The impact of turnover is a big $

A White Paper

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It is a BIG NUMBER, and beyond financial it is damaging to employee morale. What can you do to increase your confidence and mitigate the damage?

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Read on to learn about turnover: how to measure it, manage it, and how to diminish it before it happens. REALLY.

White Paper, 12 pages, on Employee Turnover, by Pamela Stambaugh and Ryoji Nakamichi, — July 22, 2013 2

EEEmmmpppllloooyyyeeeeee TTTuuurrrnnnooovvveeerrr: What is it, its costs, and how you might manage it?

by Pamela Stambaugh, MBA and Ryoji Nakamichi

“The ability to make good decisions regarding people represents one of the last reliable sources of competitive advantage since very few

organizations are very good at it.” —Dr. Peter Drucker

UUUnnndddeeerrrssstttaaannndddiiinnnggg TTTuuurrrnnnooovvveeerrr aaasss aaa CCCooonnnccceeepppttt What is Turnover? When employees leave a company and have to be replaced, that's called turnover. A certain amount of turnover is unavoidable, but too much can ruin a company. Some employees will always retire, move away, go back to school, or leave the workforce. This level of turnover is not only unavoidable, it can be beneficial. It brings new people into the organization with new ideas and a fresh perspective. Three Types of Turnover Organizations generally accept that turnover is broken into three types: overall, voluntary and involuntary. Overall turnover is composed of voluntary and involuntary turnover that reflects the total number of turnovers during a determined period. Voluntary turnover is initiated by the employee who desires to terminate employment. An employee might leave the job due to not fitting in with the established corporate culture or receiving a much better offer for a position from another company. In contrast, involuntary turnover is caused by dismissal from the company due to perhaps underperformance or a business slow down.

HHHooowww BBBiiiggg aaa PPPrrrooobbbllleeemmm iiisss TTTuuurrrnnnooovvveeerrr??? Trends for all industries average turnover rate from 2009 through 2011 Table 1 provides trend data from the Executive Brief: Tracking Trends in Employee Turnover. The data reflects that average annual turnover rate, average voluntary and involuntary turnover rates from 2009 to 2010 increased, then decreased from 2010 to 2011. These variations correlate with national unemployment during the same period. According to IBISWorld Survey June 2013 (Table 2), the national unemployment rate was 9.3% in 2009. In 2010, it was 9.6%, an increase of 0.3% from the previous year. However, the national unemployment rate decreased from 9.6% to 9.1% in 2011. Table 1. All-‐industry Average Turnover Rates for 2009-‐2011 by type

Year Average Annual Turnover

Average Voluntary Turnover

Average Involuntary Turnover

2009 14% 8% 7% 2010 15% 13% 9% 2011 13% 9% 6%

Source: SHRM Human Capital Benchmarking Database (2010-‐2011, 2011-‐2012, and 2012-‐2013)


Table 2. National Unemployment Rate for 2009-‐2011 by type

Year National Unemployment Rate Change Rate of Previous Year 2009 9.30% 3.50% 2010 9.60% 0.30% 2011 9.10% -‐0.50%

Source: IBISWorld Business Environment Profile June 2013: National Unemployment Rate Turnover Rates within Specific Industries Table 1, the data from the Executive Brief: Differences in Employee Turnover Across Key Industries suggests which key industries have high/low turnover rate, revenue per FTE (full-‐time equivalent), and cost-‐per-‐hire. The highest turnover rates were service industries such as accommodation, food, and drinking places (35%) and the lowest turnover rates were associations such as professional and trade associations and utilities (8%). The average turnover rate was 15% in all industries in 2010. The revenue per FTE is a measure of employee productivity. This ratio provides information on a company’s efficiency during a determined period. The industries with high revenue per FTE indicate much better productivity than other industries with low revenue per FTE. The cost-‐per-‐hire is usually high in high-‐tech industry in order to recruit skilled staff and train them compared with service industries. As a result, the cost-‐per-‐hire for industries such as high-‐tech ($3,357), association ($5,582), and utilities ($3,936) was higher than the service industry ($1,062).

The Relationship between Turnover and Job Satisfaction Job satisfaction is frequently — but not always — relevant to voluntary turnover rates. Employees who are satisfied with their jobs tend to stay. On the other hand, those who are dissatisfied with their jobs often seek new jobs. Figure 1 reveals trend data from the Executive Brief: Tracking Trends in Employee Turnover. The data suggests that job satisfaction rates tended to elevate over past years until 2009; however, job satisfaction has begun to slowly decline from 2009 to 2012. One of our reviewers pointed out that in the mortgage business, turnover has more to do with the ups and downs of the market than employee satisfaction and that was certainly true in 2007 and 2008. “nIn 2008 after the subprime crash, Orange County lost between 50,000 and 60,000 mortgage jobs.” He gave another more recent example of the mortgage industry being hot until a month ago when rates spiked and application volume was off by 50% -‐ 60%. “If that continues, that business will cut in half within about four months.” John further pointed out, “In a downturn, A-‐players will more often keep their jobs, B and C players will be let go.” More on A-‐players later.


HHHooowww YYYooouuu CCCaaalllcccuuulllaaattteee TTTuuurrrnnnooovvveeerrr The Turnover Rate Explained Turnover rate is the calculation of the number of employees who have left the company expressed as a percentage of the total number of employees. How to calculate turnover rate According to the Society For Human Resource Management (SHRM) April 2013: How to Determine Turnover Rate, it is calculated by taking the number of separations during a month divided by the average number of employees, multiplied by 100. This formula is the mathematical expression of the monthly turnover rate.

Turnover rate = # of separations / average # of employees x 100 When you count the number of employees in your company use employee headcount rather than full time equivalents (FTE). This headcount should include all employees on the payroll. Be sure to count temporary workers who are on your company payroll and employees on temporary layoff, leave of absence or furlough. The number of employees should not include independent contractors or temporary workers on an agency’s payroll. Example of calculation of Monthly Turnover rate Company A runs a headcount report at the beginning, middle and end of each month. The headcount on January 1 is 143 employees. The headcount on January 15 is 148 employees. The headcount on January 30 is 151 employees. Using the formula avg. # of employees = (SUM headcount from each report) / number of reports used = (143+148+151) / 3 = 147.333 Company A’s average number of employees in January is 147.333. The number of separations during a month includes both voluntary and involuntary turnover but do not include employees who are temporarily laid off, on furloughs or on a leave of absence.


In January, Company A: • Had two employees on FMLA • Let go of five agency temporary workers • Had one employee who retired • Terminated two employees for cause • Placed one employee on unpaid furlough

The number of separations for the month is only three. As stated above, count only voluntary and involuntary separations within the month. In this case, company A had three separations and 147.333 average number of employees in January. Therefore, if you follow the formula, the company A turnover rate for January is 2.04%, calculated as follows: 3 / 147.33 *100= 2.04% (Turnover rate = # of separation / avg # of employees *100 ) *If you add all 12 monthly turnover rates for the entire year (Jan. turnover rate (TR) + Feb. TR +…..+ Dec. TR), you have determined your annualized turnover rate.

TTThhheee CCCooosssttt ooofff TTTuuurrrnnnooovvveeerrr According to the Society For Human Resource Management (SHRM): Cost of Turnover, turnover costs include four classifications — 1) separation processing costs, 2) replacement hiring costs, 3) training new hire costs and 4) lost productivity or business costs. Separation costs include the time and expense required in order to exit an individual from the organization. Replacement costs generally include sourcing, interviewing and hiring expenses associated with finding new staff. Training costs include the on-‐boarding process of a new employee and the proper acclimation to the environment and new work procedures and processes. Lost business and lost productivity costs are another category of turnover costs. While this category includes the “savings” incurred by not paying wages for the exited employee, it also includes costs associated with lost morale, lost revenue and the performance differential as the new person comes up to speed, etc. For purpose of illustration, the table below depicts the turnover costs of a nurse position in the Denver/Boulder area. In this example, the hourly rate for the nursing position is $20, and benefits account for 35% of salary. Although line item costs for each category may not necessarily apply for all organizations, many of them would be similar.

Calculating Turnover Costs (Sample for Registered Nurse Position in Denver/Boulder area)

Separation Processing Costs:

+ cost of exit interviewer's time (60 minutes @ $16 x 135%)

$22.00

+ cost of departing employee's time (30 minutes @ $20 x 135%)

$14.00

+ cost of administrative functions relating to the departure (2 hours @ $14 x 135%)

$38.00

+ cost of separation pay associated with the departure (40 hours @ $20)

$800.00

+ cost of unemployment tax related to the departure (assumes account reimbursement of 4 weeks @ $337)

$1,348.00


Replacement Hiring Costs:

+ cost of attracting applicants (annual ad budget / number of positions filled)

$500.00

+ pre-‐employment administrative expenses (3 hours @ $24 x 135%)

$98.00

+ cost of entrance interviews (5 interviews @ 1 hour x 2 interviewers @ $30 x 135%)

$405.00

+ cost of aptitude, skill, drug, etc. testing (30 minutes @ $14 x 135% + $16 + $25)

$51.00

+ cost of hiring decisions meetings (1 hour x 2 interviewers @ $30 x 135%)

$81.00

+ cost of post employment physical exams (assumes performed in house)

$50.00

+ post-‐employment information gathering (records, payroll, etc.) (1 hour @ $14 + 1 hour @ $20 x 135%)

$46.00

+ cost of signing bonus (RN's in Denver area currently ranging from $1K -‐ $3K)

$1,000.00

+ cost of employee finder's fee (Denver area currently ranging from $500 -‐ $1K)

$500.00

Training New Hire Costs:

+ cost of information literature (manuals, brochures, policies, etc.) $10.00

+ cost of general orientation (16 hours @ $20 + 16 hours @ $16 x 135%)

$778.00

+ cost of job orientation (unit orientation 80 hours @ $20 + 40 hours @ $25 x 135%)

$3,510.00

Lost Productivity and Lost Business Costs:

+ cost of additional overtime to cover the vacancy (20 hours @ $30 x 135% x 6 weeks)

$4,860.00

+ cost of additional temporary help (20 hours @ $37 x 6 weeks)

$4,440.00

-‐ wages and benefits saved due to the vacancy (40 hours @ $20 x 135% x 6 weeks)

<$6,480.00>

+ cost of performance differential while new employee gets up to speed (96 hours @ $20 x 135% x 20%)

$519.00

+ cost of low morale-‐related time wasted due to "water cooler grumbling" (1 hour @ $20 x 135% x 5 days x 6 weeks)

$810.00

+ cost of lost customers, sales, profits due to the departure (gross profit loss per patient $3,100 per day x 3.5 days x 25% profit margin)

$2,713.00

+ cost of additional employee departures related to the departure (if just one other nurse leaves, the cost is equal to the total of these costs)

$16,113.00

Total $ 32,226.00

Source: ©2000-‐2004 KeepEmployees, Inc. (www.keepemployees.com/healthcare3.htrm)


To replace this $40,000 a year employee costs $32,226, which is 81% of a year’s salary.

TTThhheee PPPooottteeennntttiiiaaalll AAAdddvvvaaannntttaaagggeeesss ooofff TTTuuurrrnnnooovvveeerrr According to Chron.com: Advantages of Turnover, employers believe that turnover has only a negative effect for their organization. However, there are some advantages of turnover for the organization that are listed and explained below.

Talent Infusion. Voluntary turnover and involuntary turnover both make way for infusing talent in an organization. Employees who leave of their own volition as well as employees who leave due to involuntary discharge aren’t always high performers. Employees with subpar performance drain the company of resources and money. These turnover scenarios create opportunities for an employer to recruit new talent with new ideas and emerging skills. However, it is worth tracking whether the turnover is voluntary or involuntary to learn what else should be considered when measuring the performance of hiring practices and the assessment of performance review processes, which can be — and often are — faulty. That is a topic for a different White Paper.

Efficiency. Infusing talent also leads to updated work processes with technology-‐driven solutions. New employees bring a fresh perspective to the workplace as well as new ways of operating the business. Many of their solutions improve efficiency and, ultimately, profitability.

Shape Up. Involuntary turnover, as in employee termination, sends a message to other employees. It is a testament that the disciplinary process works and that if performance doesn’t improve, they, too, can be terminated for poor performance, behavior or misconduct. While this is a hard-‐line approach to seeing the advantages of turnover, it often works.

Morale. Improved employee morale is another advantage of turnover. Disengaged workers sap the workplace of enthusiasm, energy and productivity. When employees who are performing at marginal levels leave the organization, it inspires remaining workers and returns the workplace to a team-‐oriented work environment where everyone is focused, driven and interested in doing a good job. The strain placed on an organization by managing employees whose presence affects the entire workforce is lifted when those employees are separated from the company.

Cost Savings. When long-‐term employees leave, the company is no longer in debt for high wages tenured employees earn. Employers can reconfigure their compensation practices and set new starting salaries for less experienced workers. The cost to maintain long-‐term employees is also expensive where benefits are concerned. Companies that raise their retirement savings contributions for tenured employees start over fresh at lower employer contribution rates.

Lower Benefit Rates. Insurers base their premiums on age. The older the insured, the more costly it is to insure them due to age-‐related conditions and diseases. Seasoned employees are generally older workers for whom the employer absorbs the cost of health care premiums. When these employees leave the organization, employer benefits costs may drop significantly.

Employee Retention Hiring excellent employees with both eligibility and suitability for the job is a significant way to accomplish companies’ goals and assure the success of the business into the future. According to The Wall Street Journal: Employee Retention — How to Retain Employees, there are four tips to retain employees within organizations: 1) provide a competitive benefits package, 2) provide financial incentives, 3) hire a Human Resource Manager (for companies nearing 100 employee size), and 4) understand employees’ expectations for their jobs.


Offering competitive benefits such as health insurance, life insurance, annual paid vacation, and financial aid for advancing their careers through advanced education are essential ways to retain employees. It has been shown that these benefits motivate employees and make them feel happy to have their jobs. Offering financial incentives such as a bonus or other rewards, and annual raises for employees who reach performance goals or stay in the organization productively for long periods are also critical ways to keep the employees within organizations. It is particularly important to provide these incentives for key players. Hiring HR managers (for companies nearing 100 employee size) is crucial in order to effectively train employees and understand employees’ expectations and concerns about their jobs. HR managers review employee benefits and financial incentives systems to make sure they are adequate for the employees. They can provide the company with various programs to facilitate cooperation, productivity and boost morale. An understanding of what employees expect from their job may seem basic, but often in small companies, employees have a wide breadth of responsibilities. If they don’t know exactly what their job entails and what their employer expects from them, they can’t perform up to standard, and morale can begin to dip.

TTToooppp 111000 EEEmmmpppllloooyyyeeeeee CCCooommmppplllaaaiiinnntttsss ttthhhaaattt cccooouuulllddd LLLeeeaaaddd tttooo TTTuuurrrnnnooovvveeerrr About.com: Ten Employee Complaints. A survey conducted by HR Solutions, Inc. revealed these ten complaints that, knowing them, can help an organization to retain its employees.

1. Higher salaries. Pay is the number one area in which employees seek change. You can foster a work environment in which employees feel comfortable asking for a raise. Often, employees believe they need to change companies to improve their relative pay scale.

2. Internal pay equity. Employees are concerned particularly with pay compression, the differential in pay between new and longer-‐term employees. In organizations, with the average annual pay increase for employees around 4%, employees perceive that newcomers are better paid – and, often, they are.

3. Benefits programs, particularly health and dental insurance, retirement, and Paid Time Off / vacation days. Specifically, many employees feel that their health insurance costs too much, especially prescription drug programs, when employers pass part of their rising costs to employees.

4. Over-‐management. Employees often defined over-‐management in interviews as: “Too many chiefs, not enough Indians.” Workplaces that foster employee empowerment, employee enablement, and broader spans of control by managers, will see fewer complaints. A popular word, micromanaging, expresses this sentiment, too. As costs rise, flatter organizational structures are an appropriate adjustment that should be accompanied by efficiency and effectiveness training.

5. Pay increase guidelines for merit. Employees believe the compensation system should place greater

emphasis on merit and contribution. Employees find pay systems in which all employees receive the same pay increase annually, demoralizing. Such pay systems hit the motivation and commitment of your best employees hardest as they may begin asking, “What’s in this for me?” As you adopt a merit pay system, one component is education so that employees know what behaviors and contributions merit additional compensation. Employees who did not improve must be informed by their manager about how their performance needs to change to merit a larger pay increase.


6. Human Resources department’s responsiveness to employees. The Human Resource department needs to be more responsive to employee questions and concerns. In many companies, the HR department is perceived as the policymaking, policing arm of management. In fact, in forward thinking HR departments, responsiveness to employee needs is one of the cornerstones.

7. Favoritism. Employees want the perception that each employee is treated equally with other employees. If there are policies, behavioral guidelines, methods for requesting time off, valued assignments, opportunities for development, frequent communication, and just about any other work related decisions you can think of, employees want fair treatment.

8. Communication and availability. Let’s face it. Employees want face-‐to-‐face communication time with both

their supervisors and executive management. This communication helps them feel recognized and important. And, yes, your time is full because you have a job, too. But, a manager’s main job is to support the success of all his or her reporting employees. Through employee performance the manager magnifies his or her own success.

9. Workloads are too heavy. Departments are understaffed and employees feel as if their workloads are too heavy and their time is spread too thin. This complaint becomes worse as layoffs increase; the economy slumps; your ability to find educated, skilled, experienced staff gets more difficult; and your business demands grow. To combat this, each company should help employees participate in continuous improvement activities.

10. Facility cleanliness. Employees want a clean, organized work environment in which they have the

necessary equipment to perform well.

DDDiiimmmiiinnniiissshhh TTTuuurrrnnnooovvveeerrr ——— HHHiiirrreee AAA-‐-‐-‐PPPlllaaayyyeeerrrsss iiinnn ttthhheee FFFiiirrrsssttt PPPlllaaaccceee All of these variables impact performance and job satisfaction, so retention starts with the hiring process. “The FIRST place to manage turnover,” according to Pamela Stambaugh, President, Accountability Pays, “is to get the right people in the right roles in the company and then support their growth and development.” Among senior executives is a well-‐accepted realization that A Players hire other A Players, and B Players hire C Players. Another reviewer commented, “This is exceptionally true but some companies do not understand this because they treat any dollars out of pocket as expenses. An A-‐Player adds better value and the ROI on an A-‐Player is much greater so the cost differential is an investment and should be viewed as such.” Competitive advantage is achieved by having great people, treating them well, and keeping them employed in a challenging and fulfilling environment. While there are many assessments on the market today, most of them claim to solve hiring problems. Some — such as personality tests — can actually create legal liability because they do not report job-‐specific feedback, so they are not EEOC compliant and can create adverse impact. The one assessment that looks most deeply at both eligibility and suitability, and is structured so that you save both time and money AND identify the best person for THAT job, is the Harrison Assessments Talent Solutions. It is EEOC compliant and has no adverse impact because of its job-‐specific reporting.


Too many assessments fall short of the goal of quantifying their considerations of eligibility (CAN someone do the job) and they ignore suitability (do they WANT to do the WORK) because they think it cannot be measured, but it can. Here is the typical challenge, and the typical level of quantification of the attempt to select the right candidate. What if knowledge of medical equipment is irrelevant because it will be trained anyway. Too often too little is known about the relative weight of these variables. In fact, the Harrison Assessment quantifies all of these factors and combines them into an ideal performance benchmark called the Job Success Formula. Unique to the Harrison Assessment is the very important capability to weight each of these factors according to job impact. The Harrison Assessment measures suitability including 156 behavioral preferences, a robust quantity of data that is reported job-‐specific. Currently the Harrison Assessment hiring system includes 6,000 job success formulas. Below is an example of the time and money savings of using Harrison Assessments.

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197 Applicants 96 Short Listed 4 Brief Phone Interviews and 1 face-‐to-‐face interview 1 Hire

The previous similar campaign took more than 45 hours. This entire campaign was completed in 8 hours. Total Cost: $912 or $8.45 per applicant, including Applicant Tracking System (Harrison Assessments system)


If you are interested in learning more about the Harrison Assessments Talent Solutions or working with existing teams to improve performance and productivity, please contact Pamela Stambaugh.

Pamela Stambaugh is a graduate of Lewis and Clark College in Portland, Oregon, earning her MBA at the University of San Diego. Founder and President of Accountability Pays for 27 years, Pamela is a seasoned advisor to business leaders and their teams, providing training, coaching, and team facilitation in improving performance, productivity and results through people. Pamela has coached and provided senior executive team building experiences since 1999. She has worked globally with senior executives including five years as a TEC/Vistage chair. She has co-‐authored two business books.

Pamela is Master Distributor of the Harrison Assessments Talent Solutions (HATS), as well as a partner to The Table Group, Patrick Lencioni (5 Dysfunctions of a Team), and facilitator of The Speed of Trust, a transformational program for senior executives. Her clients include CBIZ, GE Healthcare, Life Technologies, Anthony’s Foods, IABA, Magma Technologies as well as many others. Ryoji Nakamichi is completing a certificate program in International Business Operations & Management and Project Management at UC Irvine. He has a BA in Economics from Daito Bunka University, Japan. Ryoji is a summer intern at Accountability Pays. When not in school in the United States, he resides in Mie, Japan (near Osaka). In the future he would like to work in Human Resources.

www.accountabilitypays.harrisonassessments.com

The impact of turnover is a big $

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