Four Steps to Understand the Costs of Employee Turnover and Build an Effective Retention Plan

Build a retention plan to reduce employee turnover.Image source:
Build a retention plan to reduce employee turnover.
Image source:

Retaining the right talent is vital to the long-term health, success, and scalability of your business. In the Bay Area, losing technical talent at the wrong time can lead to significant delays in product launches and pose significant risks to your company’s viability. Even though many companies know retention is important, they are often unsure of how to start a strong retention program. In order to build an effective plan, you first need to understand what employee turnover is really costing you, determine the key reasons for turnover and loyalty, and engage the right stakeholders.

  1. Calculate Your Annual Employee Turnover Rate

The first step in dealing with a problem is assessing the scope. Learning how to calculate your turnover rate as a percentage can help you know where you stand. For employee turnover rates, you need to know the ratio of total number of separations (an employee leaves or is terminated) to the average monthly rate of continued employment for the preceding 12-months, expressed as a percentage. For example:

If the number of separations is 60 and the average monthly employment is 800, then your turnover rate is about 7.5 percent [100 x (60/800)]. Use this as the starting point for your turnover reduction plan.

  1. Build an Estimate of How Much Employee Turnover Is Costing You Today

There are many calculators that can help you approximate the costs of lower productivity, lost knowledge, and training. Minnesota State offers an excellent resource on how to calculate these costs.1 In order to build an estimate, list out the hard costs of recruitment to determine how much turnover is costing you, including:

  • Recruitment – Advertising, radio, direct mail, newspaper, LinkedIn, and similar platforms.
  • Human Resources Administration – The cost of time spent interviewing potential candidates, checking references, administering paperwork for incoming employees, and paperwork for those exiting.
  • Supervisory – The cost of time spent by managers overseeing the hiring process.
  • Training – The cost of time spent by both trainers and the employees receiving training.
  • Materials – Equipment, training media, job aides, and similar onboarding materials.
  • Separation – Costs for unemployment, separation pay, and other costs paid to exiting employees.
  • Overtime – Higher rate paid for employees picking up work while a role remains unfilled.
  • Other Costs – You may have other expenses unique to your business to consider. You may want to figure in non-tangible costs for the lost knowledge of an exiting employee and the lowered productivity of other workers when a key employee leaves.

Total these costs and multiply them by your turnover rate. This will determine where you are now and allow you to project on savings. To do this, you can set a goal of reducing the cost by five percent (for example), which will give you an estimate of how much you will save. This will also allow you to set a budget for how much the business should spend on employee retention.

  1. Find Out What Your Employees Care About

The next step is to determine what motivates employees to stay with your company. It’s critical to find out both why some employees leave and why  your current employees choose to stay.

During exit interviews, ask employees why they leave. Over time, you will gain valuable data that you can analyze to determine what reasons are cited most often. The following are the most common reasons for regretted attrition:

  • Poor opportunities for growth and advancement
  • Poor match between the person and job
  • Poor fit with the organizational climate and culture
  • Poor alignment between pay and performance
  • Poor personal connections between the individual, their coworkers, and the supervisor

Put together a report that outlines the causes for attrition and ramp up the resources and incentives to help employees stay. Be sure to include information gathered from current employees during reviews about why they joined – and stayed on with – your company.

  1. Create an Employee Retention Program

Once you have compiled this data, you can begin working with executive leadership and managers to create objectives that address the causes of regretted attrition and reinforce programs and resources that encourage long-term loyalty. Set clear goals as an organization and make these individuals accountable for tangible results using the following four steps that incorporate best practices from high retention organizations, which influence feelings of “connectedness” for employees when they think about your business:

  • Make It Your Mission – Connect your retention program to the vision, mission, and values of your organization.
  • Iterate for Success – Conduct annual surveys asking for feedback on how the retention program is working and how it can be improved.
  • Include People Skills in Manager Evaluations – Incentivize managers and leadership to develop their teams.
  • Reinforce Values – Reward individuals that visibly behave in ways that reinforce values.

ABD Can Help You Retain the Best Talent

At ABD, we are in the business of helping organizations attract and retain the talent that is critical to helping them scale. If you have questions about how your benefits and compensation programs stack up against your competition, contact us today. We’ll work with you to understand your culture, growth plans, and budget to help you design the programs that can help you scale painlessly.

  1. “Calculating Turnover Rates.”

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