The Costs of Lost Productivity and Lost Business

It is useful in most business cases to include the costs of lost productivity and lost business in the fully loaded cost of employee turnover, if it is possible to tally such costs accurately. Seven additional cost elements might be included, as follows:

1. The cost of additional overtime to cover the vacancy (wages + benefits × number of hours of overtime) 


2. The cost of additional temporary help (wages + benefits × hours paid) 


3. Wages and benefits saved due to the vacancy (these are subtracted from the overall tally of turnover costs) 


4. The cost of reduced productivity while the new employee is learning the job (wages + benefits × length of the learning period × percentage reduction in productivity) 


5. The cost of lost productive time due to low morale of remaining employees (esti- mated as aggregate time lost per day of the work group × wages + benefits of a single employee × number of days) 


6. The cost of lost customers, sales, and profits due to the departure (estimated num- ber of customers × gross profit lost per customer × profit margin in percent) 


7. Cost of additional (related) employee departures (if one additional employee leaves, the cost equals the total per-person cost of turnover) .

In terms of analytics, one final caution is in order: Don’t be misled by variability across departments or business units that are based on small numbers. After all, if a six-person department loses two employees, that’s a 33 percent turnover rate. The dangers associated with generalizing from small samples that are not representative of the larger population they are designed to represent. In the case of small-sample turnover statistics, to make the sample more representative, it might make sense to segment employee turnover into broader categories that include larger numbers of employees. 
Remember, the purpose of measuring turnover costs and using analytical strategies to reveal their implications is to improve managerial decision-making.

Consider a brief example of one such an analysis. Based on the model shown in Figure 1, the researchers developed an analytical model that captured the value associated with employee separations (turnover) and acquisitions (hires) over a four-year period. Their model estimated three components in each time period: 


▪Movement costs: The costs associated with employee separations and acquisitions 


▪Service costs: The pay, benefits, and associated expenses required to support the 
workforce 


▪Service value: The value of the goods and service produced by the workforce. 


Then they estimated the dollar-valued implications of three different pay plans (equal pay increases plus two types of pay-for-performance plans) and of the subsequent separation and acquisition patterns over the four years. They did so by subtracting the movement costs and service costs from the service value. In short, they subtracted each pay plan’s costs from its benefits. 
Traditional compensation-cost analysis suggested that a strong link between pay and performance would be unwise, given its extreme cost. When the potential benefits of 
 workforce value were accounted for, however, a different conclusion emerged.

By fully incorporating both costs and benefits into their model, the researchers showed that even under the most conservative assumptions, pay-for-performance was a valuable investment, with potentially very high payoffs for the firm, in part because it caused poor performers to leave more often and good performers to leave less often. This reinforces a point we made at the beginning of the chapter: Turnover is only one part of a family of external moves. Adopting a broader perspective is a wise strategy indeed.

Figure 1: Annual Opportunity Savings from Lower Employee Turnover among Programmers: SAS Versus the Software Industry

INVESTING IN PEOPLE, SECOND EDITION: Financial Impact of Human Resource Initiatives by Wayne Cascio & John Boudreau


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