The costs to employers of labour turnover

Author: Neil Rankin

This section of the IRS guide to labour turnover 2007/08 focuses on the financial impact of labour turnover. It shows how the costs of labour turnover can be calculated, and gives the latest national figures. It concludes with some examples of named employers' labour turnover costs.

Key points

  • The financial impact of labour turnover on employers can be significant, yet many organisations fail to calculate it.
  • Employers often limit their calculation of labour turnover costs to their expenditure on recruiting replacement staff. However, the true costs include additional factors, such as providing cover for vacant posts, inducting and training replacement staff, and experiencing a drop in sales, customer care and profits while leavers' replacements attain full proficiency.
  • The national average replacement cost was £3,600 per person in 2005.

How to calculate the costs of labour turnover

The calculation of the costs associated with labour turnover depends on some fundamental administrative systems being in place to ensure that labour turnover rates and recruitment activities are monitored. In IRS's experience, many organisations have not yet reached this point.

Once such systems are operating, the HR department can identify the number of leavers and the cost per head to recruit a member of staff. By linking these two elements, it can produce a rough estimate of the financial impact of labour turnover.

The potential to refine these calculations is almost endless. Labour turnover does not necessarily lead to a recruitment need - a post may be abolished or restructured, for example - so the cost could be linked to instances of turnover where recruitment is involved. Turnover will also vary by such factors as job/role, grade and location, and it may be more or less expensive to replace a leaver according to such variables.

Turnover costs can also be refined by going beyond the simple calculation of recruitment expenditure.

Calculations can take account of any use of temporary staff or overtime payments for existing members of staff to cover a vacant post while it is being filled. The costs of inducting and training the leaver's replacement can also be added in.

The financial impact of labour turnover can also be felt through reduced productivity, lost sales, poorer customer service and other business factors.

However, it is usually difficult to ascertain costs for these measures. It will be easiest to do so where the role that falls vacant is already covered by a framework of targets and measurements that lend themselves to this purpose, such as much call center work and sales activities.

To sum up, the costs of labour turnover could potentially encompass the following major cost heads:

Leaver's costs

  • Administration time and costs when someone leaves, eg amending payroll and pension records, updating personnel records and supplying references to new employers.

The cost of replacing the leaver

  • Recruitment advertising.
  • Fees paid to an employment agency or headhunter for putting forward the recruit.
  • Fees paid to test providers for any psychometric tests used in selection.
  • The costs of other recruitment and selection methods.
  • Selectors' time in shortlisting, interviewing and appointing replacements.
  • Induction costs.
  • Training costs for the replacement member of staff.

Transition costs

  • The cost of temporary staff or agency temps to cover the vacant post.
  • Overtime payments paid to existing staff to provide cover.
  • Lost sales.
  • Reduced output or productivity in general.
  • Reduced customer care levels.

As well as producing global figures, these costs could be broken down by the major categories of most significance to the organisation concerned, such as grade (management; support staff; front-line staff, etc), role (sales; back-office, etc) and location.

Statistics on the costs of labour turnover

The best regular source of information on labour turnover costs is provided by the annual Recruitment, Retention and Turnover survey from the Chartered Institute of Personnel and Development (CIPD).

Its report covering labour turnover costs and statistics for the 2006 calendar year is due for publication in June 2007. In the meantime, the 2006 survey is available, and its findings relating to the costs of labour turnover are shown in table 1.

According to the CIPD, the average cost of replacing a leaver is £3,600. However, this average conceals considerable variations in replacement costs. At one extreme, according to the survey, are the costs associated with replacing manual and craftworkers (only £500 per head). At the other end of the spectrum, and 16 times higher, are the costs of replacing senior managers and directors (£8,000 per person).

It should be noted that the figures quoted in the previous paragraph involve no more than direct replacement costs - the expense of recruiting a member of staff to fill the vacancy created by the leaver. Labour turnover usually inflicts considerably higher costs on employers than simply those associated with recruitment. These could include the cost of arranging cover while a vacancy is being filled, and the induction and training of those recruited to replace leavers.

However, very few employers calculate labour turnover costs in this broader, but more accurate, way. For example, only 21 employers gave the CIPD actual labour turnover costs compared with 297 that provided more limited data on direct replacement (recruitment) figures. The small sample represented by the former means that its average gross labour turnover cost can only be tentative. At £8,200, it is two-and-a-quarter times higher than the £3,600 found to be the direct cost of recruiting a leaver's replacement.

Some examples of the financial impact of labour turnover

Here are some real-life examples of the impact of labour turnover costs, which might help to give some meaning to the figures quoted in the previous section.

The Compass Group is a major provider of workplace vending and catering facilities, and has a worldwide workforce of some 400,000 people, according to a profile in Personnel Today. As part of the business case to improve its employer brand, the company calculated that just "a 1% reduction in the annual staff turnover of 40% would save £16 million".

Hospitality and catering businesses, such as Compass, operate in a notoriously high labour turnover climate, and have a strong incentive to quantify and manage their staff wastage. At the Mandarin Oriental Hyde Park hotel in London, according to Caterer and Hotelkeeper magazine, the company has been able to save an estimated £250,000 a year from the cost of inducting and training replacement members of staff by making inroads into its 60% labour turnover rate. The savings have come from reducing the 60% average turnover to just 12% in the food and beverage department and 15% in its kitchens.

The same Personnel Today article that profiled the Compass Group (cited above) also highlights the success of Getty Images, a supplier of photographic and film images, in achieving cost savings through improved retention. To enhance its employer brand, Getty Images consulted its staff and senior managers, and developed a range of interlocking initiatives to address the issues raised by their feedback. These included improved communications and recognition processes, a new leadership development programme and an "overhauled" reward system. The changes have helped to reduce its labour turnover by more than one-third (37%), saving £500,000 a year.

The call center industry shares a reputation with hospitality as a high-turnover sector. In IRS's study of recruitment and retention in call centers, we profiled the Glasgow call center of the Student Loans Company, the organisation providing government-subsidised loans to higher education students. The company's exacting staffing requirements mean that recruits take around one year to be fully effective, with the result that it has attached a price tag of almost £5,000 to the cost of labour turnover in respect of each of its leavers. Its efforts to reduce staff attrition have focused on improving the quality of its selection decisions. It identified the key competencies for call center roles through an in-depth research project, and then built these into a redesigned application form. These changes have helped to reduce labour turnover from 40% to 25% a year.

In financial services, the Genome project of the Nationwide Building Society is becoming well known. In IRS's report on the project in November 2005, we noted that the society's analysis of the links between employee commitment and organisational effectiveness has quantified the financial impact of staff retention. The company told us that increasing the average length of service across the organisation by one year would raise the value derived from its mortgage sales by £5.6 million.

Our research

The information in this IRS guide to labour turnover rates is based on a large-scale review of published information about retention and attrition rates conducted by Neil Rankin, drawing on additional research by Sheila Attwood and Sarah Welfare. It also draws on feedback from HR managers obtained by IRS staff and IRS's own survey of labour turnover rates conducted in November 2006.

Table 1: The costs of labour turnover

Very few employers were able to give the CIPD estimates of the broader costs associated with replacing a leaver, so this table also shows its larger-scale findings about basic recruitment costs.
Occupational group Costs of recruitment1 Costs of labour turnover2
Senior managers/directors £8,000 £12,000
Managers/professionals £5,000 £12,500
Administrative, secretarial and technical £2,000 £2,000
Services (customer, personal, protective and sales) £1,000 £9,000
Manual/craft workers £500 £2,000
All employees £3,600 £8,200

1. Recruitment costs: advertising costs and agency or search fees.

2. Labour turnover costs: vacancy cover, redundancy costs, recruitment and selection costs, training and induction costs.

Median costs per head in 2005.

n = 297 (recruitment costs) and 21 (labour turnover costs).

Source: Recruitment, Retention and Turnover, on Chartered Institute of Personnel and Development website, 2006.