Labor is a cost. That is a well-understood statement by anyone who is a businessperson or is an employee. But what truly are the costs associated with employing people?
What are the costs associated with the loss of an employee? These questions are often asked but are rarely tracked. The old idiom, “You cannot manage what you do not measure” comes to mind.
Let’s sift through Figure 1.
The left axis shows economic value starting with cost at the lower end, and as you move up it shifts to greater value to an organization. The bottom axis is time. When employees start working, regardless of their experiences or skills, they come at a cost to the organization. As time progresses, employees know their job better and better, and their value to the organization increases. At some point, they cross over the line dividing cost from value – the point where they are a net loss compared to their compensation package.
As they improve and get to know the team, the value they bring to an organization increases. The red arrow is an injection point. Something happens to increase engagement or motivation and the employee becomes additionally productive, and this results in more value to the organization. I like to think about this as similar to starting 3X-milking from 2X. The added expense of milking time and dry matter intake causes increased milk production over and above the expense. The organization does something for the employee and gets something in return. It is an investment that yields more than the cost. As time progresses, the value of the employee to an organization increases.
This all sounds good and quite simple. It just takes time; what could possibly go wrong?
Well, turnover is a large problem for many organizations, and it keeps the organization and employees in the cost zone and not in the value zone.
Additionally, businesses must make an investment in their organization and people to move their employees out of the cost zone and into the value zone. Interestingly enough, nearly every employee wants to move into the value zone. They just need their leaders to lead them through the zones.
Let’s dive into turnover. Turnover is typically highest with unskilled labor and is most expensive with more skilled labor or management. Many studies show that turnover costs are thousands of dollars per employee and typically are 1.5 – 2 times the employee’s annual wages. Most businesses run a 30% to 50% turnover rate, and dairies often run a turnover rate of 100% or more. I have worked with clients with 150% to 200% annual turnover due to the churning of the milking technician role.
A formula for determining your annual turnover is: The number of employees who left in a calendar year divided by the total number of employees for the organization to be fully staffed. You can also take the total number of W-2s sent out divided by number of employees. This is your turnover percentage. It is a number that should be tracked monthly. To determine the cost of turnover, use this formula: cost of hiring plus cost of onboarding plus cost of training and development plus cost of lost productivity and/or errors, then multiply this by the turnover rate times the employee count.
Let’s look at an example:
A 3,000-cow dairy employs 30 full-time employees on a regular basis. They have one person quit every month on average. 1 x 12 = 12, 12/30 x 100% = 40% annual turnover. Cost of hiring (recruiting, office time, paperwork, etc.) = $1,500. Cost of onboarding (training, paperwork, inefficient worker) = $2,000. Cost of training and development (over 1-2 years) = $5,000. Cost of lost productivity and/or errors (lost milk, less efficiency, death loss, increased illness, increased or unnecessary repairs, etc.) = $10,000. Total = $18,500. (This is well below one times the annual milking technician salary, so very conservative).
The annual cost to the organization is $18,500 x (30 x 0.4) = $222,000 per year in turnover costs. That number may be shocking to you, and you may be calling me out on it. No problem. Put your own figures into the formula and your own turnover rate and see what it is. Remember, you cannot manage what you do not measure.
How do we address the employee churn and move from cost to value?
One way is to know your turnover rate and understand what might be affecting it. What are your recruiting and hiring practices like? Are you hiring, what I call, the right people for the right seat? What is your onboarding program? Up to 60% of employees who leave in the first 60 to 90 days leave due to poor onboarding. The next largest reason employees leave, provided their base pay meets their basic human needs, is career development and opportunity. Are you training your staff? Are you continuously improving their skills? Do they understand why what they do is important to you and to your business? Do they see opportunity for where their career might go? If the answer to any or all of these is no, then the chance an employee will leave for a monetary increase in pay that may seem insignificant to you is large. What other opportunity do they see that you don’t?
Productivity losses are associated with employees who are either disengaged or unengaged. Studies show that two-thirds of our workforce fits into one of those two categories. The cost of this to your organization is huge. Decide which area mentioned is most important for you to fix, and focus on it. Results often take time, so stick with it.
As we move to more and more specialized or skilled labor due to the increasing capability of robots and other automation, the focus on retaining employees becomes of even larger importance. Will you employ skilled labor to service and maintain new equipment or its software, or will you hire it out? Either way, someone or some business must take the hiring, onboarding and development of their employees seriously. If you outsource services, then you are captive to them for their ability to hire, train and retain quality service techs to maintain your new investment. If you are hiring, then this responsibility falls to your organization. Either way, these highly qualified people will need to be well cared for.
The point is, people are an appreciating asset if you care for them well. They will continue to move up the value scale for your organization. They come at a cost of payroll and benefits, but the value they bring in teamwork, knowledge of the ins and outs of your business, and productivity far outweigh the costs you have put into them. The longer they are engaged employees, the higher value they bring and the larger the loss when they leave or are poached. Studies show the cost to keep an employee is far less than the cost of turnover. You cannot avoid the cost; you do get to determine which cost you incur – the cost of turnover or investment in people.
References omitted but are available upon request by sending an email to an editor.
