Fixing A Leak In The Hotel Profitability Pipeline: How To Manage The Costs Of Employee Turnover

Despite positive projections for revenue and profitability in 2004, cost controls and enhancing efficiency will remain a priority. Unfortunately, there are two related concerns that may limit the impact of many cost management strategies: employee turnover and the accurate monitoring of the costs to replace them. In a current study, J. Bruce Tracey and Timothy R. Hinkin of the Cornell University School of Hotel Administration enumerate methods for determining the true cost of employee turnover and suggest ways to anticipate and manage the problem more successfully.

One of the most vexing and expensive managerial problems—employee turnover, and particularly turnover of the most productive and effective individuals—continues to plague the hotel industry. A recent study showed that the average turnover level among non-management hotel employees in the US is about 50%, and about 25% for management staff. Thus, small variations in property-wide turnover may have significant financial implications.

The second concern is that most hotel operators do not adequately monitor the expenses associated with replacing employees. All P&L statements account for payroll and benefits expenses, and some companies track training budgets. However, very few firms examine the discrete costs associated with attracting, selecting, and developing employees. If more detailed accounting procedures were adopted, hotel operators would be able to make more informed judgments about the ways to better manage the costs of turnover, and ultimately realize better top- and bottom-line performance.

Tracey and Hinkin present an outline of the major line items that should be tracked in order to generate a more comprehensive assessment of the costs of turnover. Their template can be used to assess the turnover costs for a single position; thus, the procedure should be replicated for all positions in order to obtain a complete understanding of financial impact. They emphasize that not all line items will be relevant for all positions. In addition, the costs will vary as a function of labor market conditions (e.g., unemployment rates, prevailing wage rates, etc.), as well as the rigor and yield of various screening and selection methods that are used when making hiring decisions.

Costs of People
Most of the costs of turnover are associated with time. Thus, the first step in this type of cost analysis is to identify the hourly rates (plus benefits) of those involved in the activities that are taken to replace an employee. Once this information is generated, it can be multiplied by the time that it takes the respective individuals to complete each step of the replacement process, and then added to the various direct costs to determine the total cost of turnover.

Employee Work Hours and Wages
Specify the typical daily hours worked and the hourly wage and benefit costs for various types of employees related to the position being examined. This data will be used in subsequent analyses.

Tracey and Hinkin’s template can be examined in full in the 2004 edition of Trends in the Hotel Industry-USA, currently available from the Hospitality Research Group of PKF Consulting.

The template includes the following:

• Pre-departure costs - exit interviews, administrative processing, severance pay
• Recruiting – sources and processing
• Selection – on-site interviews, Travel & accommodations costs, testing, background checks
• Orientation and Training – internal and external costs
• Productivity Costs – productivity losses, disruption costs, vacancy opportunity costs

J. Bruce Tracey is Associate Professor in the School of Hotel Administration at Cornell University. Timothy R. Hinkin is Professor. Their article, “Accounting for the Costs of Employee Turnover,” appears in the 2004 edition of Trends in the Hotel Industry-USA, published by the Hospitality Research Group of PKF Consulting.