Walking Assets: The Cost of Losing an Employee

Abstract

Today, many companies claim that employees are their most valuable asset. And yet, there is surprisingly little known about how much it hurts companies when those assets walk out the door. Most research on employee turnover has focused on its causes rather than on its consequences. Such focus has yielded some fruitful literature for HR management, but the impact of this employee behavior on organizational finances remains underdeveloped. Moreover, turnover has not been given the relevance it should by practitioners either. This is reflected by the lack of measures to quantify its costs, and that no item in company balances and budgets attempts to account for it. The issue of how much resources should be utilized in preventing turnover over other goals is thus still open. Ultimately, the answer to this question will assist managers in their strategic allocation of scarce organizational resources. To address this question, I will draw on learning curves literature to contribute to the existing research on the costs of turnover for the firm. Empirical evidence on the consequences of employee turnover is by and large based on very particular industries, concretely (a) health care and (b) lodging. These industries are very distinct for (a) is highly regulated, with a large public sector presence and complex revenue flows; and (b) is a highly seasonal industry with relatively low skilled personnel. It is this empirical gap that this paper addresses by providing data from a knowledge-intensive manufacturing firm, analyzed through turnover accounting models and learning curves literature. In particular, the focus will be on voluntary engineer turnover. Data was collected from company records and interviews with three key HR personnel and three engineer managers. The company under consideration had 340 engineers at the end of the period (2010-2011), and an average voluntary turnover rate of 3.24%. The results indicate that employee turnover is indeed a costly phenomenon, in line with findings in the health care sector. On average, the cost of an employee voluntarily leaving was found to be $41.549, and the total costs of voluntary engineer turnover for the firm were $914.074 over the 2-year period under consideration. The results are conservative estimates, since the impact of turnover on production and sales could not be quantified. Training accounted for approximately 19% of the overall costs, while hiring was 6%. By far the largest single item was the productivity loss ?the monetary value of the gap in productivity between the former and the new employee? accounting for approx. 73% of the total costs. For practitioners, the results suggest that most of the costs of losing an employee are intrinsic to the position. The