

·         Orientating, and training new employees

These costs alone can be excessive, but the true costs of high employee turnover lie in the hidden costs. Hidden costs include, but are not limited to:

·         Loss of productivity

·         Reduction in business activities

·         Expertise/knowledge loss

·         Administrative costs

These hidden costs can impact your business beyond measurable financial loss. In particular high turnover could result in dissatisfied customers, and in turn, reduce revenue streams.

What causes Employee Turnover?

You can check out our in-depth blog post on the causes of employee turnover here – but here’s the TLDR.

First off, it’s important to note that there are actually two types of employee turnover; voluntary and involuntary.

  • Involuntary turnover describes a scenario where the decision to leave is not made by the employee. Essentially, this is when the organization decides to leave the employee go. This can be for any number of reasons, including poor performance, workforce reductions, or simply company restructuring.
  • Voluntary turnover however occurs when the employee themselves decide to leave their position. There are a range of factors that can lead to voluntary turnover. These include lack of career progression opportunities, poor management/leadership, lack of work-life balance, or poor employee selection. Of course, most organizations aim to avoid voluntary turnover as much as possible.

When looking to reduce employee turnover at your organization, it can help to focus on the first year of employment.

The Significance of Year One 

An interesting fact that actually can be quite useful in helping deal with employee turnover costs is knowing when your employees are leaving. The majority of all turnover– 52%, occurs in the first year of employment. In fact, it actually peaks right at the 12-month mark at 27%. Therefore, when a new employee starts work on their first day, they represent pure cost and a lot of potential.

A time-to-productivity analysis can give you an indication of when an employee’s productivity has increased to a point where their contribution exceeds their cost. For example, if threshold productivity occurs on average at the six-month mark, anyone who leaves with less time on the job is to some degree, a financial loss.

The point to take away from this data is that your retention strategies should start on day one. Employee engagement, flexible schedules, providing a positive work environment, and setting fair compensation should be implemented and evaluated on a year-long basis. For example, if your company focuses its recognition and retention strategies on one yearly event, such as an awards dinner, it may be too late to retain a year one employee from looking elsewhere for employment. In order to obtain every employee’s potential; focus on keeping them in the family from day one.

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