We adapted our turnover costing methodology from Costing Human Resources, a leading human resource publication, which tailors cost accounting principles to identify costs of human resource activities.  This approach, known as human resource accounting, can be used to identify the total costs of turnover.  This is not the only way to cost turnover, but represents our attempt to more fully capture costs incurred when employees leave an organization.  This approach can be modified to include additional costs or to simplify the costs that are tracked. 

To estimate turnover costs for each of the occupations we reviewed, we asked the agencies to fill out a worksheet about the costs they incurred in the following four areas:  separation costs; vacancy costs; replacement costs; and training costs.  After we received the raw data from each of the agencies, we estimated the costs of turnover using the methodology described below.  All costs were agency-reported and were not verified by LSO.  The assumptions we make to calculate these costs are also noted.

Separation Costs

We calculated the turnover rate for each occupation from payroll data provided by the State Auditor’s Office.  We included all terminations from the agency in the turnover rate.  Transfers to another state agency were not included in the turnover rate, because these statistics are not formally tracked by the State.  We estimated turnover costs for “line workers” and not for supervisor/manager positions.  Additionally, we did not include promotions to a supervisor or manager level in the turnover rate. 

We calculated the hourly pay rate of departing employees by determining the average salary for departing employees in each occupation from payroll data provided by the State Auditor’s Office.  We did not include benefits in the wage costs we calculated.  We also did not include sick and vacation leave pay outs in our turnover costs.  Although the agency incurs these costs when an employee separates, it is an unfunded liability for the agency.

SAO and A&I officials compiled cost information for administrative costs they incur when an employee separates service from the State. 

Separation Costs =

Exit interviews = 

[preparation, duration, analysis for one exit interview x (sum of hourly pay rates of staff who conduct one exit interview) x (number of turnovers – promotions x % who complete exit) ] + [duration of one exit interview x (average hourly pay rate of departing employees)] x [(number of turnovers - promotions) x percent who complete exit interview]

+             Unemployment benefits =

total claims paid + [ (weighted sum of the hourly pay rates of staff time to administer claims) x (number of claims filed) ]

+             Administrative costs =

[weighted sum of the hourly pay rates of staff time to process employee out x (number of turnovers - promotions] + [time of departing employee x hourly pay rate x (number of turnovers – promotions) + SAO costs]

+          Other separation costs identified by agencies

Vacancy Costs

SAO provided the total hours and dollars of accrued overtime for FY99 and we requested that the agencies estimate what percent of that overtime was accrued due to vacant positions.  We did not include offsetting savings that may accrue during turnover, such as salary costs, because there is room for debate about whether the salary savings represent a vacancy savings or cost. 

Vacancy Costs =
           
            Temporary/contractor help =

Total costs of temporary workers and contractors

+            Overtime =

            Percent of overtime reported by SAO attributable to vacant positions

+          Other vacancy costs identified by agencies

Replacement Costs

We calculated the turnover rate for each occupation from payroll data provided by the State Auditor’s Office.  We included all terminations from the agency in the turnover rate.  Transfers to another state agency were not included in the turnover rate, because these statistics are not formally tracked by the State.  We estimated turnover costs for “line workers” and not for supervisor/manager positions.  Additionally, we did not include promotions to a supervisor or manager level in the turnover rate.  We assumed the number of turnovers equaled the number of positions to be replaced. 

We calculated the hourly pay rate of replacement employees by using the hiring rate reported by each agency.  We used this number to calculate the value of a replacement employee’s time, excluding benefits.

A&I compiled information about costs they incur to recruit employees.  SAO and A&I also compiled cost information for administrative costs they incur when a new employee begins service with the State. 

Replacement Costs =

            Communicating job availability =

           
Total advertising + (weighted sum of staff costs to prepare ads) + (weighted sum of staff costs to attend job fairs) + A&I charges to agency for job announcements + (weighted sum of A&I costs for job announcements not billed to the agency x turnovers)

+            Screening candidates =

(weighted costs for A&I to screen one application x number of applications they screen) + [(weighted sum of in-house screening costs for one application) x (number of applications per opening x number of turnovers)]

+          Pre-employment tests =

The cost of each exam was multiplied by the average number of applicants given each test

+            Interviewing candidates =

[(prep time and duration of interview x sum of pay rates of staff who conduct interview) x (number of interviews conducted for one position x number of turnovers)]

+            Selecting candidates =

            (weighted sum of staff costs to select a candidate) x number of turnovers

+            Administrative Costs =

[(weighted sum of staff costs to process a new employee) x number of turnovers] + [(time of employee to complete administrative functions x hourly pay rate) x number of turnovers] + SAO costs + A&I costs]

+          Other replacement costs identified by agencies

Training Costs

We calculated the turnover rate for each occupation from payroll data provided by the State Auditor’s Office.  We included all terminations from the agency in the turnover rate.  Transfers to another state agency were not included in the turnover rate, because these statistics are not formally tracked by the State.  We estimated turnover rates for “line workers” and not for supervisor/manager positions.  Additionally, we did not include promotions to a supervisor or manager level in the turnover rate.  We assumed the number of turnovers equaled the number of employees to be trained.

We calculated the hourly pay rate of trainees by using the starting wage for new employees reported by the agencies.  We used this amount to calculate the value of a replacement employee’s time, excluding benefits.

We estimated the costs of training during a new hire’s first year and not subsequent training provided by the agency.  A&I compiled information about costs they incur to provide the new employee orientation.  All other training costs were agency reported, and were not verified by LSO.

Training Costs =

A&I Orientation =

[(weighted sum of A&I costs to prepare and provide one training for one trainee) + (length of training x average pay rate of trainees) x (number of new employees who attend as a percent of turnovers)]

+          In-house Orientation =

[(weighted sum of staff costs to prepare and provide one training + contract costs + materials) x (number of turnovers/number of trainees per training)] + (length of training in hours x average pay rate of trainees x number of turnovers) + (daily per diem rate x length of training in days x number who travel) + (average travel costs x number who travel)]

+            Formal Skills Training =

[(weighted sum of staff costs to prepare and provide one training + contract costs + materials + overhead, if offsite) x (number of turnovers/number of trainees per training)] + (length of training in hours x average pay rate of trainees x number of turnovers) + (daily per diem rate x length of training in days x number who travel) + (average travel costs x number who travel)]

+            Informal Training =

[(hrs per week spent mentoring x number of weeks) x (average hourly pay rate of staff who mentor) x  (reduction in productivity of experienced employee) x (number of experienced employees who mentor)] + [(hrs per week spent with mentor x number of weeks) x (average hourly pay rate of new staff) x (reduction in productivity of new staff) x (number of turnovers)]

TOTAL COSTS =

Separation costs + vacancy costs + replacement costs + training costs

COST PER TURNOVER =

Total costs/number of turnovers