Calculating the Costs of Turnover: The Math Behind Relocation Stress

Let us start by dividing the cost of relocation stress into three broad categories:

  • Turnover: Relocation stress can cause some moves to fail.  Employees may initially be willing to try a new job or a transfer, but over time may find that it is just not working for them.  Recruiting, relocating and training new employees is expensive, so having to start over after going through this entire process can be extremely expensive.
  • Reduced effectiveness on the job: Even if a relocated employee sticks with the job until they are past the critical period, the stress of the move can still substantially reduce their productivity in the interim, hurting the company’s bottom line.
  • Indirect transition costs: In addition to being less productive when they are at work, a new hire or transferred employee experiencing relocation stress will often take more days off, as well as have a heightened level of payout for health benefits. This can happen even if the employee is personally quite resilient to stress because they can still have children and other family members who are having difficulty adjusting and require their attention, as well as use of health care benefits.  Indirect costs can also include reduced morale and productivity for the entire team if the employee experiencing relocation stress exhibits behaviors that adversely impact the work environment (such as being obviously depressed, stressed, or strained in communication with others).

 

 

Turnover Costs

We will begin by examining the turnover costs in more detail, since this is an area that has been studied more broadly than other relocation stress-related costs.  As mentioned previously, a recent study by the Center for American Progress examined the impact of turnover.  This was a “meta-analysis”, meaning that it was a summary of prior studies (in this case, 31 studies) on the subject.   For jobs in general, the authors found that the cost of turnover was 21 percent of salary (so, for example, if an employee made $50,000 a year, the extra cost incurred from their departure (in addition to paying the new hire their salary) was 21% x $50,000 = $10,500.  Looking at this cost from an aggregate level, if your company turns over employees every two years, the study suggests you are paying an average 10 percent above what you do in salaries every year, due to that turnover.

This is a high number, however we believe it significantly understates the turnover impact for the employee base impacted by relocation stress.  We will get to why shortly.

The cost of turnover estimate generally included the following direct and indirect costs:

 

Direct Costs:

  • Separation costs such as exit interviews, severance pay, and higher unemployment taxes
  • The cost to temporarily cover an employee’s duties such as overtime for other staff or temporary staffing
  • Replacement costs such as advertising, search and agency fees, screening applicants, including physicals or drug testing, interviewing and selecting candidates, background verification, employment testing, hiring bonuses, and applicant travel and relocation costs
  • Training costs such as orientation, classroom training, certifications, on-the-job training, uniforms, and informational literature

 

 

Indirect Costs:

  • Lost productivity for the departing employee who may spend their last days on the job writing exit memos or with reduced morale
  • Lost productivity due to the need to hire temporary employees
  • Coping with a vacancy or giving additional work to other employees
  • Costs incurred as the new employee learns his or her job, including reduced quality, errors, and waste
  • Reduced morale
  • Lost clients and lost institutional knowledge

 

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It is important to note that the indirect costs were not included in all the studies—and this is one of two reasons we believe this cost is underestimated.  The authors stated: “…by their very nature indirect costs may be hidden and difficult to ascertain. Because of this, out of the 11 research papers that we looked at, only two included indirect costs.”

If we look closely at the list of indirect costs, it is not a stretch to say that they can be even larger than the direct costs.  If we just look at the “Costs incurred as the new employee learns his or her job” (sometimes known as the “learning curve”), we can see that there is an opportunity for substantial costs to be incurred here.  According to a study by Mellon Financial Corp, the cost of the “learning curve” is between 1 percent and 2.5 percent of total revenue for companies in general.  And at an individual level, this cost rises with the level of employee.  While for clerical jobs “full productivity” is reached in eight weeks on average, for executives it takes a full half year to reach full productivity.  (In our experience, many skilled jobs take even longer than six months for most employees, depending on how “full productivity” is defined).

This leads us to the other reason why the turnover cost for our purposes is likely substantially higher than the 21 percent estimate.  The Center for American Progress study found that for highly skilled workers and executives, the turnover cost as a percentage of salary was much higher.  In fact, one of the studies focusing on this class of worker found that the turnover cost was 213 percent of salary!

Who do companies pay to relocate?  In our experience it is typically to hire employees who they cannot easily find locally or whose talents and skills may have a potential impact large enough to make it worthwhile getting the very best, regardless of location. Typically companies will stick to the local talent pool for clerical staff and workers in roles requiring low-to-moderate skill levels.  The kinds of workers that require a national or international search are disproportionately from these categories:

 

  • Executives/senior managers
  • Highly skilled technical workers (programmers, data scientists, etc.)
  • Others with hard-to-find industry-specific skills
  • (To a lesser extent) College recruiting targeting high potential individuals (e.g. recruiting nationally at top-rated MBA/BA or other programs to attract top talent for what it is hoped to be a long-term career path).

 

The point is that most of these are exactly the groups of people found to have unusually high turnover costs.  The exact average can vary depending on the company and who they typically relocate.  But in most cases it will be closer to 33 percent or more of salary.  So for purposes of doing a generic calculation, we will assume 33 percent.

To calculate the cost of turnover due to relocation stress, the other piece of information needed is how much relocation stress increases turnover.  Based on our data, it can be substantial.  But it can also vary a great deal by company.  It can depend on what the baseline turnover is for the company, who/how the company recruits from out of area, where the company is located, and for what kind of roles they recruit.  Some differences we see may be intuitive (regional recruiting such as within the West Coast or Southwest typically has less turnover impact than does national recruiting), some may not be intuitive (international recruits may have higher retention than national recruits, which may initially seem counter-intuitive, but perhaps less so when you consider that the companies doing international recruiting are also often sponsoring the employees through the immigration process).

But putting aside those details, we return to do a generic calculation.  It is reasonably conservative to say that in most cases the increase in turnover will be 15 percentage points (i.e. if your “normal” turnover is 20 percent after hire, the relocated employees will have a turnover rate of 35 percent).

Combining these two numbers, a rough ballpark estimate of the impact of relocation stress is 15% x 33%= 5%.  In other words, you are paying a “tax” totaling 5 percent of their annual salary for every newly relocated employee—and this is just for the turnover component!

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Excerpt from The Hidden Costs of Relocating Employees: Corporate Strategies for Reducing Loss from Relocation Stress