No matter which business leader you talk to nowadays, one consensus prevails: talent is hard to acquire and even harder to retain. With numerous opportunities available to skilled professionals, employers must clearly communicate their vision and employer brand. For Chief Financial Officers (CFOs) and Chief People Officers (CPOs), accurately accounting for employee turnover costs is crucial for effective budget planning.

People leaders often feel like they're trying to sell a fire extinguisher to someone who has never seen a fire. Convincing others of the importance of retention strategies and employer branding is challenging when the risks and costs of employee turnover aren't immediately visible.

This article aims to help people leaders assess the true cost of losing employees and prepare for discussions with CFOs. By understanding the return on investment (ROI) of retention measures and implementing effective countermeasures, organizations can justify their budget requests and reduce the high costs associated with employee turnover.

Understanding the Damage of Attrition

Calculating Total Attrition 

Total Damage = Cost per Replacement x Number of Estimated Replacements per year

1. Calculating the Cost per Replacement

The Fully Loaded Cost of Replacement encompasses all direct and indirect expenses associated with replacing an employee. This comprehensive view ensures that organizations account for every aspect of the replacement process, beyond the obvious costs like recruitment fees and training expenses.

Below is a detailed breakdown of the key cost components involved in replacing an employee:

Total Fully Loaded Cost of Replacement: Approximately €26,100 - €52,500 per hire.

For our calculations, we'll use an average cost of €30,000 per replacement.

2. Estimating the Number of Replacements

The second part of the equation involves estimating the number of replacements you expect:

Number of Replacements = Total Headcount x Expected Attrition Rate x Replacement Rate

Example:

• Total Headcount: 300 employees

• Expected Attrition Rate: 20%

• Replacement Rate: 80%

Calculations:

• Expected Terminations: 300 employees * 20% = 60 employees

• Expected Replacements: 60 employees * 80% = 48 employees

3. Calculating the Total Damage

Total Damage = € 30,000 x 48 employees = €1,440,000

Assessing the Impact of Your Measures

Now, let's assume you've prepared a set of retention measures and require a budget to implement them. You estimate that these measures will reduce your attrition damage by 25%. Since the exact impact is hard to measure, it's practical to work with scenarios:

• Best Case: 30% reduction in attrition damage

• Expected Case: 25% reduction

• Worst Case: 10% reduction

Calculating Potential Savings:

• Status Quo Damage: €1,440,000

• Best Case Damage: €1,440,000 * (1 - 30%) = €1,008,000

• Expected Case Damage: €1,440,000 * (1 - 25%) = €1,080,000

• Worst Case Damage: €1,440,000 * (1 - 10%) = €1,296,000

Savings Under Each Scenario:

• Best Case Savings: €1,440,000 - €1,008,000 = €432,000

• Expected Case Savings: €1,440,000 - €1,080,000 = €360,000

• Worst Case Savings: €1,440,000 - €1,296,000 = €144,000

Summary Table:

Calculating the ROI—Comparing Costs vs. Benefits

To justify the budget for your retention measures, you need to calculate the Return on Investment (ROI).

1. Determine the Cost of Retention Measures

Assume the set of retention initiatives you're proposing will cost €100,000 to implement.

2. Calculate the ROI Under Each Scenario

Best Case Scenario:

• Savings: €432,000

• ROI: (€432,000 - €100,000) / €100,000 = 3.32 or 332%

Expected Case Scenario:

• Savings: €360,000

• ROI: (€360,000 - €100,000) / €100,000 = 2.6 or 260%

Worst Case Scenario:

• Savings: €144,000

• ROI: (€144,000 - €100,000) / €100,000 = 0.44 or 44%

Interpreting the Results

Even in the worst-case scenario, the ROI is positive, indicating that the retention measures are a worthwhile investment. In the expected and best-case scenarios, the ROI is substantial, showcasing significant financial benefits.

We have set up an Excel template which facilitates this calculation for you. All you have to do is hit up michael@cartha.de and ask him to send it.

Conclusion

By quantifying the cost of employee turnover and the potential savings from retention measures, people leaders can present a compelling case to CFOs. This approach transforms the abstract concept of employee retention into concrete numbers—much like demonstrating the value of a fire extinguisher by showing the potential cost of a fire.

Implementing effective retention strategies not only saves money but also enhances organizational stability, boosts employee morale, and increases productivity. Investing in your employees is investing in the success and resilience of your company.

Key Takeaways for People Leaders

• Prepare Concrete Data: Use tangible numbers to illustrate the cost of attrition and the financial benefits of retention measures.

• Use Scenarios: Present best-case, expected, and worst-case scenarios to provide a realistic range of outcomes.

• Highlight ROI: Emphasize the return on investment to showcase the value of proposed initiatives.