What would your company be worth tomorrow if 100% of your employees quit today? Assuming the answer is “not much,” then you can appreciate how employees collectively comprise a HUGE asset that does not show up on your company balance sheet. To take this idea a step further, have you ever thought about how much your employees are worth in relation to the value of your business and what it would cost to lose them?
What is the cost of employee turnover?
According to an article in Gallup Business Journal, the U.S. Bureau of Labor Statistics has found that the U.S. voluntary turnover rate is 23.4% annually. In this article, it is estimated that replacing an employee costs a business 50% to 500% of that person’s annual salary. To illustrate, if 25% of your employees voluntarily leave and the average pay is $40,000, this article suggests it could cost a 10-person company somewhere between $50,000 and $500,000 each year to replace them.
An appropriate replacement cost percentage (50% to 500%) to use varies per employee and is dependent on such factors as: their position in the company, their importance as a leader or contributor, the potential risk of losing relationships with key clients and lost institutional knowledge. Additionally, there are hard costs incurred during the search/interview/selection process and soft costs associated with any negative impact to employees having to take on additional burden during the transition period.
Below is how to determine if you have a problem AND how to quantify the cost of voluntary employee turnover – to both annual earnings and company valuation:
STEP 1
The first step to solving any problem is admitting you have one. If you don’t have a problem with voluntary employee turnover, stop reading…
STEP 2
The second step is to quantify the actual financial impact that higher than desired voluntary turnover costs your company. Begin by listing the employees who left last year due to voluntary turnover and their base salary. Next, do your best to assess what percentage (50% on the low end and 500% on the high end) to multiply times their base salary as a proxy for a reasonable cost of replacement. After using an Excel spreadsheet and going through this process, what collective cost of turnover number did you come up with? For illustrative purposes, let’s continue the example above and say the cost of voluntary turnover per year for your 10-employee company ranges between $50,000 to $500,000.
STEP 3
Calculating the impact to your company’s valuation is the final step. To do this, multiply the value determined in STEP 2 by some earnings multiple. For small privately held companies, use a multiple of 4 to 6; which is a fair range for companies that are valued based Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). To extend the example above one step further, the negative impact to this company’s financial valuation ranges between $200,000 and $3,000,000.
How can you reduce voluntary employee turnover and increase company valuation?
What’s critical is to illustrate is that there is a HUGE opportunity for companies to invest time, effort and money to become more deliberate about dramatically shrinking the probability of voluntary employee turnover and reducing the associated costs. Doing so will increase annual earnings and company valuation.
Here are 3 quick tips to get you started:
- Effectively screen for potential to fit. Companies that focus on hiring employees who fit the company’s culture; can articulate why they believe in a company’s stated core values while demonstrating behaviors consistent with these values are more likely going to succeed in at your company than individuals who cannot. For example, if open and transparent communication is a stated core value, screen for this with each interviewee and look for signs of deception or lack of honesty.
- Develop an employee on-boarding program which means invest in systematically teaching new employees what actions, behaviors and beliefs are essential to becoming a valued member of your company team. The benefit of doing this is to ensure a company’s core values are maintained and not diluted through the ongoing process of turnover.
- Continue developing the team which means that every day, week or month is an opportunity to train-up everyone; while strengthening their commitment to company and each other.
The underlying principle of this message is undeniable; that developing a highly effective and functioning team will help any company become more profitable with less effort. Running this type of business is way more FUN too! Why not get started today…