Employee turnover: the good, the bad, and the ugly

It is a common truism in Human Resources that labor turnover is generally bad news for a given company and that management must take precautionary measures to reduce it, or at least to keep it under control.

When there is market demand for the services performed by an employee that leaves a company, the latter finds itself with unforeseen expenses to qualify, source, hire, and “onboard” a suitable replacement.

Aside from being out-of-pocket, which is directly reflected in the balance sheet, the wound is usually deeper than that. There are hidden costs, linked to the loss of business in the area that the former employee was presumably contributing to, during both the period in which the position is open and the time it takes to accommodate the new employee and retrain him or her to reach the peak level of productivity of their predecessor. These hidden costs may also be traced back to the loss of knowledge that may leave a gap and affect other employees in the department and hinder cooperation and so forth.  These indirect costs are hard to properly quantify, but typically dwarf the direct accounting costs that are immediately felt in the cash flow statements. Estimates of the impact taken from literature range from 25% to 200% of the departing employee’s annual compensation, with the figure probably being industry or even business dependent.