Eng Mgt 6113

Advanced Personnel Management

(Strategic Human Resource Management & Measurement)

The High Cost of Employee

Separations
David G. Spurlock, Ph.D., Instructor
 Statistics on employee turnover

Loosely speaking, turnover is often equated

to separations or quit rate
Varies widely by industry and occupation
and experience level
Also affected dramatically by general
economic conditions and overall labor
market conditions
Statistics cited in opening pages of Ch. 4
range from 9% to 63%
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 Statistics on employee turnover

Ceteris paribus, one would like to have less

turnover than ones competitors as turnover is
associated with some costly inefficiencies
BUT must consider costs & benefits of
programs to reduce turnover
This chapter (4) addresses ways to do these
calculations so that decisions regarding
turnover can be made in a more
sophisticated way instead of by simple-
minded rule of thumb
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 The logic of employee turnover
Some more precise definitions:
Turnover includes both separations and
acquisitions but is mostly precisely associated
with replacing a specific separation with a
specific acquisition
Both separations & acquisitions are external
movements of employees
Internal movements within the organizations
boundary would include transfers & promotions
(and, of course, demotions, though this last type
is relatively rare)
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 The logic of employee turnover
Some more precise definitions (contd):
External movements can derive from
several situations
Pure growth (acquisitions only)
Pure reductions (separations only)
Any combination of growth & reductions including the
most common situation: steady state that includes
normal acquisitions & separations
Normal could be considered the nominal base-rate
when the organization has neither special hiring nor
downsizing programs in place
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 The logic of employee turnover
Decisions about movement of employees
involves 3 quantifiable parameters
Quantity of movers
Quality (strategic value) of movers
Costs of movement (both acquisitions &
separations)

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 The logic of employee turnover
Two main ideas:
Results of movement decisions
expressed through quality, quantity, &
cost
Consequences of decisions depend upon
interactions of separations & acquisitions
Fig. 4-2 shows (somewhat vaguely) the
interactions of acquisitions & separations

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 The logic of employee turnover
Much of the logic of this chapter derives
from the application of inventory
optimization principles widely used to
manage inventory of physical goods
Inventory depletion rate in a
warehouse is logically equivalent to the
turnover rate of employees

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 The logic of employee turnover
Just as in other business areas, there are
transaction costs associated with hiring and
terminating employees so those costs are the focus
of this chapter
There are a few basic distinctions we should clarify
before getting into the actual calculations:
Voluntary vs Involuntary turnover
Functional vs Dysfunctional turnover
Pivotal talent pools vs nonpivotal talent pools

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 The logic of employee turnover
Voluntary turnover results from an employee
choosing to resign (aka voluntary quits, which
may involve many reasons beyond the control of the
employer (e.g., spouse gets job in different city)
Involuntary turnover spans a wider range of subtypes
For-cause dismissals
Expiration of employment contract without renewal
Permanent layoff
Retirement (in cases where retirement is mandatory where
it isnt, retirement could be considered voluntary)
Death (or disability that prevents continued functioning)

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 The logic of employee turnover
Functional vs dysfunctional turnover
Turnover is Functional when the resulting difference in
workforce value is positive and sufficient to offset the
associated transaction costs
Turnover is Dysfunctional when the resulting difference
is workforce value is either negative or such a small
positive difference that it does NOT offset the
transaction costs
Pivotal talent pools
Where small changes in the quantity or quality of the
talent make the biggest difference in strategically
important outcomes
Sales brokers (pivotal) vs fast-food cashiers (nonpivotal)
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 The logic of employee turnover
Table 4-1 lists 28 cost elements grouped into 4 broad
categories and associates each with one or more
type of turnover
Separations costs (9 cost elements)
Replacement costs (9 cost elements)
Training costs (3 cost elements)
Lost productivity (7 cost elements)
Obviously, some of these cost elements are more
relevant in particular jobs & organizations than others
Some cost elements are more easily measured than
others

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 The logic of employee turnover
Focus of remainder of chapter is on
voluntary quits and for-cause dismissals
although layoffs have many of the same
features as for-cause dismissals
Authors claim on p. 87 that for-cause
dismissals and voluntary quits are by far
the more prevalent but please be aware
that it varies by industry (e.g., defense
contractors have been known for decades to
be layoff prone)
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 The logic of employee turnover
Layoffs can be very costly and can have
effects beyond the short-term obvious costs of
separation pay
Long-term consequences can include
Lower productivity & morale among survivors
Backlash from clients/customers
Increased voluntary separations before, during,
and after layoffs
Best people may quit because they are the ones who
can most easily get jobs elsewhere when they perceive
the ship to be sinking
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 How to compute turnover rates

X 100
Typical US monthly rate is 1.5% = 18% per year
One study found correlation between
unemployment rate and turnover rates to be (-.84)
for the period 1945-1976
Total cost of one employee separation often
around 150% of departing employees salary
Varies by industry & job but can typically range from
93% to 250% of salary
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 Separation costs
Simple formulas for 4 major factors in Fig. 4-3
Some subtle considerations involved in certain
factors like the unemployment tax
Text mentions cost of (possibly) reduced productivity
but often this is going to be context specific and well
defer consideration until later in chapter
It is of course up to the organizational management
to decide where in the overall scheme of cost
calculations to include lost productivity, if at all

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 Hypothetical example from text
Example of annual separation costs from
hypothetical Wee Care Childrens Hospital
Example with actual numbers is instructive but note
the assumptions in several places
Note the relative proportion of the overall costs
associated with each of the 4 major cost elements
When constructing analyses & measures like this it is useful
to consider cost of measurement & sensitivity analysis
as errors/variations in, say, separation pay costs are going
to be much more important overall than errors/variation in,
say, exit interview costs

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 Replacement costs
Formulas for Replacement costs are given in Fig.
4-4
Example from the Wee Care Childrens Hospital
shows how to do those calculations for the 8 or so
cost elements for a one-year period
Note again the relative size of the annual costs of
each element
Clearly moving expenses are by far the biggest expense
(roughly 85% of total replacement costs) with R1 Job
availability communications coming in a distant second

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 Training costs
Training cost element formulas are shown in Fig.
4-5 and are calculated for the Wee Care example
Note that costs of reduced productivity are not
included here but could be very important, perhaps
as much as 2 or 3 times what the actual calculated
costs are (potential productivity gains of new
employees should be considered also)
Note the aside about liftouts when stars depart and
take other supporting players with them common in
mergers & acquisitions but Ive seen it in layoff situations as
well
Also note that the 3 main training cost elements are
relatively close in magnitude for Wee Care, unlike in the
other categories
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Performance, productivity, & lost business cost
impacts
Difference in performance (DP) computed as a sum
over all turnover instances of differences of
compa-ratios of leavers and replacements
multiplied by mid-point of pay grades
Compa-ratios are ratio of ones pay to mid-
point of pay grade and typically range from .8 to 1.2
in many organizations (some have narrower ranges
and some have wider ranges)

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Performance, productivity, & lost business cost
impacts
Compa-ratios matter most for perfectly competitive
markets (typically entry-level) where there is little
firm-specific human capital
In imperfect labor markets (most non-entry level jobs),
value to present employer may include firm-specific
knowledge while potential wages paid by other competitors
may reflect only generic value what another employer
would pay that worker ,which is often equivalent essentially
to the opportunity cost of the workers second best
employment opportunity (i.e., the best opportunity besides
the present employment)

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Performance, productivity, & lost business cost
impacts
Some assumptions about linearity of excess
value/wages paid relationship discussed
Example calculations worked out for Wee Care
and the authors then sum those four items
(separation costs, replacement costs, training
costs, & DP costs) to arrive at a grand total cost of
turnover for the year at Wee Care of about $3.5
million or about $12k per employee who left the
hospital

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Performance, productivity, & lost business cost
impacts
Text also concludes this example with discussion of
seven other productivity & lost business factors
that could be potential costs
Note mention of study that used this sort of approach
to evaluate effectiveness of pay-for-performance
compensation plans when compared with an equal
pay plan
Study discussed in text concluded that pay-for-
performance was worth the cost because it
encouraged more quits by poor performers and fewer
quits by good performers
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 Process
Text discusses some example cases in real
organizations that reveal how prior assumptions
about turnover factors were shown to be wrong
or misleading when subjected to careful analysis
Superior Energy Services
Thrivent Financial
Wawa, Inc.
Extended comments about SAS (extremely well-run
firm that is routinely listed among best places to work
in US)

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END OF SLIDE SET

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