Calculate Total Cost of Turnover

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When management thinks of workforce costs, wages and salary are what come to their mind. However, they only capture a fraction of the organization's total workforce expenses each year. Other workforce expenses that management should care about include benefits, health insurances, payroll tax and contingent workforce cost to name a few.

And it's not that management doesn't care about the workforce and workforce cost. 

 

A recent survey found that almost 40% of companies are consistently discussing human capital matters at every board meeting. It's because they don't have a reliable methodology to monitor how much the organization is spending each year on recruiting, training and developing talents or what sort of impact these investments are bringing to the organization.

It's up to HR and Finance to help organizations start measuring, tracking and benchmarking their Total Cost of Workforce or TCOW. In the following, we’ll tell you everything you need to know about this metric, how to calculate it and how to use it to make data-driven workforce decisions.

  1.  Why bothering with turnover

  2.  How much turnover really cost your business

  3.  How to calculate your cost of Turnover

  4.  Cost of turnover best practices

  5.  Additional Resources

Calculating Cost of Turnover

Have Questions?

Why Bothering with Turnover

Total Cost of Turnover generally has some directly measurable or "hard" costs that negatively
impact the organization, but many costs or impacts typically associated with turnover are difficult to
quantify for most organizations.

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Total Cost of Workforce

How Much Turnover Really Cost Your Business

With workforce cost can be as much as 70% of the organization's total expenses, it doesn't take a lot of persuasion to co convince why management should care about TCOW. Another big reason is that workforce cost is projected to increase steadily in the next decade. Before COVID-19 took place, the overall 2020 salary budget was projected to grow by 3.3% according to SHRM.

 

Many other factors are also pushing up workforce cost. Here are the top workforce trends that companies need to keep track of:

  • Climbing minimum wage - Many states are slowly rolling out their $15/hour minimum wage and companies need to stay on top of this to maintain their bottom line margin.

  • Rising workforce costEven before the new minimum wage took place, workforce costs are already on an upward trajectory in recent years, especially for highly-skilled positions (i.e. cybersecurity analyst and software engineer) or skills that are in high demand (i.e. Python, RN nurses and analytics translator.)

  • Demand for more transparency in human capital management - More institutional investors and activist groups are demanding for more transparency around how companies are managing their workforce such as workforce cost, pay equality and diversity.

How to Calculate Your Cost of Turnover

TCOW or Total Cost of Workforce is the sum of the total costs of the workforce and includes all compensation costs, benefit costs, and other employee costs. 

 

Data required to calculate Cost of Turnover can be found in the Human Resources Information System (HRIS), Applicant Tracking System and Finance database.

Turnover Analytics Best Practices

Measuring The Organization's Total Cost of Turnover

Total Cost of Turnover is best used or optimized as a fully agreed upon cost to the business that can then be used as a leading or predictive indicator in combination with employee dimensions around critical job role, performance level, employee engagement level and productivity.

 

When it is used with such dimensions, Total Cost of Turnover can be leveraged to enable proactive planning as part of managing the total cost of the workforce, future planning via workforce planning and total talent management.

Example 2: Benchmarking TCOW Against Competitors

A simple benchmark comparison against closely matched competitors can provide a lot of insights into your workforce cost.

 

For example, the below company's TCOW as a percentage of Expense is almost 63% and TCOW as a percentage of Revenue is around 35%. The percentages are high but it makes sense since this is a Financial Services company. They help management better understand their bottom line margin but beg for the next question: how are they doing versus peers?

 

When putting them against competitors of similar sized and geographical location, it's clear that the company has higher TCOW as a percentage of both Revenue and Expense. The good news is that while they're behind their peers, they're not that far off. Also, all the competitors are very close to each other so no company has a real competitive advantage edge over the rest.

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Total Cost of Workforce

Want to See How Your Organization Can Benefit from TCOW?