Most of the rhetoric surrounding the rising cost of labor in the U.S. focuses on President Barack Obama's plan to hike the federal minimum wage by nearly $2, but experts say the debates over whether or not this will be too large a burden for some companies do not get to the heart of the problem.
According to Chris DeRose, co-author of "Judgment on the Front Line: How Smart Companies Win by Trusting Their People," the issue has affected businesses in several sectors, including retail, food and beverage, and manufacturing. And although 70 percent of the public favors an increase, many small businesses still say they worry such a hike would cripple them.
What DeRose contends in his Huffington Post piece is that while higher wages certainly can affect a business' labor costs, an even larger problem is that many of these companies aren't looking at the entire picture.
The True Cost of Labor
DeRose writes that many of the industries that typically offer minimum wage have another factor in common - extremely high employee turnover. In some cases, the rate of turnover in minimum-wage establishments has ballooned to as high as 200 percent. This alone should be enough to convince businesses to focus on investing in employee retention, as opposed to focusing on keeping wages lower.
"To put it simply, if a company has 100 percent annual turnover in a position, it's essentially hiring two people over the course of the year to fill one job," DeRose wrote.
With the cost of replacing an employee ranging anywhere from 30 to 150 percent of a worker's salary, it makes sense that the one of the most crippling problems businesses face is losing an employee.
"Everybody knows it's a big, expensive problem - they just don't know exactly how big," DeRose added.
'Grossly Underestimated' Labor Costs
To write his book, DeRose spoke with several large retailers that employed more than 50,000 workers. After his research, he found that most of the time, labor costs related to employee turnover were "grossly underestimated," as he put it. For example, one business reported a 107 percent turnover rate in its part-time staffing division, which led to annual expenses of $150 million, including hiring, training, separation and other staffing tasks.
Yet another firm stated almost half of its turnover typically occurred two months after the employee started. This, DeRose found, was detrimental to productivity, since the worker quit the company just as he or she was beginning to contribute to the existing workforce. This was seen to have affected the company's customer services and sales, in addition to the lost employee's position.
"We find it mind-bending that business leaders often aren't deeply informed about their actual costs incurred due to high turnover, relying instead on generalized industry figures and focusing predominantly on hourly pay," DeRose wrote. "It's a bit like basing a decision on which car to buy by looking at the sticker price versus calculating the real costs of ownership once gas, insurance and the many other expenses are factored into the equation."
Getting It Right
According to the Sacramento Business Journal, the best way to improve employee turnover is to get the hiring process right the first time around. Recruiters should always use the best hiring practices, including in-depth screening, background checks, references, orientation and training to ensure a candidate is the right choice.
Other companies have found they can avoid such high costs associated with labor by turning to performance-based labor options that drive productivity and provide financial incentives to their associates. This alternative to temporary staffing, offered by companies like Insource Performance Solutions, minimizes employee turnover and ultimately reduces labor cost.