What is Cost of Turnover? Why do companies want to minimize it?

One of the biggest challenges for a company is ensuring that the employees they hire work there for a long time. Since companies spend huge amounts of resources and manpower on the hiring process, terms like turnover and attrition are used. In this article, we will talk about the former.

The cost of turnover is a very accurate metric that tells a lot about a workplace and its environment.  So, what is the cost of turnover and how is it calculated?

Cost of turnover 

The cost of turnover is defined as the amount of financial resources incurred by the company to replace an employee. The employees could have left the company for several reasons be it termination, or resignation owing to better opportunities. 

It is a great metric to determine the company’s working. A high cost of turnover is never good for a company as it means that a lot of employees leave the company soon after joining. This means that the attrition rate is high. Infact, turnover cost and attrition are usually paired to give a clear picture of the organization’s affairs.

Turnover cost also varies due to various things. This can range from how senior an employee is and how skilled he is. A good employee leaving can skyrocket the cost required to replace them.

Also Read: AI Bias Audit Strategies for Fair Hiring Practices

How to calculate the turnover cost

While there is no defined formula to cost of turnover, we can calculate the turnover rate that may give us rare insights. The best way to explain is however with real numbers. So, let’s take for example a company named X. So if 100 employees joined X at the start of the year this will be our base on which all future calculations will be done.

Now let’s say that ten employees left after the first month and a further ten the very next month and a further ten left the month after. So what was the turnover cost? For this let’s build a table to make things even easier.

Month	January	February	March
Original Employees	100	90	80
Employees that left	10	10	10
Total Present Employees	90	80	70

Taking data from the table, one way to calculate cost of turnover will be applied in the formula mentioned below:

          Total numbers of employee left       X  100

Total Present Employees/Number of months

So, using the above formula we can easily calculate that turnover rate.

                                                                 (10+10+10)            X          100  = 33%

                                                                 (100+90+80)/3

A 33 per cent turnover rate automatically means a very high cost of turnover. However, most of the time companies generally prefer to calculate this on an annual or biannual basis. 

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How does cost of turnover impact companies 

Companies always focus on increasing profit and reducing operational costs. However, replacing an employee is a cost that is largely unavoidable. If the hiring is not good enough, these costs will only spiral up. So, what is its impact?

Low morale work environment 

A high turnover rate is just not limited to employees who left but also who are still at the company. When a lot of employees leave the company it automatically makes the other employees anxious. It also ensures that employees cannot form strong bonds that can lead to better teamwork which in the long run will affect the efficiency of the workplace.

Stress for existing employees 

If employees leave an organization at a rapid pace, it also means that the work that was assigned to them is then shifted to the existing employees. This means that employees now have far more work to deal with. This means their work-life balance is also disturbed which can lead them to leave the organization which means even more work for the now existing employees.

Leads to downsizing

As mentioned earlier, replacing an employee puts a great financial burden on the organization. And if the company cannot get control over the issues the costs can get so high that it can force the company to downsize to reduce costs. This not only leads to decrease in the revenue that an organization can earn but also means that hikes may be less or minimal further deteriorating the morale of the employees.

Also Read: What is Gender Bias in Hiring? Solutions to Prevent it

How to control cost of turnover 

Now that we have mentioned that the cost of turnover is very bad for the company, how do we ensure it stays minimal? 

Ensure there is no toxic work culture 

One of the major reasons why employees leave a company is due to the toxic work culture. A place where employees are stressed is not a good sign for the company in the long run. So, ensuring that the work culture of a company fosters positivity will motivate employees. This means that they will be even more dedicated to their work massively increasing the efficiency of the workplace.

Conduct individual sessions with employees 

A great way to improve the environment of any company is to make the employees feel that their work, opinion is valued. Thus, conducting individual sessions with employees where they can be asked to share their opinions. Doing so encourages employees to be frank about the issues affecting them.

Reward benefits to employees 

Rewarding benefits to an employee is a sure shot way to to not only improve employee retention but to also attract better employees in the future. Employees who work hard in the end expect a pay raise or promotion or both. While it is not possible for every employee to get their due raises, those working hard or who are adept at their job should be given their fair share to ensure their retention.

Also Read: Unlock the Power of Your Workforce: How to Optimize Your HR Tech Stack

Use AI tools like BarRaiser 

One of the best ways to ensure the growth of an organization is to hire the right talent. However, good hiring is easier said than done. It is where companies can take advantage of our AI-powered video interview platform.

Our tool includes AI Interview Copilot which gives the interviewer real time suggestions while conducting an interview. This includes asking the appropriate questions to ensure that the interview is smooth.

We provide various services such as interview as a service for companies who don’t have the resources to train their staff on our platform. However, for companies that do have the manpower we provide interviewer training where we will fully train that recruiters on our software to ensure they are fully equipped to use it in a real-time interview.

Our structured interviews will help an organization conduct quick and quality hiring that promotes diversity and inclusion. Using BarRaiser will help organizations eliminate hiring bias and have the best crop of employees that take their workplace to new heights.