Cost of redundancies averages £16,000

Redundancies often cost more than £16,000 each, according to the Chartered Institute of Personnel and Development (CIPD).

The CIPD has produced a lengthy formula for working out the cost of redundancies in a bid to stem the tide of job cuts.

The UK’s unemployment rate hit a nine-year high in the three months to October 2008, latest figures showed before Christmas, and a new wave of job cuts is feared in early 2009.

CIPD chief economist John Philpott said: “Businesses are under huge pressure right now and restructuring is a fact of economic life that can never be ruled out.

“But while making people redundant can seem one of the most straightforward ways of cutting costs, redundancy is itself a significant cost to most organisations with a number of direct and indirect or hidden costs.”

The CIPD’s formula says the cost of redundancy = (n x R) + (X x H) + (X x T) + ny(H + T) + Wz(P – n), where:

n = number of people made redundant

R = redundancy payments

X = number of people subsequently hired

H = hiring costs

T = induction/training cost

y = percentage quitting post-redundancy

W= average monthly staff salary

z = percentage reduction in output per worker caused by lower morale

P = number of people employed prior to redundancies

Philpott added: “While the average direct cost to employers of making redundancies can reach £16,375, on top of this are hidden or indirect costs resulting from the effect of redundancy on survivor employees, such as higher labour turnover and a fall in staff productivity.

“The formula shows how redundancies can impede quick recovery from the downturn. This doesn’t mean that restructuring can’t take place but it should be with a view to the long term and not short-term cost cutting.”

Read the CIPD report A False Economy: the cost to employers of redundancy here.


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