How much will it really cost to replace an employee?

This title on a report from one of those nationwide surveys in our local newspaper caught my eye: "Contractor's Wake-Up Call: Cost of Turnover." I rarely pay much attention to these surveys or polls because those conducting the research can get any result they wish by selecting the audience they survey.

There were several thought-provoking items in this article that I would like to share with you who are struggling to combat our critical craft shortage and migration of top management employees.

The Cost Of Turnover

At the top of the list is the cost of turnover, which very few contractors compute or analyze. Naturally contractors all know that it is expensive to find and train new employees, but they rarely put that cost in actual dollars. This survey was conducted with all types of service industries and quotes an average cost of $30,000 to replace one employee.

One of my clients and I estimated his replacement cost for a senior project manager at $80,000 - plus the ongoing salary and benefit increases of $25,000 per year. The tragic part of that story is they could have retained their project manager with a yearly increase of $12,000, which they thought they couldn't afford.

We will look at some of the factors that you need to consider as you analyze the potential costs of losing and replacing an employee. You should establish a reasonable impact cost with each employee in your office, as well as all of your jobsite and service staff. I'm sure some will remember my advice on how much you can afford to pay your employees. It is simply "the cost to replace them" - because that's what you will have to do if they leave.

On the brighter side, we will also look at some of the positive options that you should consider to keep your employees happy to be working for you. I'm sure you are all aware of the enticing job offers your employees are receiving from headhunters and your competitors.

You should also keep in mind that "cost to replace" with regard to any of your marginal employees, especially those who would be more valuable to your company if they quit and went to work for your competitor. You certainly don't even want to consider giving a counteroffer or a raise to an employee who is not earning what you are now paying him.

Let's look at some of the realistic cost factors that go into the turnover of a good employee:

  • Recruiting - Finding, interviewing and hiring a new employee can involve a lot of time and expense for you and your staff. Hopefully, your goodwill ambassadors (present and past employees) are out there spreading the word about your firm, extolling the "rewarding career opportunities" at the "best job in town" throughout your hiring radius. In addition to saving advertising costs or expensive fees to headhunters, your employees could also eliminate the need for background checks and soul-searching interviews. They will only recommend people they know and trust.

  • Orientation - Introducing a new employee to your existing staff, your method of operation, your company policies and your safety procedures (drug test, hazard communication, etc.) will also cost valuable company time and money.

  • Training - Possibly your biggest cost, depending on the position you are replacing, will be training, along with expensive learning curves. You must pay for "beginners' mistakes" that would not have occurred with your former employee.

  • Intangibles -Although it is difficult or almost impossible to estimate in actual dollars, you still need to consider how much you will lose with the absence of your former employee's rapport and relationship with your other employees, customers, suppliers, other trades, building officials, architects and engineers.

You must also weigh the loss of the relationship to you personally. Depending on the employee's personality and expertise, these intangible qualities can be very expensive and quite difficult to replace.

You might be thinking about the increase in wages, salaries or benefits as part of the turnover cost, but that possibly could have been all that you should have spent to prevent the turnover from occurring. Your former employee would have been very content and motivated with that wage package had it been initiated before he had any thought or intention of leaving. That's why the article was titled "Contractor's Wake-Up Call" - it's already too late when your disheartened employee musters up enough courage to come into your office and give you notice.

Eliminate The Negative

There are other strategies you can use to minimize turnover. Follow the advice from that old hit song from the 1940s and "accentuate the positive, eliminate the negative." Let's proceed in the reverse and begin by discussing the latter, since the negatives definitely lead to the majority of our turnover:

1. Never Break A Promise: You've heard me talk about the "old school," where a man was only as good as his word. Our industry is saturated with broken promises that are generally made by well-intentioned contractors or their supervisors, such as:

  • "We'll start you out at this low wage, but you'll get a raise after 90 days."

  • "You'll get a bonus if the job turns out OK."

  • "I'm sure you are worth more money, but I'll check it out when I get back to my office."

  • "The next new truck we buy will be yours."

  • "You will move up when we get another opening at the top."

  • "Just put it on your expense slip and the office will reimburse you."

  • "We review everyone's wages at the end of each year."

When you fail to honor any of these commitments, your word is no longer your bond. If you must make a promise to an employee, write it down and put that commitment in his file. This will prevent you from forgetting it. Even if you can't keep that promise, you need to go back to the employee and explain your circumstances. This will at least help honor your word.

2. Never criticize or discipline an employee in public. You should say anything good about your employee to as many people as possible. Say anything negative, disciplinary or critical only to him, and only in private. That is called respect, and you cannot have pride without it. How proud could any employee be if you did not respect him or show him respect in front of others?

3. Do not break the chain of command. It is always very embarrassing or demeaning for one of your supervisors to have his boss give order to one of his employees or discipline them for doing exactly what the supervisor told them to do. Likewise, the boss should not bypass the supervisor with an employee's complaint or give an employee a raise without his knowledge and approval.

Eliminating these negatives is very crucial but fortunately not very costly. You need to establish and abide by a written chain of command defining who can tell an employee what to do, as well as whom the employee should address questions. You cannot simply expect your supervisors to know or understand how to treat their employees. They must be taught!

Accentuate The Positive

Now that the major negatives to avoid have been defined, we can look at some positive options you can use to keep good employees from looking elsewhere:

    1. Keep Score. Anyone good wants to be measured and rewarded accordingly. You can use my "eight-for-eight daily scorecard" or simply pay on a piecework basis. Your good employees will not leave you for more money if they can control what they earn on your payroll.

    2. Offer flextime. Include flextime schedules as an option for all your employees, office and jobsite.

    3. Promote from within. Hiring at the top virtually locks the door for any good employee to advance without changing employers.

    4. Train your staff. Institute an after-hours training system and a skill/inventory database to provide every jobsite with pre-certified quality craftsmen.

    5. Furnish company vehicles. Your proud company men should have the option to take home a proud company truck.

    6. Provide a benefits plan. Offer your employees an attractive but reasonable benefit package including term life insurance and disability coverage.

    7. Open lines of communication. Create a convenient time to talk with each employee. Employees need to discuss their personal situations with someone, and often it's too late when they must come to you.

Hopefully this "wake-up call" will help you accept the fact that each of your employees is worth what it costs to replace them - before you ever need to replace them!