Employee turnover costs can have a significant impact on your bottom line. Calculating the direct costs of employee turnover is usually quite straightforward. Direct costs, in the main, consist of:
(i) Time invested in to process termination: exit interview, administration related to the termination process (Job+, Inland Revenue, Social Security, etc.), collection of company property, formatting of computers and mobile phones, etc.
(ii) Time invested to identify a replacement: this can be one of the major cosst as you engage an external recruitment firm to manage the process together with management time to vet applications, hold interviews, etc. or including the related human resources payroll costs if the process is carried out A to Z by your human resources unit.
(iii) Market correctivity costs: in an ‘employee’s market’ – as has been the case in Malta these past years – you may find that recruiting a replacement is more expensive than the compensation package you paid the person who has just left you – the result of scarcity of available talent on the market. You may find that you need to source a replacement employee from outside of Malta as you cannot find a person locally – which may require your undertaking administration as well as relocation expenses.
(iv) Training: no matter how experienced the replacement employee is – he or she have to be induced in your corporate ethos and work culture, understand the new work environment, get to know your clients and staff members s/he will be interacting on, etc. This will require both formal – such induction programmes – or informal – such as buddying and mentoring – training.
To some part, this Direct Cost of replacing an employee may be offset by compensation expenses saved until such time that a new employee is on board.
Whilst this reduces your labour costs, it may negatively impact the bottom line or reputation of your business: the turnover generated by the person in position is lost, the project you are undertaking on behalf of your client may have to be suspended or ‘goes slow’ until you have the replacement person on board, etc.
A large part of local employers associate the cost of replacing an employee to be solely the Direct Costs mentioned above. In fact, the true cost is significantly higher than that. Research shows that depending on the competencies, skills, qualifications and experience required of your employees for your business to perform well, the total costs of replacing an employee varies from 30%-200% of their compensation package.
This is because there are Indirect Costs associated with loss of an employee. One major Indirect Cost is the ramp time that a new employee has to undergo to reach peak productivity. The Table below present Deloitte’s view of the productivity ramp up when a new employee joins an organisation.
Source: Bersin – Deloitte
There are formulas on how the indirect cost of productivity is estimated. In our ĠEMMA Cost of Employee Turnover Calculator we use the formula shown below to estimate the € impact of productivity loss on your company.
There are than ‘Other Non-Direct’ costs – otherwise known as Intangible Costs. Such costs arise due:
o Lower Morale and Engagement of Remaining Employees: Any company survives on a well-coordinated teamwork and a shared vision. Employees’ moral breaks down when a respected leader leaves your company, or your company is experiencing a high-turnover companies. When co-workers leave, remaining employees constantly have to cycle through the process of getting to know new employees – which has a cost. Additionally, the staff that is left will probably take over new responsibilities to counteract the loss. These employees may become resentful and, with no pay raise, start looking for new employment where they feel more valued. To compound that, the longer they stay in their overworked roles, very likely in an ‘employee’s market’ the harder it is for you to regain their trust and engagement levels even after you have filled the vacancy.
o Disruption in Management: Constant change in employees makes it difficult to execute the plan as scheduled. Hiring new employees drain managers’ precious time and effort, whilst at the same time battling to keep the project or service going.
o Loss of Institutional Knowledge. Whether an employee has been with your company for a year or ten years, when s/he leave your company, you lose the institutional knowledge or history that s/he takes with them. The knowledge possessed by the employee who has just left you is immeasurable in terms of “cost” but the loss is extremely damaging. The new employee can’t “train” on that lost historical data, so must ramp up and learn all the new nuances that come with any job.
Pensions have been a key public debate issue since the White Paper on pension reforms for future generations was launched in November 2004. The reforms carried out then, and since, sought to ensure that when a person retires the pension income received from the social security contributory pension will provide that person with dignity during retirement. Successive reforms since 2004 have underlined that what the pension system will not do is provide a pension income that is close to the income earned during employment – and hence allow people on retirement to enjoy the same quality of life they had whilst they were in employment.
Whilst young persons do not really think about when they will retire, and hence prepare early to have a health nest egg for when they retire, the understanding of the pension issue is starting to seep into people’s consciousness. Indeed, this is one of the primary underpinning education platforms of ĠEMMA – who is working with constituted bodies representing both employers and employees to raise awareness across differet age groups on pension income and quality of life.
Introducing a VORPS in your workplace is one other employee attraction and retention tool that will give you the edge on your competitiors as increasingly employees when chosing a job will not only consider the income earned for the here and now, but the extent to which their employer will help them prepare for a better quality of life when they eventually retire.
As part of the reform process, in 2017 the Government introduced a framework that incentivises you to introduce a VORPS at your workplace. The incentive framework is designed as follows:
01. As an employer you can contribute up to a maximum of €2,000 contribution for an employee and receive a tax credit of 25% – a maximum of €500 for every employee.
02. The cost of contribution is treated as a Profil and Loss item – thus it is added as an expense and not as a fringe benefit.
You can estimate in actual terms – that is € – the fiscal impact of VORPS on your company through our Calculator – Tab 2 titled ‘Impact of Introducing VORPS.
Let’s say you are a SME in the service industry employing 15 persons – with an average employment cost of €30,000, and apart from your salary bill you have a P/L costs of €150,000. Your profit before tax is €200,000 (Rows 3 to 8). Your profit after tax is €130,000 (Row 18).
Let us now look at two scenarios under which you introduce a VORPS in your workplace.
Scenario 01 – You pay an annual contribution for each employee of €1,000.
This means that you add to employee compensation bill an additional cost of €15,000 annually (Row 13). This, however means that your profit before tax is €15,000 lower than if you had not introduced VORPS (Row 15).
As you are earning a profit, the tax credit of 25% on the cost of the contribution per employee to a maximum of €2,000 annually is applied. The result is that you obtain a tax credit of €3,750 (Row 17).
You profit after tax is €120,250 (Row 16). Your profit after tax and the application of the tax credit is €124,000 (Row 18).
This means that the cost of introducing VORPS to you is €6,000 (Row 20) – an average effective annual cost of €400 per employee.
In Tab 1 – titled ‘Cost of Employee Turnover’ – you estimate that the cost of replacing an employee is €32,207 (Tab 1 – Row 64): 107% of the actual compensation package paid annually (Row 65).
These are presented in Tab 2 – ‘Impact of Introducing VORPS’ in Rows 24 and 25. This means, on the basis of the estimated cost required to replace an employee who left you company, the annual cost of introducing a VORPS for 15 persons is only 19% of what it will cost you to replace the person you are replacing (Row 27).
The cost of replacing one employee would, indeed, finance VORPS in your company for 5 years.
Scenario 02 – You pay the maximum annual contribution for each employee of €2,000 annually.
Under this Scenario, the cost of introducing VORPS doubles compared to Scenario 1 – €30,000 (Row 13), as does the resulting Tax Credit – €7,500 (Row 17). The proft after tax and the application of the tax credit is €118,000 (Row 18). This means that the cost of introducing VORPS to you is €12,000 (Row 20) – an average effective annual cost of €800 per employee.
This means, on the basis of the estimated cost required to replace an employee who left your company, the annual cost of introducing a VORPS for 15 persons is only 37% of what it will cost you to replace the person you are replacing (Row 27).
The screen shots under Scenario 1 apply – but you are to relate these to the column titled ‘€2,000 Max VORPS Contribution’.