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How to Measure Employee Retention Costs

written by: ciel s cantoria•edited by: Linda Richter•updated: 2/27/2011

Understand why employers & HR managers need to know how to measure employee retention costs. Recruitment and hiring expenses are considered discretionary since they do not directly contribute to profitability & could even be a burden. This article explains how and why, by way of examples.

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    The Importance of Measuring Employee Retention Costs

    800px-FEMA - 24002 - Photograph by George Armstrong taken on 04-24-2006 in Mississippi 

    Savvy human resource managers have learned the importance of knowing how to measure employee retention costs. They have become well aware of the fact that a high rate of employee turnover creates additional and unnecessary expenses. Naturally, business profitability is highly burdened particularly if the company relies heavily on its workforce’s productivity.

    Determining the retention costs incurred provides the HR manager an indicator about the efficiency of the company’s hiring methods and employment policies. Bear in mind that these costs have to be recovered and that each new employee recruited is expected to contribute positively to the operations of the business.

    A comparison between the retention costs against the contributions expected from the employee can furnish the HR manager with a quantitative analysis of the efficiency or non-efficiency of their recruitment initiatives. The results of business operations are affected since the total recruitment and hiring costs have to be recovered by means of profit generation.

    The following sections provide explanations on how to measure employee retention costs as well as examples to illustrate their significance for business profitability.

    Image Credit: George Armstrong for Wikimedia Commons

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    Understanding the Required Input for Calculating Employee Retention Costs

    800px-FEMA - 25760 - Photograph by Keith Riggs taken on 08-17-2006 in Louisiana 

    It is quite important to have a clear perception of what is being measured, in order to arrive at the appropriate amount of expenditures to include in your calculations.

    Training costs refer to how much the company spent in recruiting and training new hires during a given period. This includes related expenditures to source, interview, orient, process and develop an applicant into becoming a productive member of the workforce.

    Turnover rate pertains to the number of workers that need to be replaced or those who left the company during a specific time period.

    Retention costs refer to the amount of money spent in a given period to retain a company’s new hires.

    In understanding all these, you can now comprehend the input you need in order to measure employee retention costs.

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    Illustrating How to Measure Employee Retention Costs

    To best illustrate how to calculate employee retention costs in a given period, a sample computation is presented below using the following givens:

    Recruitment Costs to hire a new Customer Sales Representative (CSR) = $1,200

    Training Costs to orient and coach a new CSR = $2,500

    Employer’s Monthly FUTA Contributions (EC) = Ave. Salary/mo. $1,500 x 7.65% = $114.75 per CSR

    Number of new CSRs recruited for the year = 30

    Number of new CSRs who separated during the year = 15

    Assumptions: Four new CSRs resigned after two months; four more resigned after 4 months and seven others resigned after 6 months.

    Objective: To determine the Retention Costs and Turnover Costs of New Customer Sales Representatives hired during the year:

    Step 1: Calculate the total training costs and employer’s expenses for new CSRs incurred during the year.

    Recruitment costs of CSRs = 30 x $1,200 = $36,000

    Training costs of CSRs = 30 x $2,500 = $75,000

    Total Recruitment and Training Costs = $111,000

    Step 2: Calculate Employer’s Contributions (EC) to FUTA for the 30 new CSRs during the year.

    4 resigned CSRs= 4 x (2 x $ 114.75) = 4 x $229.50 = $918

    4 resigned CSRs = 4 x (4 x $ 114.75) = 4 x $459 = $1,836

    7 resigned CSRs = 7 x (6 x $ 114.75) = 7 x $688.50 = $4, 819.50

    15 Active New CSRs = 15 x (9 x $ 114.75) = 15 x $1,032.75 = $15,491.25

    Step 3: Calculate percentage of CSR turnover during the year of recruitment:

    No. of resigned CSRs hired during the year of recruitment = 15

    No. of new CSRs hired during the year of recruitment = 30

    = 15/30 x 100%

    = 50%

    Turnover rate of new CSR hires = 50%

    Please proceed to the next page for the continuation of this section on how to measure employee retention costs.

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    Study our examples on how to measure retention costs by understanding the significance of recruitment and hiring expenditures. Our sample computations will provide a set of guidelines for calculating retention and turnover costs. Read on to learn the mechanics in this article by Bright Hub's Ciel S. Cantoria.
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    Illustrating How to Measure Employee Retention Costs (continuation)

    Step 4: Calculate the retention costs of new CSR recruits:

    Retention Costs = (Total Recruitment & Training Costs x 50%) + EC-FUTA of New CSRs

    = ($111,000 x 50%) + $15,491.25

    = $55,500 + $15,491.25

    = $70,991.25

    Retention Costs of new CSRs hired during the year= $70,991.25

    Step 5: Calculate the turnover costs incurred for recruitment and training of new hires:

    Turnover Costs = (Total Recruitment & Training Costs x 50%) + EC-FUTA of resigned new CSRs

    = ($111,000 x 50%) + ($918 + $1,836 + $4,819.50)

    = $55,500 + $7,573.50

    = $63,073.50

    Turnover Costs of New Hires during the year = $63,073.50

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    Measuring the Retention Costs of New Recruits: Appreciating the Significance

    BLS Quit Levels by Industry 2010 

    After calculating the retention costs and the turnover costs of the new CSRs recruited, it is apparent that there is still much to be desired from the results of the recruitment processes. Half of the new hirees did not stay on, but the amount of money spent for their recruitment and training was equivalent to those spent for those who stayed on. The significance may be pointed out by the following indicators:

    Comparing vs. Industry Standards

    Compare the company’s turnover rate for new CSRs against the Bureau of Labor Statistics (BLS) Quit Levels per industry. (Click-on on the screen-shot image of BLS’s table for this purpose, in order to have an enlarged view).

    You will note that the rates for Dec. 2009 and December 2010 for the Retail Trade both ended at 2.0% industry rate for turnovers.

    The 2.0% rate was explained as a percent of quitters over the total employment. Hence, assuming that our business example has 50 employees in all, the turnover rates for the new CSR recruit is 30%, which was computed as follows:

    15 resigned new CRS / 50 employees = 0.30 x 100% = 30%

    This denotes that as far as our business example is concerned, its new CSR hirees have a high rate of turnover if compared to industry standards.

    The next page furnish explanations on how to evaluate retention and turnover costs as part of our discussions on how to measure employee retention costs.

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    This page of our article on how to measure employee retention costs will show you the relationship between said expenses against the results of the business operations. New hires are required as part of business plans to increase sales projections -- and you must understand how retention and turnover costs are evaluated in terms of business profitability.
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    Evaluating Retention and Turnover Costs vs. Business Profitability

    Every customer service representative is considered essential to any retail trade industry, since each one provides a direct link between the business establishment and the customers. This is why a company, through its human resources department, invests well in their recruitment and training.

    The company’s financial analysts, on the other hand, make projections for increased sales based on the number of additional CSRs plus the costs of hiring. In our example, the analyst considers it reasonable to expect a monthly sales quota of $1,500 per CSR based on the $1,500 per month salary.

    • The required number of new CSRs during the year is an additional 30 sales recruits, hence the analyst makes projections for at least $45,000 (30 new CSRs x $1,500 sales quota) as the sales increment per month.
    • However, since only half of the new recruits stay on, an estimate of their projected contributions to increase the sales figures for the year is for $202,500 (15 CSRs x $1,500 x 9 months) only.
    • Take into consideration the retention costs of $70,991.25 plus the turnover cost of $63,073.50 created by the new hires who resign, the total recruitment and hiring costs to be recovered against sales increment, was $134,064.75.
    • Assuming that the new hires deliver the projected sales quota, and that the the company increases its sales at around $202,500 for the year, this indicates the HR depatment's accuracy in selecting at least half of the new hires. In hiring the fresh recruits, the ability to meet the projected quota denotes the effectiveness of HR's hiring program.
    • If the actual sales increment realized is less than the total retention and turnover costs, it means that the burden that the latter created is charged against the sales performance of the existing and older members of the sales force, thus creating a negative reflection on HR's recruitment and training programs.

    This now explains the importance of knowing how to measure employee retention costs as they can directly affect the profitability of the business.

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    References:

    By Holtom, Brooks C., Mitchell, Terence R., Lee, Thomas W. Increasing human and social capital by applying job embeddedness theory -- http://www.topmba.com/emba/increasing-human-and-social-capital-applying-job-embeddedness-theory