14 May A Guide to Adopting a Costing Model for Turnover
Because some ramifications of turnover are more difficult to measure than others, it is advisable to focus on data points that are measurable, indisputable, and relevant to operations in your company when performing an analysis. To adopt an effective cost model, analyze the aspects that are most compelling – this will also increase the odds of gaining buy-in.
It is more important for a turnover cost model to have support from leadership than it is for it to be all-encompassing. Plus, when considering the amount of time and effort it might take to produce the broadest possible cost model, most organizations find it is too resource-intensive. Instead of attempting to analyze every minute details or over-simplifying the process, or, a “middle of the road” approach is often effective for the majority of employers.
Factors to Consider
To begin costing turnover, start by gathering a cross-functional team. The team should include HR professionals with responsibilities in talent acquisition, compensation, and HR business partners. It will also be helpful to include someone from finance, and if possible, the CFO. Additional team members could include affected department heads, executives, and operations employees.
After developing your team, the next step is to determine the data points to analyze. Consider the following categories:
- Separation cost: exit interviews, administrative costs, and separation pay
- Acquisition cost: advertising, travel, interviews, assessments, background checks, sign-on bonuses, employee referral bonuses, and relocation
- Placement costs: agency fees, onboarding, training
This list is not exhaustive, but it may serve as a good starting point. Again, it is best to consider the data points most relevant to your organization.
Once you have chosen which data points to analyze, gather the relevant position and company information, including:
- The position’s annual average total cash compensation and benefits
- All positions’ annual average total cash compensation and benefits
- The projected number of exits this year in the position
- Annual revenue
- Number of full-time employees (FTEs)
Additionally, you can look at historical data to determine lost productivity, including the number of days for which the position is typically vacant, and the anticipated days an employee will need to become productive in the role.
Limitations to Costing Models
Every cost model will have its limitations, since accounting for 100% of costs typically is not feasible. Trying to account for every dollar may reach a point of diminishing returns. The objective of identifying the real costs of turnover should be to have executive agreement.
If you manage your cost model properly, company leadership should be able to look at it and realize you’ve actually been conservative in your calculations of the financial impact of employee turnover. It will then serve as a baseline your company can use for developing the most impactful retention strategies possible.
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