HR – Show Executives the $ Cost of Their RTO Decisions
I wrote a newsletter in January this year called “H.R. Know There is A Problem.”
In it, I explored research from NORC at the University of Chicago, one of the largest independent research organisations in the United States. The research involved HR representatives from companies where employees were either fully remote or on a hybrid schedule.
Although the participants were US-based, the findings apply to many countries, including Australia.
H.R. know there is a problem
Three out of four HR representatives said that retaining those who do not want to return to work in the office is a problem—one in five called it a major problem.
Most HR representatives said companies are having a problem with employee retention. About a quarter said their company is not having retention issues with employees who want to stay remote but whom the company is not willing to let work remotely.
Nearly a quarter of HR representatives cite a loss of flexibility or work-life balance as the top reasons they think employees are unwilling to return to the office, and an equal number mention the ease, convenience, and increased productivity of working from home.
In the newsletter, I highlighted that the top talent will be the first employees to leave an organisation. The dilemma is, then, how are you going to replace the talent? I suggested you would not be able to “as the talent is working for the organisations that give them the autonomy and flexibility to work where they want, when, and how they want. They are working for organisations that treat them as adults.”
I also said, “Whilst HR may know this, the executive has yet to wake up to the fact. They may not feel the talent drain yet, especially in the finance sector, as many employees are tied to the organisation with the golden handcuffs. But I assure you, the slow burn will become a wildfire as other companies start the war for talent and offer the same or equal benefits, autonomy and flexibility.
Let me leave that there for now.
HR’s new role
I then read an article in Harvard Business Review May -June 2024 by Peter Cappelli and Ranya Nehmeh called HR’s New Role.
The authors said, “To meet the fundamental challenge of hiring and retaining good people, HR needs to return to its traditional role of taking care of employees. It must play a lead role in persuading top management to treat employees better and to change company policies on pay, training, layoffs, vacancies, outsourcing, and restructuring.”
“It’s understandable why breaking old habits is hard. Telling leaders that the approach they’ve been following for 40 years—and the one thing investors seem to understand about human capital (“cut it!”)—is all wrong does not seem like a career-building move. Nonetheless, HR executives can—and must—make the case to their CEOs and operating executives that the old way is no longer working and that their companies need to change direction.”
The sentence that linked the HBR article to my January newsletter was this:
“One critical step HR can take to get the C-suite to alter course is to show leaders what the costs of current practices are and illustrate the value of human capital.”
The HBR article provides many reasons why people are leaving organisations, including lack of career development and advancement, restructures and uncertainty, constant change and the impact on mental health. I want to add to that the return to the office mandate.
I realised it was not okay for my newsletter to tell HR they needed to convince the C-suite of the error of their ways with a return-to-office mandate. I needed to help them show leaders the cost of current practices and the value they bring to the people they have.
Show me the money
Let’s show the C-suite the true cost of their actions. I want to focus on the cost of demanding employees return to the office full-time or on specific days of the week.
Flexidus
Firstly, we need to get an idea of how many employees have left, or will potentially leave, an organisation due to a return to the office mandate on a full-time basis or a prescribed number of days per week basis,
“Flexidus” is a term coined by Dr Melissa Wheeler, Senior Lecturer of Business Administration at MIT University. The term combines the phrases flexible work and exodus to warn bosses they could see many employees leaving their job rather than giving up their remote working arrangements.
Let’s look at the potential numbers.
Gartner research of more than 3,500 employees from November 2023 revealed that 19% of non-executives said they would leave their organisation due to an RTO mandate.
One in three executives presented with a return-to-office (RTO) obligation reported that they will leave their current employer for that reason.
In a survey of nearly 3,000 job candidates, 36% of senior-level job seekers who have faced a return mandate at their current employer said that factor influenced their decision to leave.
Researchers at the University of Chicago and the University of Michigan studied Apple, Microsoft, and SpaceX. They found a spike in departures among the most senior, tough-to-replace talent following the return-to-office mandate.
This finding was based on a global survey of 10,243 workers in the U.S., Australia, France, Germany, Japan, and the U.K. by Future Forum.
“Among those who say they are dissatisfied with their level of flexibility, 75% say they plan to look for a new opportunity within the next year.
Flexibility ranks second only to compensation in determining job satisfaction.”
Another Gartner survey of 2,080 knowledge workers examined the differences in employee outcomes between organisations that implemented onsite mandated requirements and those that did not.
“Intent to stay among average employees was 8% lower with strict RTO mandates. Among high-performing employees, their intent to stay was 16% lower with these RTO mandates, double the rate of average employees. Among millennials and women, the intent to stay was 10% and 11% lower.”
Deloitte released the findings of its survey on financial services institutions in 2023 and found that among respondents who still work remotely at least part-time, 66% say they will likely leave their current role if mandated to return to the office five days a week.
The Guardian reported that more than a third of UK workers would quit their jobs if their employers demanded that they return to the office full-time. Data collected by LinkedIn revealed that women were keen on more workplace flexibility, and more than half (52%) reported they had left or were considering leaving their job because of a lack of flexibility.
Returning for Good, a Unispace Global Workplace Insights report – which combined the results of a survey of 9,500 employees and 6,650 employers from 17 countries worldwide – found that, of the 72% of companies globally that say they have mandated office returns, 42% now report a higher level of employee attrition than anticipated, while almost a third (29%) are struggling to recruit altogether.
Owl Labs State of Hybrid Work 2023 (Global Edition) report found that if hybrid workers were required to work in the office full-time, 35% would go in but start looking for a new job, and 6% would quit.
While the numbers vary, there is one recurring trend: one-third. Gartner: 1 in 3 executives; 36% of senior-level job seekers. LinkedIn: a third of UK workers. Unispace: almost a third (29%). Owl Labs: 35% would go.
So, let’s start with the potential to lose 33% of your workforce if you mandate a return to the office, noting that the figure includes the most senior, tough-to-replace talent.
The cost
There are many cost-of-turnover calculators, but I like the one from Claire Harrison, Managing Director at HR consultancy Harrisons. I like it because it not only takes into account the direct costs but also the many indirect costs
In this blog, Claire explains how to calculate your direct, indirect, and total employee turnover costs. She provides the formula to calculate your direct employee turnover costs and then lists the indirect costs that need to be considered and how to calculate them. These include:
· In-house hiring costs
· Training/induction costs
· Termination administration costs
· Loss of productivity in early stages of employment
· Loss of productivity in final stages of employment
There is also the offset – the unpaid costs while a job is vacant.
In summary, you calculate your total employee turnover cost as follows:
The total cost of turnover of one employee is as follows:
Total direct costs
PLUS total indirect costs
LESS Unpaid costs while the job is vacant
= Total cost of employee turnover
The crunch
Let’s look at an example scenario. I will use the 2024 Australian Bureau of Statistics (ABS) figures.
Full-time adult average weekly total earnings of $1,955.20 (Nov 2023).
Add 30% to this wage for the cost of employee benefits and on-cost amounts to $586.56, giving a total cost of $2,541.76.
The ABS classifies businesses as:
· Large businesses, with employment of 200 or more persons
· Medium businesses, with employment of 20 to fewer than 200 persons
· Small businesses, with employment of 5 to fewer than 20 persons
· Micro businesses employ fewer than five persons (including non-employing businesses).
If we took a small business employing 19 people and a 33% employee turnover, that would be six resignations per year.
Assuming turnover cost is a year’s total remuneration for each employee, the total annual cost of turnover for this business is $$2,541.76 x 52 weeks x 6 employees.
That is a total of $793,029.12 for a small business.
If we looked at a medium business with up to 199 employees, the total annual cost of turnover would be $$2,541.76 x 52 weeks x (199/33%) 66 employees.
That is a total of $8,723,320.32 for a medium business.
If we looked at a large business and assume 2000 employees, the total annual cost of turnover would be $$2,541.76 x 52 weeks x (2000/33%) 666 employees.
That is a total of $88,026,232.30 for a large business.
Those figures would scare the bejesus out of me if I were the CEO.
What next?
Have the conversation.
“Research by professional services firms such as Gartner and Deloitte and esteemed Universities such as Michigan, Chicago, and RMIT all confirmed that the return-to-office mandates will result in employee attrition and include the tough-to-replace talent.
Although attrition rates are predicted to vary, many research bodies agree that the figure will be around 1 on three employees.
This is what that means for us…$…..”