Diversity and Inclusion – Return on Investment, part 1: Employee Turnover Reduction

The cost of employee turnover is staggering and yet goes largely unrecognized. There is no financial statement line item, no general ledger entry, and no budget explicitly set aside for this expense that can cost an evenly modestly sized company well over a million dollars each year. And a significant portion of voluntary attrition is directly related to the abusive work environment many employees indicate exists within the marketplace today. Thus, improvements in workplace civility can directly improve the organization’s bottom line.[wcm_restrict plans=”75937, 25542, 25653″]

A company of 250 employees making an average of $43,000 per year experiencing a 20 percent attrition rate spends an estimated $2.15M on employee replacements annually.

Cost of Attrition

The American Management Association estimates the cost of employee turnover as ranging from between 25 percent (for entry level employees) and 250 percent (for executive level employees) of the employees annual salary.¹ These costs are derived from a multitude of sources including:

Exit costs including time to conduct the exit interview, stop payroll, change benefits, turn-in equipment, etcetera
Turnover costs associated with managerial exit interviews, work-in-progress turnover to other employees, rescheduling of ongoing work, etcetera
Lost productivity of employees filling in for the vacant position
Overtime and/or temporary employee costs to fill in for the vacant position
Cost to hire a replacement employee including advertising, resume screening time/cost, manager and staff interview time, interview travel costs, and new hire relocation costs and signing bonuses
New hire training costs including general on-boarding and employee training and position specific training
Lost/low productivity until the new employee is fully productive in his/her new role

And then there are the qualitative costs including:

Loss of customers and contacts
Lost business knowledge and technical expertise

Based on a U.S. average annual salary of $43,000² and average annual voluntary turnover rate of 23.6 percent³, it is easy to see how an organization can have considerable employee turnover expenses.

An Abusive Work Environment

While many like to think of the modern workplace as being diverse and inclusive, a place where individuals respect and value each other, surveys by the [email protected] Group, the Employment Law Alliance (ELA) and WBI/Zogby indicate quite the contrary. A survey conducted by the [email protected] Group found that 61 percent of employees witnessed diversity-related acts of incivility, disrespect, and/or discrimination at work.⁴ According to ELA, 44 percent of Americans indicated they have worked for an employer or supervisor who they consider abusive. A WBI/Zogby survey revealed that 37 percent of workers reported being bullied at work.⁵

These instances of workplace incivility profoundly impact a company’s financial performance as revealed in the research report, Assessing & Attacking Workplace Incivility⁶. From among the 775 individuals surveyed, instances of workplace incivility resulted in:

28 percent lost work time avoiding the instigator
53 percent lost work time worrying about the incident or future interactions
37 percent believed that their commitment to the organization declined
22 percent decreased their effort at work
10 percent decreased the amount of time that they spent at work
46 percent contemplated changing jobs to avoid the instigator
12 percent actually changed jobs to avoid the instigator⁷

In addition to those who do leave, [email protected] Group research finds that 73 percent of employees experiencing disrespectful and demeaning behavior would leave the company if a better job were available – making these employees six times more likely to quit than those not experiencing workplace incivility.⁸

Calculating Diversity and Inclusion’s Return On Investment – Employee Turnover Reduction

Workplace incivility clearly contributes to employee attrition which in turn directly impacts the organization’s bottom line. This occurrence presents leaders with an opportunity to realize financial benefits from investments aimed at improving the workplace environment. Estimating the return on investment for such initiatives involves the following steps:

Determine the annual organizational attrition rate caused by workplace incivility – This rate can be calculated using exit surveys and resent culture surveys balanced against benchmark studies. Note that direct measurement using exit surveys alone may result in a lower than actual rate if such feedback is not collected anonymously.
Identify the initiatives to be implemented in order to improve workplace civility – Expert advice from individuals/organizations specializing in the field of diversity and inclusion should be consulted to identify those initiatives best suited to address the organization’s unique needs and circumstances.
Estimate the cost of implementing these initiatives on an annual basis – Use standard project management cost estimation methods to determine the expected monetary cost of all resource expenditures expected to be made during implementation of these initiatives on an annual basis. Alternatively, expert advice from individuals/organizations specializing in the field of diversity and inclusion could be consulted to determine this variable.
Estimate the reduction in annual organizational attrition caused by workplace incivility – This will vary based on the nature of the initiatives undertaken. Expert advice from individuals/organizations specializing in the field of diversity and inclusion should be consulted to determine this variable.
Estimate the cost to the organization of a 1 percent turnover rate – Use the StrategyDriven Cost of Employee Attrition Nomograph to calculate the cost to the organization of a 10 percent annual attrition rate. Divide this value by ten.
Determine the annual value of improving workplace civility through attrition reduction – Multiply the percent reduction in annual organization attrition to be realized determined in Step 4 by the 1 percent turnover cost per year value determined in Step 5.
Determine the component of Diversity and Inclusion’s return on investment value to the organization resulting from reduced attrition – Subtract the cost of the workplace civility initiatives determined in Step 3 from the annual value of improving workplace civility through attrition reduction determined in Step 6 and divide the result by the cost of implementing the workplace civility initiatives determined in Step 3. Multiply this value by 100 to convert to a return on investment percent.

Example Return On Investment Calculation for Employee Turnover Reduction

Background

Organization Size: 400 employees
Average Employee Salary: $43,000 / year

Calculation (Illustrative)

Annual Organization Attrition Due to Workplace Incivility: 12 percent
Workplace Civility Initiatives to be Implemented: workforce training, executive/management coaching, performance appraisal system upgrade, new diversity and inclusion organizational performance measures implemented, Diversity and Inclusion Council established
Annual Cost of Implementing Workplace Civility Initiatives: $300,000 / year
Estimated Annual Reduction in Attrition Due to Workplace Incivility: 4 percent
Cost to the Organization of 1 Percent Annual Attrition: $172,000 / year
Annual Value of Workplace Civility Initiatives from Employee Turnover Reduction: $688,000
Annual Return On Investment of the Workplace Civility Initiatives: A 129 percent return on investment!

Final Thoughts…

Workplace civility improvement initiatives have a far more expansive impact than just reducing incivility related attrition. In future articles, we’ll discuss how to calculate these benefits to determine the total financial benefit of these initiatives.

Lastly, we presented a strong financial case for implementing programs aimed at improving the workplace environment. However, we at StrategyDriven believe such programs are not only the financially prudent thing to do, they are the morally and ethically right thing to do. All employees should be treated with the utmost respect, not because it is financially beneficial to do so but because as fellow human beings they deserve to be treated as such. It is our sincere hope that all leaders will work to end workplace abuse, bullying, and discrimination and that they and their employees will respect and value their colleagues.

Sources

“The High Cost of Employee Turnover,” Scott Allen, American Express, April 7, 2010
Note: Quantitative employee turnover cost estimate provided by the American Management Association.
“May 2009 National Occupational Employment and Wage Estimates – United States,” U.S. Department of Labor – Bureau of Labor Statistics, May 14, 2010 (http://www.bls.gov/oes/current/oes_nat.htm#00-0000)
“U.S. Annual Employment Turnover Rates by Industry and by Geographic Region Through August 2006,” Nobscot Corporation, 2010 (http://www.nobscot.com/survey/us_voluntary_turnover_0806.cfm)
Note: Data supplied by the U.S. Department of Labor
“Linking Employee Commitment & Workplace Incivility to Corporate Earnings,” Craig B. Clayton, Sr., The [email protected] Group, July 2004 (http://www.hrm-ri.org/whitepapers/dEPS_White_Paper_Ver.12.2005.v17.pdf)
“The High Cost of the Bad Boss,” American Management Association, October 2, 2007 (http://www.amanet.org/training/articles/The-High-Cost-of-the-Bad-Boss.aspx)
“Assessing and Attacking Workplace Incivility, “ C.M. Pearson, L.M. Andersson, and C.L. Porath, Organizational Dynamics, Volume 26(2), Fall 2000
“The Brutus Syndrome^TM,” Craig B. Clayton, Sr., The [email protected] Group, January 2005
“Linking Employee Commitment & Workplace Incivility to Corporate Earnings,” Craig B. Clayton, Sr., The [email protected] Group, July 2004

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