Funding Focus

Factoring in Employee Turnover

• By Kelly Riley
• Jul 01, 2007

Most savvy HME managers can quote their cost of goods as a percentage of revenue, cost per delivery and even revenue generated per FTE. Lately, there’s been a focus on the cost of doing business for all HME organizations, especially for those preparing to bid within the auspices of national competitive bidding and then live with the winning price for three years.

An interesting by often overlooked metric to consider is the employee turnover rate and its subsequent costs to a company. While we can all relate to the pain of going through the hiring, training and orientation processes, how many managers really stop to calculate the direct costs that employee turnover has on the company? Direct costs include but are not limited to severance pay, temporary staff salaries, screening and pre-employment tests, and advertising fees. There is also a significant impact from indirect costs, including time for recruiting, interviewing, training new staff, lost productivity and lost revenue for employees who take customers with them.

Knowing the company’s turnover rate and comparing it to other industries similar to HMEs as well as tracking the company rate from year to year can help save a company big bucks.

To calculate the rate of turnover, count the average number of employees on the payroll during the year. Then count the number of employees that left. Divide that number into the average total to get the turnover rate. For example, a company with 30 employees that has eight employees leave during a 12-month period has a 26.6 percent turnover rate.

In calculating the financial impact of turnover, research shows the cost to be anywhere from 30 to 150 percent of an employee’s annual compensation. To obtain a starting point in calculating a company’s cost, first determine the average annual salary by dividing the last full-year’s salary costs by the average number of employees during the same period. Multiply the average annual salary by the number of employees who left. Next, multiply that number by 35 percent (a conservative estimate in the 30 to 150 percent range). This number reflects the turnover costs. In the company mentioned earlier with a turnover rate of 26.6 percent, if we use an average salary of $35,000, it costs the company a conservative estimate of $98,000.

Looking for ways to reduce turnover starts at the top. Companies must mentor and develop the next generation of leadership. The book “Good to Great” by Jim Collins gives examples of performance levels and the impact of failing to cultivate leadership. The loss of key leaders can cripple a company and cause turnover rates to skyrocket — which has a greater effect on small companies. Having a good supervisory team that is ready to step up is a critical element to promote employee retention.

Consider a scenario in which an HME firm loses a key leader. Add to that loss the corporate decision to not replace that person but rather to fill in with members of the remaining supervisory team. Within six months, the company suffers a loss of seven employees from a total of 14. The resulting stress on the remaining employees, combined with the steep learning curve of new team members contributes to a 60 percent loss in the number of rental patients in one segment of the business.

Accreditation bodies require customer surveys to gauge satisfaction, but not nearly enough employers survey employees. HR executives say that to know what customers think of a company, they ask employees what they think. It has been proved that there is a direct correlation between employee and customer satisfaction. It makes sense that if the staff perceives that they are valued and sets a tone of happiness and satisfaction, then the customer will, too. To get good data, creatively encourage participation and ensure anonymity.

Efforts to decrease turnover rates must start and stay at the top. Managers should be taught to consider that if a staff member fails at the job they were hired to do, then the managers are the ones who must at some level own the consequences for that failure. Managers that do so will be quick to learn from the experience and develop remedial action plans for future staff placement.

This article originally appeared in the Respiratory Management July/Aug 2007 issue of HME Business.