To budget turnover sounds counter-intuitive. During annual budget cycles, turnover is a predictable cost, and can be planned for just like other business expenses.
Resources and staff budgets cover cost of employee salaries and benefits – why not also budget for the cost of turnover.
A turnover budget is tightly also coupled with key-employee retention strategies.
Some, but not all, companies think ahead and budget for a reasonable recruiting expense. Progressive companies do this to ensure they are actively focused on building their bench-strength.
Typical turnover rates vary based on typical human resources metrics such as position type, pay grade and contribution level, as well as industry, market and demographic. Turnover is inevitable, and measurable. Most human resources leaders have some measure of this for your firm.
It stands to reason that if turnover is expected and typical turnover rates and cost factors exist, then budgeting for it is a reasonable planning step for companies to take.
How much should be budgeted for turnover? CBS Moneywatch writer Suzanne Lucas itemized the cost factors to include “productivity losses during training, recruiting [fees], and lost work while a position is vacant.” Your firm may have other costs to bear.
The cited article from the Center for American Progress suggests that position level and grade are a factor in that for jobs earning less than $50,000 per year (more than 40% of jobs in the US, the average cost of replacing an employee is 20% of the employee’s annual salary.
Lower paying jobs are generally less expensive to replace. Higher paying senior level jobs, are somewhat to significantly more expensive to replace. You can see the pattern here – which presents the opportunity to budget better.
For one’s own company, a simple framework for budgeting the cost to replace employees can be developed by adding up the general and unique costs, and planning for the turnover rate your company experiences.
Your simple turnover budget framework should produce a predictable budget number by summing the results of the following equation for each level/grade of employee:
( Turnover Rate % ) * ( Turnover Cost % ) * ( Average Salary ) = ( Turnover Budget for Grade-Level )
This planning step has three benefits.
- It prepares the firm for the cost due to the inevitable loss of employees.
- The framework can give insight to managers when considering the cost of retention in the case of an employee asking for a raise.
- Leaders can use the turnover budget as a metric for management performance in terms of retention and employee satisfaction relative to division or team productivity.
Items number 2 and 3, above, puts this budget exercise in the positive context. It helps understand the balance between retaining key employees by knowing that typical raises to satisfy need are less than the cost of turnover. And, it enables leadership to identify turnover costs per manager, group or division. It enables a metric for retention strategy performance in terms of real dollars other than productivity.
Barton Professional Placement Group has skilled advisors on staff prepared to discuss how understanding turnover costs is critical to managing your business. We are here to partner with clients with goals to achieve exceptional results through building teams hired one individuals at a time. Call us today.
