Impact of Total Employee Compensation on Corporate Profitability
Profitability depends on increasing revenue, decreasing expenses, or both. Whether in good times or bad, decreasing expenses is always a good thing to do – unless it affects the quality of what you offer or your ability to sufficiently reward the people that make your company successful.
To compensate for company budget shortfalls, some executives choose to over-focus on saving pennies on things like single-ply toilet paper, eliminating employee lunches, charging employees for coffee, and so on; or, fixate on large, often counterproductive measures such as a less attractive health care plan. Typically, the greatest costs are associated with employees, and an understanding of employee turnover costs can be a revelation.
The Costs of Turnover
Company turnover costs don’t need to be hard to pin down, even though most employers have never taken the time to calculate the true cost of replacing a worker. These costs can be deceptive, but they are significant and avoidable. How significant? Anywhere between 25% and 100% of an employee’s annual salary!
Let’s look at the costs of turnover, which we can break into two categories: the costs associated with an employee leaving the company and the costs of replacing that employee. Of course, both sets of costs are incurred when an employee is replaced.
When an employee leaves a company expenses may include:
- the cost of performing exit interviews, changing passwords, etc.;
- severance pay and benefits;
- lost revenue due to lost productivity in the time when one employee is leaving and the other is being hired, trained and coming up to speed; and,
- clients lost due to continuity issues when an account manager leaves.
New employee acquisition costs can include:
- costs of using an internal or external recruiter;
- costs of ad placement for the job opening;
- cost of the new employee’s time for any interviewing process;
- cost of staff time to perform interviews;
- costs that are incurred when performing background checks;
- any inherent bonuses, compensations or other hidden administrative costs;
- costs associated with training new hires; and,
- the cost of carrying new hires while they are going through the training process.
There are also significant hidden costs, such as the intangible effects of stress a short staff puts on other workers and the loss of company knowledge.
All of this assumes the employee works out. A significant number of employees leave after only a few months, either because they receive a better offer (possibly from a job they were pursuing when they found you), they don’t like the company culture, they don’t like the work, or you don’t like them or their work.
How to Reduce Turnover
Often the best way to increase profits is to reduce turnover. Solve your turnover issues by focusing on sustaining a healthy company culture. Happy, productive workers are your most valuable assets. And let’s not forget the brand-value of happy workers saying good things in a community of peers and associates.
To reduce turnover, you want to examine exactly why employees are not happy – and then fix it.
- Are they feeling overworked?
- Is the work environment unsatisfying?
- Do they not fully appreciate their total compensation?
The first two may involve some surveying and internal soul searching. The last one is a problem easily solved by today’s inexpensive, online total compensation reporting solutions.
The Striking Value of Total Employee Compensation Statements
The tool that most effectively reduces turnover is . A good solution will provide a simple, one-page, graphic display of each employee’s total compensation, including everything from salaries to the cost benefit of free parking. Many employees are pleasantly surprised to learn how much their benefits add to their total compensation. This helps them be less likely to leave for salary or benefit reasons, and has them feeling more valued.
Reduced turnover always means higher on-going profits. Sustainable growth means stabilizing your workforce to cultivate steadily-increasing employee value as they become experts in the field and in their positions. To this end, don’t underestimate the value of total employee compensation statements. Consider this business advantage today.
