Human Capital & Careers

A Costly Revolving Door

If your company's employee turnover rate is soaring, you may just have to start answering to your shareholders about it.
Kris FrieswickOctober 1, 2000

If your company’s employee turnover rate is soaring, you may just have to start answering to your shareholders about it. A new study claims that employee turnover replacement costs have had a dramatic impact on company stock price, especially in high-turnover industries such as specialty retail, call- center services, high-tech, and fast food.

Earnings and stock prices were depressed an average 38 percent as a result of turnover costs, according to the study by Sibson & Co., a consulting firm in Princeton, N.J. The expenses tallied to compute turnover costs included recruiting costs, advertising, headhunter costs, the cost of training a replacement, and the cost of processing out the departing employee.

The survey determined the effect on the stock by subtracting the industrywide turnover costs from earnings, then recomputing the industry’s market capitalization based on accepted multiples for that industry.

“Most companies don’t know or underestimate their turnover costs,” says Jim Kochanski, a principal at Sibson. He adds that many companies fail to target their turnover efforts toward employee groups that are expensive to replace–for instance, a high-tech or revenue-generating employee, such as a salesperson–and apply one-size-fits-all strategies to all employees.

A more specialized retention approach is being used at Booz, Allen & Hamilton Inc., a privately held management and technology consulting firm based in McLean, Va. Chief administrative officer Sam Strickland says the company currently has a turnover rate in the “mid-teens.” He’s not sure what turnover is costing his company, but intuitively, management is aware that it’s “a lot of money,” he says. After surveying employees, the firm quadrupled its training and development budget and created clear benchmark standards that, once achieved, automatically qualify nonmanagement personnel for promotion.

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