When an employee leaves a company, it generates costs that can impact the organisation’s efficiency and financial results. To accurately determine these costs, Professor Eric Flamholtz developed the Discounted Cash Flow (DCF) method[1]. In this article, we will present an analysis of the costs of employee turnover based on this method, taking into account compilations, examples, and tabular data.
- Recruitment and Selection Costs
When an employee leaves the company, it is necessary to find a replacement. The recruitment and selection process generates costs such as advertising, recruitment agency fees, time spent conducting interviews, and administrative costs associated with hiring a new employee[2].
- Training and Adaptation Costs
A newly hired employee must go through a training and adaptation process, which includes the costs of learning new skills, adapting to the new work environment, and achieving full productivity[3]. It is also worth considering the lost benefits resulting from the lack of full productivity of the new employee during the initial employment period.
- Lost Productivity Costs
The departure of an employee can affect the productivity of the remaining team members. Employees may have to take on additional responsibilities, which can reduce their efficiency and lead to overload and burnout[4]. Furthermore, the time needed to find and hire a new employee means that the position may remain vacant, which also affects productivity.
- Knowledge and Experience Loss Costs
Employees leaving the company take valuable knowledge and experience with them, which can be difficult to replace[5]. Costs related to knowledge loss include efficiency losses, communication problems, and the need to transfer knowledge to other team members.
- Customer and Business Contact Loss Costs
Employees who leave the company may also take important business contacts and clients with them, especially if they were responsible for serving key clients or maintaining relationships with business partners[6]. Losing such contacts can impact sales results and the company’s reputation.
- Morale and Team Engagement Impact Costs
Employee departure can also affect the morale and engagement of the remaining team members. In some cases, it may lead to a domino effect, where other employees also begin to consider leaving the company[7]. Increased staff turnover can lead to further costs related to recruitment, training, and adaptation of new employees.
Discounted Cash Flow Analysis
To account for all of the above costs, the Discounted Cash Flow method developed by Professor Eric Flamholtz can be used. This method is based on forecasting future costs associated with the loss of an employee and discounting them to present value, providing a complete picture of the costs[8].
Example: Company X lost an employee who earned £40,000 per year. Costs related to recruitment, training, and adaptation of a new employee amounted to £16,000. Loss of productivity, knowledge, and clients cost the company an additional £24,000. The impact on team morale and engagement contributed to further costs of £8,000.
The future value of costs associated with employee loss is therefore £48,000 (£16,000 + £24,000 + £8,000). To calculate the discounted value of these costs, a discount rate, e.g., 5%, can be used. Assuming that these costs are evenly distributed over a one-year period, the discounted value of costs is:
£48,000 / (1 + 0.05) = £45,714.29
Conclusion:
The costs of employee turnover are significant and include recruitment and selection costs, training and adaptation costs, lost productivity, knowledge and experience loss, customer and business contact loss, and the impact on team morale and engagement. Professor Eric Flamholtz’s Discounted Cash Flow method allows for an accurate determination of these costs by forecasting future costs and discounting them to present value. Understanding these costs can help companies make better decisions regarding human capital management, such as investing in talent retention programs, more effective onboarding, or developing motivational strategies.
Managing human capital is crucial for the success of any company, and understanding the costs associated with employee turnover can aid in optimising personnel management processes. Investments in retaining valuable employees and implementing effective recruitment and onboarding strategies are essential for maintaining competitiveness and achieving long-term success.
Sources:
- [1] Flamholtz, E. G. (1985). Human resource accounting: Advances in concepts, methods, and applications. San Francisco: Jossey-Bass.
- [2] https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/cost-per-hire-a-standard.aspx
- [3] https://www.gallup.com/workplace/236927/employee-turnover-costing.aspx
- [4] https://www.forbes.com/sites/forbescoachescouncil/2018/05/31/the-hidden-costs-of-employee-turnover/?sh=4d4c4eeb37a6
- [5] https://hbr.org/2016/09/why-do-employees-stay-a-clear-career-path-and-good-pay-for-starters
- [6] https://www.inc.com/guides/201102/5-ways-to-prevent-client-poaching.html
- [7] https://www.psychologytoday.com/us/blog/mind-the-manager/201306/new-employee-study-shows-recognition-matters-more-money
- [8] Flamholtz, E. G., & Lacey, J. M. (1981). Personnel management, human capital theory, and human resource accounting. Los Angeles: University of California, Graduate School of Management, Center for Human Resource Studies.
