Employee turnover is a common phenomenon in the workplace, and it can have significant financial implications for companies. In Saudi Arabia, the cost of replacing an employee can range from 50% to 200% of the employee’s annual salary (Al-Omran, 2018). However, this is just the tip of the iceberg.

To accurately gauge the financial implications of turnover, businesses must consider various factors, including separation costs, replacement costs, training costs, lost productivity costs, and the return on investment (ROI) of employee retention strategies. By delving into these aspects, companies can gain a comprehensive understanding of the true cost of turnover and take proactive measures to mitigate its impact.

Separation Costs:

• Separation costs encompass the financial obligations associated with an employee’s departure, such as severance pay, unused leave, and benefits owed. To calculate separation costs accurately, companies must determine the total amount of compensation owed to the departing employee.

Replacement Costs:

• Replacement costs arise from the recruitment and hiring of a new employee. This includes expenses such as advertising, background checks, and interviewing. To determine replacement costs, businesses need to calculate the total cost incurred during the recruitment process.

Training Costs:

• Training costs account for the investment required to train a new employee. This covers aspects like orientation, onboarding, and job-specific training. Companies should calculate training costs by evaluating the overall expenditure associated with the training process.

Lost Productivity Costs:

• Lost productivity costs encompass the reduction in output and decreased morale during the transitional phase. Businesses must consider the impact on productivity and quantify the costs incurred during this period.

These are the cost factors that will impact the Investment of the Company into their workforce. To be  able to understand the ROI of this investment we must first look into the Employee Retention Rate, which will help us understand how long we anticipate this investment to be a benefit to the organization.

Employee Retention Rate:

• Monitoring the employee retention rate is crucial in assessing the effectiveness of employee retention efforts. A high retention rate indicates success in retaining employees, while a low retention rate signals potential challenges. Regularly tracking and analyzing this rate provides valuable insights into the overall effectiveness of retention strategies.

How this will impact the ROI:

• Calculating the ROI of employee retention involves comparing the gains from implementing retention strategies against the costs incurred. Businesses should consider investments made in training and development, employee engagement programs, and performance management. By quantifying the costs and benefits, companies can evaluate the effectiveness of their retention strategies.

For example, if a company invests SAR 50,000 in employee retention initiatives and observes a 20% reduction in turnover, a 10% increase in productivity, and savings of SAR 100,000 in recruitment and training costs, the ROI of the employee retention investment can be calculated as follows:

ROI of Employee Retention = ((Gain from Investment – Cost of Investment) / Cost of Investment) x 100

ROI of Employee Retention = ((SAR 100,000 – SAR 50,000) / SAR 50,000) x 100

ROI of Employee Retention = 100%

In this example, the company can expect a 100% return on its investment in employee retention strategies. This signifies that for every SAR 1 invested, the company can anticipate a return of SAR 2.

Reference:

Al-Omran, N. (2018). High Cost of Employee Turnover in Saudi Arabia. Gulf Business. Retrieved from https://gulfbusiness.com/high-cost-employee-turnover-saudi-arabia/