Employee turnover is an ongoing problem in the world of retail. It is typically measured incorrectly or, in most cases, inconsistently. Senior HR, operations and financial executives understand that poor employee hiring practices can negatively impact the bottom line. One of the most misunderstood metrics in HR is cost of turnover. Many companies measure turnover rates but few truly understand what it costs to replace an employee. The reason for the lack of visibility on this metric is because it is hard to measure.
The following is the framework to get you closer to understanding your cost of turnover.
Two cost buckets
There are two core buckets when evaluating the costs of employee turnover:
- Direct costs are highly measurable and take into account costs of technology, hiring manager time, staffing firm fees, assessment vendor costs. It can be broken down into three major costs:
- Separation costs – exit interview spend, and separation pay.
- Replacement costs – job advertising costs, assessment costs, and new employee administration.
- Training costs – formal and on the job training.
- Opportunity costs are caused by replacement of employees with a lack of experience. These costs are harder to measure because of a lack of systems to track these costs. Things you would measure include: the impact turnover has on customers and ultimately sales, inventory shrinkage, paperwork errors that affects other administration, inefficiencies on the store-level due to slow initial productivity and also the potential loss of customers. New employees are unlikely as successful at influencing the customer’s buying decision because of their lack of experience.
Industry insights
In 2000, Coca-Cola Retailing Research Council created a study on the retail grocery industry and found that the average annual turnover cost per store was $190,000. This number is believed to be north of $250,000 today. The report was focused on calculating the cost of store-level turnover and then provided ways of measuring the impact of turnover on individual stores and companies. Although the report was based on the grocery industry, Mindfield and retail industry professionals use this report as a benchmark to measure retail costs of turnover. The study found in a non-union environment that the total cost of turnover for a cashier was $2,286 and a union environment totaled $4,313. Turnover of store managers totaled $34,735.
Calculating your cost of turnover
Mindfield’s recommendation is to use this loose framework as a benchmark when calculating your cost of turnover. Based on the cost of turnover of a non-union cashier, the impact to you as a business could be the following:
Assumptions:
- We used an average turnover rate of 65%. This is on the lower end of the spectrum for large retail companies, and your organization may have higher turnover.
- We used the cashier role, which is lowest cost of turnover that was measured in 2000.
Mindfield finds that the cost of turnover for many organizations is now closer to $6000 to $7000 per employee and that is typically due to heavier training costs that drive direct costs up. This table is to give you an idea of what employee turnover costs could look like for your business size.
Conclusion
Mindfield believes that measuring your turnover percentage is as equally important as understanding how much turnover costs you. Understanding total cost of employee turnover is one of the first things we do at Mindfield to vet and identify the return on investment Mindfield solutions and strategies can offer our customers. The first step is to understand the cost of turnover and the next step is to understand your true cost of turnover.
Contact Mindfield today to learn how we can lower turnover and help you improve the quality of your hourly workforce, click here.
For the full Coca-Cola Retail Research Council study on ‘New Ideas for Retaining Store-Level Employees’, click here.