Employee turnover is a serious issue facing every business in the world.
A recent survey found that 67% of life science professionals will be looking for a new job in the next 12 months. Could your organization handle that level of employee turnover? A recent survey found that two-thirds of life science professionals will be looking for a new job in the next 12 months. It’s a worrisome number, especially given that recent wage growth is making the job market more favorable for employees than employers. Turnover in the life sciences is less than in some other sectors (fast food, anyone?)—but employees in the life sciences are typically highly skilled, so constant churn can have an outsized impact.
If even one third of the life science professionals who say they’ll be looking for a new job find one, you could be stuck trying to deal with a job vacancy rate of more than 20%. For most life science organizations that would be very difficult, with catastrophic consequences for production. In addition, the remaining team would have to shoulder the load, leading to increased stress, burnout…and more turnover.
Employee turnover is costly.
What does employee turnover cost your organization? Developing an accurate, precise answer is surprisingly complex.
Calculating an accurate cost for employee turnover is surprisingly complex. The costs of employee turnover can be divided into three categories: separation costs, replacement costs, and productivity costs. Separation costs include, among others, severance pay, unemployment insurance claims, and the costs of continuing benefits. In addition, there are other HR costs associated with processing an employee’s departure, such as conducting the exit interview. Replacement costs include a range of activities that may be handled internally or outsourced—defining the “right-fit” employee, advertising the open position (developing, placing and paying for the ad), recruiting applicants, reviewing resumés, arranging and conducting multiple interviews, developing the offer, extending the offer, negotiating—plus the costs of the agreed-upon benefits package. Productivity costs include three major areas: the hit to productivity in the surrounding team while they’re covering for an absent teammate, the impact to this team’s productivity while the new employee is coming up to speed, and the productivity losses from the new employee while they go through training and become a fully functioning member of the team. And that’s not to mention the more intangible loss of “institutional knowledge” and inevitable changes in team dynamics.
These costs also don’t take into account the soft and potentially profit-draining costs of employee turnover, like damage to your reputation with your current clients, or the orders you might lose because of the longer delivery times your sales team has to negotiate with prospects, because your team is working overtime.
Calculating the cost of employee turnover: one approach.
The actual cost of employee turnover is larger than most people first envision.That’s a long list of factors. The implication? The actual cost of employee turnover is larger than you might first envision. Okay, but what would the final dollar amount be? Many of the factors listed above are simple to measure: the cost to place an ad, the cost of the time for HR personnel to hold an exit interview. Other factors are much more difficult to calculate, including the productivity impact on the surrounding team while a new employee is first being found, and then trained. Those are costs with many variables; they are quite difficult to estimate accurately.
If it’s a precise figure you’re after, Google or Bing will serve up many websites that let you download spreadsheets that can help you create an accurate estimate of the true costs of employee turnover. These spreadsheets require that you enter dozens of data points, from the salaries of the HR staff conducting the exit interview to the length of the probation period for any new employee.
A simpler approach to determining the cost of employee turnover.
Instead of trying to define every single cost precisely, another approach determining the cost of employee turnover is to use an average. This can give you a rough estimate of the cost of replacing a single employee, expressed as a percentage of the employee’s salary. Table 1 gives one commonly accepted set of these averages. What they lack in accuracy, they make up in convenience; they’re ready to plug and play.
|Replacement costs expressed as a percentage of employee salary|
|Top-level employees||>200% of annual salary|
|Mid-level employees||~125% of annual salary|
|Low-level employees||50% of annual salary|
Table 1: Actual employee turnover costs are difficult to calculate precisely; the estimates shown here are commonly used and represent averages across many sectors. Employees in the life sciences are typically highly skilled, so there’s a smaller pool of potential replacements to draw from; the effect of turnover can be larger than in other industries.
Plug and play.
To help you estimate the dollar cost of employee turnover at your specific organization, here’s a simple calculator that uses only 4 data points:
- the total number of employees in your organization
- the average salary
- the annual turnover rate (as a percentage)
- the replacement costs expressed as a percentage of employee salary (see Table 1)
You can use this calculator to look at your entire employee base, or focus on certain subsets that have significant turnover, such as a department, location, or shift.
Now that you’ve used this calculator to estimate your total employee turnover cost (you have, haven’t you?), are you surprised by the final figure? As I said earlier, the total cost of employee turnover is higher than most people expect. It’s worth noting that this cost comes straight off of the bottom line—ouch! In addition, many of the employees that leave your organization do so to take a new job at one of your competitors—ouch again!
Five key points about employee turnover.
While turnover can be costly, not all turnover is necessarily bad. Having poor-fit employees leave can be a positive event. While turnover can be costly, it’s important to maintain some perspective. First, not all employee turnover is bad. It can be a net plus to your organization if poor-fit employees leave, either because they self-select out, or they’re pushed to leave and find a better future. Another way to say this is that typical employee turnover calculations don’t account for the impact that poor-fit employees have on morale and productivity. Along these lines, there’s a common management meme which was popularized by Jack Welch in the 1980s. This involves “stack ranking” all employees—and firing the bottom 10%, every year. Whether or not you believe in measures this severe, it’s worth recognizing that not all employees are a long-term fit. Not all employee turnover is bad.
Second, your situation could be worse. Many organizations (or even entire sectors) have learned to cope with surprisingly high turnover rates. The fast food sector is a prime example. CNBC reports that “for fast-food chains, employee turnover runs as high as 130% to 150%, according to industry measures.” Thankfully, turnover rates in the life sciences are not that high. Of course, no matter what your overall rate is, turnover is a drain on profits, which means it’s worth thinking about how to reduce turnover. Even at your local KFC, if they train a worker, it’s still worth keeping that worker for 8 months, rather than only 4.
Employees today, on average, stay with a company longer than they did 25 years ago. Third, employees today, on average, stay with a company longer than they did 25 years ago. Surprising, but true. According to the Bureau of Labor Statistics, in 1983 the average employee tenure was around 3.5 years. Today’s average employee tenure is 5.1 years. Obviously, this puts a premium on proper hiring in the first place.
Fourth, no matter how much you work at it, you’ll probably never get employee turnover to zero. It’s unclear whether you’d even want to, for several reasons. New employees can bring fresh ideas and counteract the tendency towards “group-think.” Also, a situation with zero turnover might begin to resemble those in France—where it’s very difficult to fire an employee—or Japan, where a culture of lifetime employment is only now being slowly phased out.
If you don’t know what your employee turnover is costing you, you don’t know how big a problem you actually have. Last, you shouldn’t look only at the overall turnover rate; you need to look at the cost to reduce that turnover rate. If you spent $300,000 to reduce your turnover costs by $50,000, you’d have to reap a whole host of other benefits to make that investment worthwhile.
In the end, if you don’t know what turnover is costing you, you don’t know how big a problem you have.
Why do employees leave?
To address the issue of employee turnover, it’s important to understand why employees leave. A Gallup poll conducted in 2016 found that 68% of people are either not engaged or are actively disengaged at work. The Biospace survey I quoted at the top of this article mentioned four reasons life science employees are thinking of leaving:Employees leave for many reasons. In general, they often fall into three categories—relating to Autonomy, Mastery and Purpose.
- Are ready for more challenges: 54%
- Are looking for more rewarding opportunities: 42%
- Want greater compensation: 35%
- Are looking to relocate: 15%
It’s shouldn’t be a surprise that compensation is not the first item on the list. In the book Drive, The Surprising Truth About What Motivates Us, author Dan Pink unpacks the science behind human motivation. It turns out that once employee compensation hits a certain level, more pay doesn’t result in more effort or better results. Pink goes on to characterize the factors that actually do motivate us as part of three deep-seated needs: desires for Autonomy, Mastery, and Purpose.
There is no shortage of lists that specify all the reasons employees leave their jobs. Here’s another, created by HR experts and company leaders that work in many sectors (not only the life sciences). As you read this list, notice that most of the items here can be sorted into one of the three groups that Dan Pink identified, plus a couple of others: Compensation and Personal.
- Little-to-no opportunity for growth and development, no advancement opportunities
- Lack of trust and autonomy
- Not being appreciated or recognized
- Lack of respect
- Feeling underutilized
- Bad manager
- Poor management
- Poor communication
- Feeling over-stressed or over-worked
- Lack of support
- Work-life balance
- Uninspiring or unhealthy work environment or company culture
- Seeing good employees leave
- Disconnect with company’s values
- Disconnect with personal or professional goals
- Changes in one’s personal life (geographic move, romantic relationship, etc.)
Autonomy, Mastery and Purpose all have a common denominator: your life science company’s Culture. If you get your culture right, you have a much better chance of keeping employees from leaving to go work for your competitors.The sorting into Autonomy, Mastery and Purpose that I’m recommending might not always be crystal clear. For example, “Feeling underutilized” might fall into Autonomy (“I could do this by myself if they’d let me”), or Mastery (“I’ve got all the skills to handle more responsibility, no sweat!”). Similarly, “Lack of support” might represent Autonomy (“They don’t trust my decisions”) or Mastery (“They don’t have any concrete plans for my professional growth”). But even though each reason employees leave might be difficult to classify specifically, the relevant research shows that motivation comes from Compensation, Autonomy, Mastery, and Purpose. Compensation is of course, table stakes. You’ve got to have it, but once you do, a whole lot more isn’t necessarily better. Which leaves Autonomy, Mastery and Purpose. If you want to find the reasons that employees are leaving, these are the prime places to begin your search.
The common denominator.
Employees who have a clear sense of Autonomy, Mastery, and Purpose are more motivated, and less likely to leave. Is there a common denominator among Autonomy, Master and Purpose? Yes; I call it Culture. Your corporate culture is the “growth medium” within which employees can develop a keen sense of Autonomy, Mastery, and Purpose.
Figure 2: Motivation comes from a sense of Autonomy, Mastery, and Purpose. Culture is the common element that affects all three. Your culture will either support employees in having Autonomy, a sense of Mastery, and a common understanding of Purpose, or it won’t. If it doesn’t, employee turnover will be higher.
Our research into life science company culture.
In the summer of 2018 Forma conducted research on company culture in the life sciences. We talked to more than a dozen life science employees; upwards of two-thirds were vice-presidents or members of the C-suite. I’ve written about it before; here is a quick summary:In the vast majority of companies we spoke to, culture is not clearly defined or clearly documented.
- All respondents reported that corporate culture is very important.
- But respondents noted that very little effort goes into planning or nurturing culture, particularly in advance of an M&A event.
- Most respondents reported that culture is set at the top of the organization but, when pressed, admit that employees affect culture.
- In the vast majority of companies we spoke to, culture is not clearly defined or clearly documented. In other words, most leaders have not given employees a “North Star” around which they can align their behavior or use to guide their actions.
- Statements of Mission, Vision and Values are not common or effective tools for defining employee behavior or corporate culture. Typical responses called these statements: “silly, stupid…,” “a waste of time,” or just so much “blah, blah, blah.”
- This is at least partly true because statements of Mission, Vision and Values are not memorable. Among those organizations that publish such statements, few respondents believe that their employees remember them with any clarity.
A positive corporate culture can be crucial to keeping employee turnover in check, but our research shows that most organizations pay little attention to establishing, defining, or maintaining culture designed to maximize employee contribution, cooperation, understanding or satisfaction.
Employee Turnover, Culture and Marketing
In the next issue, I’ll cover the interaction between employee motivation, culture and marketing—and how you can deliberately affect culture and keep your employee turnover levels in check by using a few of the tools in your marketing toolbox.