Written by: Tim Saumier, CEO
I received a number of emails regarding January’s write-up on a “best-in-class” company called Danaher. You can read can find this blog by “clicking here” in case you missed it. One of the emails I received was from a TYGES friend who is also a former Danaher leader himself. I’m taking some editorial rights with his response to keep it short and to the point but I wanted to capture the essence of his note:
“Good thought put into this one. Yes, Danaher does try to continue to build bench strength throughout the organization. They actually have a CVD (Core Value Driver) to measure voluntary turnover (people leaving the organization that Danaher didn’t want them to leave). Larry Culp helped develop these CVDs before he left to help filter out the most important metrics for the organization. Tom Joyce (Culp’s replacement) helped develop the new Vision for the company “Helping Realize Life’s Potential”. This is fantastic when you break each word down to understand how powerful it is. Of course there are tradeoff’s as the DBS culture pushes people and it is difficult to find the quality of life balance.”
So as we think about the cost of talent, how do we get the attention of senior leadership within a company to try and understand the “Opportunity Cost” of having an opening. I scoured the internet as I’m sure there are a number of people who have built financial models that show this number. I read quite a few articles but found this one excerpt from an article written in April 2015 by Karlyn Borysenko who states:
“But regardless of the reason, what this information exposes is a fundamental lack of understanding about what turnover really costs an organization. When you consider all of the costs associated with employee turnover – including interviewing, hiring, training, reduced productivity, lost opportunity costs, etc. – here’s what it really costs an organization.”
- Entry-Level Employees – it costs between 30-50 percent of their annual salary to replace them.
- Mid-Level Employees – it costs upwards of 150 percent of their annual salary to replace them.
- High-Level or Highly Specialized Employees – you’re looking at 400 percent of their annual salary.
Let’s look at it this way and play a game called “Fun With Math.” For the a simple example, let’s assume that a business loses 12 employees in one year, averaging one per month.
- Six of these employees were entry level, with an average salary of $40,000. It costs, on average, $16,000 to replace each employee at 40 percent of their annual salary, for $96,000 total
- Four of these employees were mid-level, with an average salary of $80,000. It costs, on average, $120,000 to replace each employee at 150 percent of their annual salary, for $480,000 total.
- Two of these employees were senior, with an average salary of $120,000. At 400 percent of their annual salary to replace them, you’re looking at almost $1 million, specifically $960,000.
Add everything up and you’re looking at costs of over $1.5 million to replace just 12 employees.
Numbers seem high? Fair enough – there are organizations that estimate replacement costs to be lower. So let’s cut the cost of replacing all of those employees to the lower end of what it costs to replace an entry-level employee – 30 percent – across the board. Here’s how it breaks down:
- It’s going to cost your company $72,000 to replace the six entry-level employees.
- It’s going to cost your company $96,000 to replace your four mid-level employees.
- It’s going to cost your company $72,000 to replace the two senior employees.
That means that at the absolute lowest estimated end of the spectrum – your best case scenario – you are looking at almost $250,000 as the cost of the turnover of just 12 employees.
If your company has a quarter of a million dollars that it can just light on fire at the next office BBQ social activity, then maybe you don’t really need to invest in these areas. But my guess is that the vast majority of companies are simply not in that position. It costs less to retain than it does to replace.
You can argue with the math or even the thought process but one thing I’ve learned is once a position is “officially” opened it’s already too late and mark my words when I say this: You cannot replace the person who left with a new person at the same rate especially if you’re looking for the best talent. The concept of “internal equity” is a joke. We need to be thinking “market rate” at this point. The best talent cost’s more.
This is just one man’s opinion. I would appreciate your feedback. You can find me on LinkedIn and at Twitter you can find me at @timsaumierTI. Also, you can learn more about TYGES at www.TYGES.com, on Twitter @TYGESInt, or here on our blog.
Our mission is simple:
We’re here to make good things happen to other people.