Many risks go in cycles. And While it makes some sense to keep an eye on them during the part of the cycle when they are low, it makes much more sense to concentrate on them when they are imminent.
A recent report from Metlife “Study of Employee Benefits Trends” diverts from its primary topic to spend an entire chapter on The Erosion of Employee Loyalty. One startling statistic that they report is that over one third of employees say that if they have the choice, they will change employers in 2011!
Risk managers often think of risks like employee turnover as being “soft” risks that are difficult to measure and model. But that may be mostly due to lack of familiarity. In this case, people have measured the costs. The Society of Human Resources Management (SHRM) has estimated that turnover costs vary by the level of employee. For minimum wage employees, the costs are 30% to 50% and goes up for more skilled employees – up as high as 400% of salary for the most skilled employees.
And that does not take into account that the people who are most able to leave are the most competent and productive of your employees.
So your firm has an imminent risk that will emerge when the job market in your industry opens up. You will know exactly when that risk is going to hit. You will know because your firm will start to hire more after several years of low or zero hiring. Once you notice the actual turnover, it will be too late. So monitoring hiring by your own firm and in your part of the economy is your key risk leading indicator.
The risk treatment steps to take would be those that might impact either the frequency or severity of the losses from this risk. (duh)
Metlife includes this discussion in their report on employee benefits so that they can make the case that more employee benefits would be an effective preventative.
But before setting out to define risk treatment plans, the risk manager will want to look at the loss estimates. That SHRM study points to costs from the hiring process, from training costs as well as productivity losses. Each firm should examine their practices and experience to refine the general estimate to their situation. Some firms will always choose to hire highly experienced employees to minimize the training and lost productivity costs. Other firms will go to the other extreme, hiring mostly at the entry level and expecting to promote from within to replace any higher level losses.
Salary costs are a large percentage of financial businesses costs. The management of this cost could probably benefit from some good quantitative analysis, if that is not already the practice.
If the SHRM costs are correct and even half the people identified by Metlife are able to change jobs, then firms on the average are facing extra costs of as much as 20% of payroll.
Do the math, where does this put employee turnover risk in terms of your top ten risks list?