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Impact on profit of regretted losses



On June 24th, I read an article in the ‘Financieele Dagblad’ (the Dutch national financial newspaper). The theme of the article was: for which reasons do people start working for a new employer? Since the people who participated in the survey, were allowed to mark more then one answer, the total number of answers therefore exceeds 100%.

Undesired employee turnover can be disastrous for the top and bottom line of a company. Several surveys have shown that each employee leaving an organization, will cost the company between 150% and 400% of his/her annual salary, depending on his/her level and responsibility. In other words: if an executive easily earns an annual salary between € 100.000 and € 150.000, the total replacement costs will easily amount to € 200.000 or even € 400.000. And when senior executives are concerned, the total costs for the organization can even amount to one million Euros or more. This money is thus directly deducted from the company’s result. Impossible? Think again. Just follow this link, for instance, if you want to read more about the impact on the total costs caused by the fact that the wrong people leave the company.

Do you still want to read more? Just type 'turnover employee costs' in Google. The following will be included in the calculation of the total costs: all costs for the temporary replacement, all recruitment costs (often representing 20 - 35% of an annual salary alone), possible severance packages, the training period required before the substitute will be effective, the expertise lost, unsatisfied customers and less or smaller assignments.

Example:
Let's suppose that the total replacement costs for a so-called 'regretted loss' at executive level amount to € 250.000, on average. In this example, I assume that a company not always has a new challenge for a particular employee. Especially when the economy is hardly growing, as it is the case nowadays, and companies have difficulties to grow, there are fewer opportunities at the top, simply because the pyramid is smaller at the top.

Let us suppose that this company is employing 5.000 people and is being confronted each year to a regretted loss of 20 executives. If we suppose that the average replacement costs per person amount to € 250.000, the total annual replacement costs for the company would amount to 5 millions of Euros a year! Due to the fact that the company is not really growing, we suppose that it is unavoidable that some people are leaving because of new opportunities they get: half of them are concerned here (49%): € 2.500.000. You can’t avoid that some people leave because of their salary either.

However, the people who participated in the survey organized by the ‘Financieele Dagblad’, were allowed to mark several answers. So, let us suppose that among the regretted loss of 20 executives, the company could have really influenced 5-8 executives willing to leave. For the company, this means an annual loss of profits of 1,25 - 2 millions Euros!

The management could retain these 5-8 executives by adopting a more effective behavior! Just look at the reasons why they leave: #1. A bad manager, #2. Not enough appreciation, #3. Poor communication. All of these reasons are related to the behavior of their direct bosses, which means that it can be improved. The fact that this can almost be achieved without extra costs, might sound even more interesting!

Executives can really improve their effectiveness by doing three things.
  1. by giving up certain types of behavior,
  2. by emphasizing certain types of behavior they are already showing,
  3. and lastly by adopting new types of behavior as a new habit,

executives can make great progress. As a consequence, they will better know how to motivate their own employees and be able to avoid unnecessary staff turnover. This way, they will considerably and directly contribute to the profit and value creation for the company.

Paul

By Paul Donkers

"my purpose is to help improve strategy execution, to create high performing teams and coach for effective business leaders"

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