Want Managers To Focus On Retention? — Show Them The $ Impacts Of Turnover

Almost everyone in talent management agrees that managers don’t place enough emphasis on employee retention, despite the fact that retention is often ranked as the No. 1 people-management problem. In fact, according to a recent PayScale survey, “63 percent of employers consider retention a top priority” (where five years ago, only 20 percent believed retention was as important).

One of the factors restricting a firm’s ability to reduce turnover is that few managers are willing to invest the required time in resolving the employee turnover problem. Through my research and corporate retention work, I have found this lack of manager interest is a direct result of managers severely underestimating the business impacts on their own team as a result of a key turnover. Talent management leadership indirectly contributes to the problem because they seem unaware that many individual managers are primarily driven by a somewhat selfish focus on their own business success and the monetary rewards that come with it. And as a result …

Individual managers do not fully know the quantified bottom line and the personal impacts of turnover, and until they do, they will never pay sufficient attention to retention.

Show Your Managers the 27 Real Business and Personal Consequences of Turnover

One of the reasons that managers underestimate the cost of turnover is because most HR professionals mistakenly focus only on the transactional costs related to hiring a replacement employee. This is a huge mistake because, for key jobs, hiring costs may be as low as 20 percent of the total costs of turnover. So if you want to garner your individual manager’s attention and get them focused on retention, begin working closely with the CFO’s office to quantify in dollars the actual negative business and personal impacts in each of the following impact areas.

Google found that the top 10 percent of its workforce produced 90 percent of the value.

Impact category A — The top 12 negative business impacts before the replacement starts

Calculate the average cost of each business impact factor in dollars and then present it to your managers.

  • Lost productivity when the position is vacant — during every day that the position is vacant, most of the important work simply won’t get done. Or if you require employees to do double duty, that overload work will lower the quality of the work, it will increase errors and accidents, and stress your workers. If you need to hire temporary replacements or use overtime, you must include those added budget costs in your cost of turnover calculations. In addition, calculate the lost productivity when an employee develops a “short-timer” attitude. Productivity goes down because an employee who is already decided to leave is unlikely to do much work for weeks, and they will also likely be absent frequently once they have “mentally left the position.”
  • Negative customer impacts — customers will certainly notice when “customer-impact” positions are vacant. And if they get no service or weak service, sales and customer satisfaction will also decrease. In cases where a single salesperson is assigned to a customer, you may even lose that customer because competitor salespeople inevitably move in when they hear of the vacancy.
  • Negative team impacts — if a strong team environment exists, the loss of a single key member will disrupt team cohesiveness. If the individual was a leader, the chances for lower team confusion and lost productivity increase dramatically. Having a key employee leave might cause others on the team to begin considering if they should use this departure (a break in the dike) as a signal that they should also leave. This sudden uncertainty will likely add to team disruption and additional turnover. If the negative productivity, customer, and team impacts are significant enough, they will reduce the manager’s business results in the short term.
  • Lost innovation and ideas and the loss of secrets — obviously when the position is vacant, no new ideas will be generated. And, the departing employee will take their ideas and company secrets with them. If they go to a competitor, those ideas and secrets will benefit another firm. As a result, double your turnover cost calculation when a key employee goes to a direct competitor (you can usually find where an employee went on LinkedIn).
  • The loss of potential leaders  if the departing individual was a leader or if they had leadership potential, that capability will obviously be lost. Losing potential leaders will reduce a manager’s internal candidate pool for promotions. Indirectly, it may reduce a manager’s own promotability because they won’t be able to move up until there is a suitable internal replacement.
  • Turnover requires additional management time — the inevitable confusion that occurs right before an employee’s departure and during the time when the position is vacant will require a great deal of the manager’s time and attention. Filling out the termination paperwork, exit interviews, and meeting with HR will also take up a manager’s time. There will also be a significant opportunity cost because the manager could be working on higher ROI areas if they didn’t have to be working on resolving position vacancy issues.
  • Lost revenue — in cases where the turnover happens to be in a revenue-generating or revenue impact position. The amount of revenue generated in this position could go to zero every day the position is open. If a temporary replacement worker fills in, their lack of experience and knowledge will undoubtedly result in a reduced revenue stream.
  • Slowed product development – if the departing individual was involved in product development, time to market will be significantly slowed. In some cases, the new product or service may be lost.
  • Others may follow — if you’re losing an admired key employee, they may take between three and five individuals with them. Even though there may be a delay of several months, add the cost of those additional employee departures to the total cost of losing the initial employee.
  • Other companies will raid your team — when a team loses a well-known individual, recruiters from other firms will take note. And that may cause aggressive poaching activity which will disrupt your team and it may result in the loss of one or two additional employees.
  • Lost diversity — if the departing employee is a member of a diverse group that is a significant part of your customer base. You may suffer a measurable decrease in sales and customer satisfaction, in addition to a reduction in diverse ideas.
  • The cost of accrued vacation — when a long-term employee leaves, there is a real one-time cost when they cash out their accrued vacation or personal leave. In most cases, those costs will come out of their manager’s budget.

Impact category B — The top five impacts that will be felt by individual managers 

if you want to get complete manager buy in, individual managers should realize that there will be some negative personal impacts as a result of their turnover. So, calculate the average cost of each of these personal impact factors in dollars and then present it to your managers.

  • Reduced business results — the loss of the talent and the lost contribution from the departing top employee talent will directly reduce business results. Those factors coupled with the days that the position is completely vacant and the likelihood of hiring a weaker replacement will likely result in a dramatic reduction in a manager’s business results. Even in a team of eight, losing a single top-performing employee can result in a huge decrease in business results. 

Google found that the top 10 percent of its workforce produced 90 percent of the value

  • Reduced pay and bonuses — obviously, if an individual manager suffers from reduced business results as a result of turnover, they will likely receive lower performance appraisal and forced ranking scores. This may directly reduce a manager’s bonus percentage and stock opportunities. It may also jeopardize upcoming pay raises.
  • Reduced chances for promotion and opportunities — losing key employees is something that certainly will be noticed by your superiors. That coupled with your poor business results may limit a manager’s chance for promotion. Excessive turnover may also cause a manager to be branded as a “C-level” manager. And this may limit opportunities for new internal projects, assignments, and opportunities.
  • More work and higher stress levels for managers — having to produce results without top performing employees. That coupled with the arduous task of replacing them with equal or better-performing employees will require a manager to put in many more work hours. It will also increase a manager’s stress levels, making their work less enjoyable.
  • A feeling of helplessness and frustration — we now know that successfully solving turnover issues requires a data-driven and personalized approach. Unfortunately, most managers rely on their intuition and retention approaches that are applied across the board. And as a result, many managers feel helpless when nothing that they try seems to work. Some even revert to the mentality of “everyone has turnover and there is nothing that can be done about it.” And unfortunately, HR also fails to use a data-driven approach, so they provide little help in reducing manager frustration related to turnover.

Impact category C — The top 10 impacts and costs related to hiring a replacement

If a manager loses a performer, the odds are that their new hire will be weaker in many aspects. And a weaker replacement hire will cost an individual manager and their team in many important areas including:

  • The new hire may perform at a lower level — in a tight job market, it is quite difficult to replace a top performer with another one. So, if the replacement hire performs at a 10 percent to 20 percent lower level of performance, the manager and the team will have to suffer that lower performance for multiple years (as long as the employee stays). You can get a rough idea of that dollar cost by multiplying the percentage that the performance is reduced by the average yearly revenue per employee (which can be found for most firms on MarketWatch.com). Lower-performing new hires will also need a significant amount of costly coaching and support by team members and the manager. If the new hire has lower skills and capability, obviously, the team itself will be less capable. If the new hire is a complete disaster, the damage that they cause and the cost of having to refill the position again must be included in the turnover calculations.
  • Manager time required in hiring the replacement  the cost of the time that a manager must put into filling the position must be included in the turnover calculations.
  • Higher salary costs — external new hires typically cost at least 20 percent more in salary because the best candidates are bid on by several companies. These higher salary costs will likely continue on for several years. New hires in a hot job market may also require starting bonuses and relocation costs.
  • Recruiting and hiring costs — obviously, the out-of-pocket cost of recruiting a replacement needs to be calculated. Part of those hiring costs should include the time that your employees devote to making referrals, screening, and interviewing. If relocation is involved, those costs should also be included.
  • Losing key employees will weaken your team’s culture — the loss of a single key employee and their replacement by another new employee with different values will dilute your team’s culture that you worked so hard to build. Rebuilding your team’s culture after a key employee leaves is even harder if the replacement hire is effective at influencing others to try their own new cultural values.
  • Onboarding costs — the cost of onboarding a new employee can be significant. But the cost associated with the new hires lower productivity and errors during their break-in period maybe even higher (the difference between a new hire’s full pay and their actual lower performance level are known as “lost salary dollars”). Initial training costs must also be included in the cost of the new hire.
  • A reduced leadership pool — even if the manager hires quality replacements, it may be years before any of them can assume leadership positions. With weak replacement hires, you permanently reduce your potential leadership pool within your team. And the cost of those reduced leadership capabilities should be calculated.
  • The negative impacts of turnover on future hiring — when you lose a single top employee or when your overall turnover rate is high, the word spreads. When others see your repeated job openings, it may negatively impact your ability to attract top candidates for many months to come.
  • Legal issues increase  an employee leaving increases the risks of future legal issues down the road. Similar legal issues are also likely to occur whenever you are hiring to refill the position. And if you end up with a weak replacement hire, you need to include the costs of increased complaints and performance management.
  • The position might never be filled — in today’s tight job market, the fact that the position might never be filled needs to be considered and calculated.

Understand the Tremendous Impact That Individual Managers Have on Retention

It might sound corny at first, but the phrase “show me the money” is literally the answer to getting individual managers to set aside enough time to focus on retention.

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There are three reasons why individual managers must be fully involved in retention.

The first is because I have found that a manager’s actions (or lack of action) impact as many as 75 percent of the underlying causes of top employee turnover. A second reason is that because the manager has the closest relationship with their employees, they are best able to identify key employees who are likely to leave. And third, most of the levers, tools, or approaches that can be applied to prevent a “flight-risk” top employee from leaving rely heavily on the individual employee’s manager for execution and success. In fact, data reveals that of all influencing factors, individual managers have the highest impact on retention, productivity, and successful hiring.

Final Thoughts

Unfortunately, most individual managers are not aware of the many negative impacts resulting from losing even a single key employee. The cost of losing a top performer can exceed 10 times their salary! And to make matters worse, quantifying the business impacts of people-management problems is simply outside the competency of most HR functions. As a result, talent management leaders should work directly with the COO’s office to identify all of the possible negative impacts. And then talent leaders must work with the CFO’s office in order to quantify those negative business impacts on the team and the manager in dollars.

Finally, reiterate that after 20+ years of experience in retention, I have found nothing that comes close to getting individual managers’ committed to retention than directly presenting to them the tremendous negative dollar impacts that they will suffer when they lose even a single key employee. It’s really just that simple: “show them the money” and how much turnover is costing each individual manager. Once the individual managers are fully committed, they can and will handle the rest.

About the Author

Dr. John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business impact; strategic Talent Management solutions. He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on www.ERE.Net. He lives in Pacifica, California.

  • http://www.PeopleAssessments.com Tom Janz

    John works his trademark magic by coming up with an exhausting list of 27 business impacts of turnover, broken conveniently into three categories. But perhaps the lamentable lack of focus on turnover lies with HR failing to drive the impacts to a clear investment proposal. “Dear C-Team, if you spend time and treasure on A,B, and C you will see a reduction in negative business impacts on (pick your poison from the 27), resulting in an EBIDA increase of X, with a breakeven at Y months.” Just whining about dollars out the door doesn’t cut it. “So what are we supposed to do?”— executives rightfully ask. Few HR leaders relish putting their career on the line over investment proposals that may not pan out. Some do, and kudos to them.

    Beyond that, there is the reality that John doesn’t discuss. Turnover can add EBIDA, depending on the performance value of those departing vs. the performance value of those who replace them. (Remember that Google quote about 90% of the value from 10% of the workforce). Given the much larger leverage for that net business impact, it should get more attention. But getting serious about performance value estimation requires science. Not rocket science, but people science. If you don’t have that expertise (I/O Psychology plus talent analytics), Googling it won’t help. The net impact of turnover depends on two drivers— the sourcing and selection power at the time of hire vs. the time of replacement. See– http://peopleassessments.com/when-turnover-boosts-the-bottom-line/ for details. Sourcing power depends on labor market conditions but selection power depends on replacing the wildly popular worst practices found in hiring systems. You know the ones: (1) subjective, biased resume sorts and interviews (2) the myth of behavioral interviewing, (3) science-free personality testing, (4) boring, repetitive, ability tests that look nothing like the job and cause over 90% of top talent to click out, particularly on mobile. How do you fix those? Coming soon, but I have gone on too long already.

  • Andrew Marritt

    Very good article and comprehensive list.

    What’s important to recognise is that all of these are relatively easy to estimate with supporting data. We tend to do it for the average performer and then use multiples to adjust each performance grade. It’s easy to over-engineer the calculation but getting to ‘good enough’ generally is relatively simple. We get finance to agree that the assumptions are realistic (i.e. conservative). This really helps getting acceptance.

    From a technical perspective this type of work is called building a ‘loss function’ and we believe it’s essential to any analysis work. In fact your analytics team doesn’t have to be very large before it makes sense to have someone just building loss functions for each challenge. It can quite easily take as much time to build the function as building the model.

    I wrote a bit about it here: http://www.organizationview.com/2016/09/14/the-greatest-mistake-for-many-in-people-analytics/

    In terms of Tom’s comments my only caution is that most hiring managers are over-estimate their ability to make a good hire (and they are more likely to show their hires as good as it reflects their capability in recruitment).