In today’s competitive business landscape, organisations are increasingly recognising the importance of effective Human Resources (HR) practices, not only for fostering a positive workplace culture but also for enhancing financial performance. One critical area where good HR practices can lead to substantial cost savings is in recruitment and staff turnover. Here, we explore how reducing staff turnover can directly benefit a company’s bottom line by calculating the actual cost of recruiting.
Understanding the cost of staff turnover
Consider a company with a workforce of 200 employees and an annual staff turnover rate of 5%. This implies that the organisation needs to recruit about 10 new employees each year, even if overall employee numbers remain stable. The direct and indirect costs associated with this turnover can be significant.
Direct costs
- Recruitment agency fees: If the company opts to use a recruitment agency, the cost is typically around 15% of the annual salary of the new hires. Assuming an average salary of R350,000 per year, the calculation would be: Agency fees = 10 employees×R350,000×0.15 = R525,000.
- Pre-employment checks: The cost for background checks and other pre-employment assessments averages R500 per candidate. Therefore: Pre-employment checks = 10×R500 = R5,000.
These result in a total direct cost of R530,000 or R53,000 per employee hired.
Note: We have not considered further pre-employment checks and psychometric assessments. These will be dealt with in a later article, but would incur even more direct costs.
Indirect costs
In addition to the direct costs, there are several indirect costs that must be accounted for:
- Recruiting time: HR and management typically spend hours reviewing resumes, conducting interviews and selecting candidates. Assuming the same average salary above and eight hours spent for each position to be filled (not unrealistic given the back and forth and time for HR and management), the effective cost would be 8*350,000/12/173.36*10 = R13,500. Although this could be seen as a sunk cost because HR and management are employed, it also means they cannot use this same time to be doing more constructive operational work.
- Training and induction: New employees usually require training and orientation to get up to speed. This can easily cost around R20,000 per new hire, resulting in: Training costs =10×R20,000 = R200,000.
- Lost productivity: New employees often take about six months to reach full productivity. If we conservatively estimate their productivity loss at 50% of their salary during this period, the calculation would be: Lost productivity = 10×(R350,000×0.5)×0.5 = R875,000.
- Exit process costs: The time and resources spent on the exit process for departing employees can also be significant, particularly where the departure involves some form of disciplinary process. For the purposes of this analysis we shall assume they are incidental, but where it is a difficult process this could be substantial in the form of management and HR time, CCMA awards, mutual termination awards, external chairperson and consulting costs etc.
These indirect costs would amount to approximately R1,188,500 or let’s say R120,000 per employee hired.
Total cost of turnover
Summing up all of these costs gives us the total cost associated with a 5% turnover rate of R173,000 per employee.
The impact of reducing turnover
Now, let’s examine the potential savings if the organisation successfully reduces its turnover rate from 5% to 3%. This would mean only needing to recruit 6 new employees per year instead of 10. This results in a saving for the year of 4*173,000 = R692,000.
So what is the point?
Many employers will intuitively understand the costs we have highlighted above. Yet, very, very few employers track staff turnover ratios and even less have targets to aim at or programmes in place to save costs. Speak to HRTorQue today on how we can help you improve your staff turnover and start saving you money.