By: Pat Kelley
As the newly-hired Human Resources Manager for a small manufacturing company, I quickly realized that many of the company’s problems were directly related to employee turnover. That was driven home in dramatic fashion when we began drug testing. Thirty-six percent (36%) of the then-current employees tested positive for illegal drugs, even after being given more than thirty (30) days’ notice of when the testing would begin. During the first ninety (90) days or so after we began testing applicants, we had positive results on nearly fifty percent (50%). Eventually, word got around and the positive test results dropped to less than five percent (5%) while the quality of applicant increased. Our new hire turnover went down to nearly zero (0), and our product quality quickly became the best it had ever been.
The turnaround of that company was not entirely due to drug testing, but that was certainly a large part of it. It was the beginning of a major change in the company’s attractiveness as a potential employer and was the start of a long list of good things for all the employees. Best of all: the company returned to profitability for the first time in several years, providing employment stability for more than two hundred (200) people, and parts supply stability for our customers.
As business owners and managers, we’ve all asked ourselves why drug test from time to time. After all, drug testing is time-consuming when we’re trying to get people started to work, and it costs money when we’re trying to make a profit. Let’s take a look at several reasons why drug testing of employees has become such an important management tool.
First, the bottom line is that if you’re not drug testing applicants and employees, the only people you’ll be able to hire are those who cannot pass a drug test. That informal network of job seekers knows which companies test and which don’t test; they don’t bother to apply at the companies that do pre-employment drug testing.
Second, employee turnover costs a lot of money that goes right to the bottom line, and drug-and-alcohol-abuse is a major reason for turnover. The cost of absenteeism, work-related accidents and injuries, poor morale, and poor work quality can all be traced to employee drug use.
Turnover costs are overhead, pure and simple. If we sell a product, we can add the cost of turnover to the cost of the product, if we don’t cost ourselves out of the market. If what we sell is a service, overhead costs are included in the rates we charge, but if our overhead is too high, we again price ourselves out of the market. There is simply no way to pass along most of our overhead, so we pay for it out of our gross margin and hope there is enough there to cover it. In other words, every dollar we spend on turnover is one less dollar that goes into the profit column. It is a cost we cannot afford and be competitive.
The Society for Human Resource Management (SHRM), a national organization of HR professionals with more than 200,000 members, has sponsored extensive research on the costs of turnover. One study proved the average cost of turnover is between one-and two-and-a-half time the average annual pay for an employee. Let’s look at some examples: You pay your front counter customer service clear ten dollars ($10.00) per hour. Annualized, at 2,080 hours for full-time, that’s $20,800 per year. That’s the minimum cost of turnover.
Costs are even higher for professional level employees. A CPA firm pays entry-level accountants with college degrees an annual salary of $50,000. Because of the higher cost of recruiting and training, your turnover now costs 2 1/2 times annual pay for a total of $125,000.
Before you deny those costs, consider some of the “hidden” costs of turnover. Newspaper advertising, interviewing time and payroll, reference checking, skills testing, travel expenses, and training time are all included in the cost of turnover. Add the loss of company knowledge, mistakes that trainees make and the lack of productivity of new employees; possible cost of overtime, and loss of customer confidence when you have a “revolving door”, and turnover costs continue to rise.
Next, drug and alcohol abuse by employees has been proven to lead to dishonesty and theft, costing one to two percent (1%-2%) of gross sales each year. That’s according to research by the U.S. Chamber of Commerce. The Small Business Administration estimates that thirty percent (30%) of business failures are directly related to employee theft.
Finally, consider your own peace of mind. Whether you are managing your own business or managing a department or company for someone else, it’s impossible for you to feel good about the business when high turnover is wrecking your profits, creating customer problems and perhaps forcing you to turn away work.
Forget about making excuses for failing to drug test — those excuses simply do not stand up to security. The costs of testing are a tiny fraction of what you’ll save when you drug test applicants and current employees and improve your business’ bottom line.
**Before Pat Kelly retired, she was certified as a Senor Professional in Human Resources and was the 2008 recipient of the Lifetime Achievement Award presented by the Arkansas Society for Human Resources Management. She is the author of “Hiring Right: A Business Blueprint for Lower Turnover and Higher Profits”.