Employee turnover is a struggle that virtually every employer of every size has to deal with in some capacity. 87% of employers say that improving employee retention is a critical priority for them.
That's because the costs, lost productivity, and impact on morale associated with high employee turnover are well known and are felt across an organization. Getting a handle on employee retention issues should be a top priority for any organization experiencing them.
This article will serve as a detailed guide about employee turnover and provide insights into how you can calculate and reduce your turnover rates.
What is employee turnover?
Employee turnover is the loss of talent in a workforce over time. This is calculated by the rate at which employees leave the organization for various reasons over time.
Examples of why an employee may leave a company include:
- Location transfers
- Taking a job with a new company
Employee turnover isn't always a bad thing: it just depends on the reason for that turnover and its impact on the organization.
For example, an organization that removes a few low performing employees and replaces them with one high performing employee experiences net benefits from that turnover. Or, if an employee leaves voluntarily for an exciting position at a new firm, that reflects positively on the growth and development opportunities available at your company. While the initial departure can be challenging, the organization may boost motivation and engagement from the remaining team members looking to show their abilities.
Employee turnover can have a lot of different causes and impacts on an organization. Understanding what types of employee turnover you're experiencing and the contributing factors are important for actively managing your retention efforts.
What are the different types of employee turnover?
Generally speaking, there are two main types of employee turnover: voluntary and involuntary.
Examples of voluntary turnover might include:
- Taking another job
- Internal transfer
- Extended sabbatical
- Personal reasons
- Return to school
- Job dissatisfaction
Voluntary turnover is usually more expensive for an organization because it often involves the loss of a high performer. This is particularly true in the turnover because the employee took a new job or was promoted internally.
Voluntary turnover often leaves a knowledge and skills gap within your organization that needs to be filled with an internal or external candidate. Filling these roles - especially if they are more senior or technical positions - can be quite costly and time-consuming, as we'll show later in this article.
Involuntary turnover can be either good or bad for the organization, depending on the circumstances. Terminating a poorly performing employee or insubordinate in violation of company policies can positively impact the organization in the long term. Layoffs, on the other hand, are often symptomatic of poor management or financial difficulties.
It's important to take into account your sources of employee turnover. Understand why employees leave and at what rate will help you flag potential issues and causes before turning into a significant problem for your company.
One way to accomplish this is to perform quarterly or yearly calculations of your employee turnover rate.
How to calculate employee turnover
Regularly calculating your employee turnover rate will help you predict and adapt to the employment losses you can expect to have in the coming year.
Turnover rate is defined as the percentage of employees who leave the company during a defined period of time. Typically, you would calculate your turnover rate yearly as part of a review of the previous fiscal year's performance and guide strategy going forward.
The equation for calculating the turnover rate is a simple one:
To accomplish this calculation, you'll need two figures:
- The average number of employees you employed last year. Break your employment numbers down month-by-month in an Excel worksheet. Find the average of all 12 months. This will be your yearly average number of employees.
- The total number of employee departures. Pull a list of all employee departures from across the organization. Find the sum total of all departures.
For example, if 47 people left your organization this year, and you employed an average of 500 people, then your turnover rate would be 9.4%.
If your organization doesn't keep a central database of all employees and all departures in a given year, this process may require you to individually approach each department head. Use Excel to populate data as you go to make calculations and analysis more comfortable to manage.
Once you have your annual employee turnover rate, it's important to benchmark it versus the industry average and your company's previous years' performance. Look for employee turnover statistics from companies that share the same industry, locations, sizes, and revenue levels as you. Compare your turnover rate to that of the industry average to see how you stack up to the competition.
Likewise, you should keep a running tally of your employee turnover rates year over year. This will help you quickly identify spikes or depressions in turnover that might indicate positives or negatives in your hiring and performance strategies. Doing so will help your organization identify and adapt quickly to potential problems.
What is the cost of employee turnover?
Replacing employees is very expensive. Anyone who has managed a business or been involved in recruitment can attest to that fact. The common statistics that illustrate this point is that filling a vacant role costs the employee roughly 33% to two times the employee’s annual salary.
It's also known that filling more senior, technical, or in-demand positions can take much longer than other roles. And, these positions demand much higher salaries. The cost of filling the most senior and in-demand positions is a combination of hiring resources and spend plus lost productivity due to the vacancy, plus lost strategic direction in the case of vacant senior management roles. This cost is exacerbated; the longer a specific role remains unfilled.
In all, the cost would include:
- Cost of lost productivity in the lead up to turnover
- All recruitment and onboarding costs
- All recruitment and onboarding resource efforts
- Lost productivity in the time between turnover and new hire
- Loss of corporate knowledge
- Lag time in returning to previous productivity in that position
- Strategic losses due to unfilled leadership positions.
As you can imagine, it can be quite difficult to pinpoint the exact cost to the organization when a single person leaves. To help, here is a simple formula that you can use to get a handle on actual costs from employee turnover.
The equation above assumes that your cost of employee turnover matches the 20% average listed earlier. Calculating your exact cost-per-turnover using real data within your organization would further illustrate the true cost of employee turnover.
To accomplish this calculation, you'll need two figures:
- The total number of employee departures in your survey period. This is a lump sum figure of all employees who left your organization within the last year.
- The average salaries for each of those employees. Identify each of the employees who left, and note the salaries that the organization was paying them. Use Excel to collect that data, and then find the average salary for all leavers.
For example, if 47 people left your organization last year, and you paid those people an average salary of $75,650, then your rough cost of employee turnover would have been $711,110.
Again, the above figure includes the hiring costs and lost productivity outlined earlier in this section. Being armed with this lump sum "waste" figure will help senior management with recommendations for improvement.
What are the reasons for employee turnover?
As you can likely imagine, there is a wide range of different reasons and factors that can lead to employee turnover.
Generally speaking, here are some of the common reasons why people leave a company, either voluntarily or involuntarily:
- Poor hiring
- Lack of fit
- Poor management
- Non-competitive pay or benefits
- Strong competition in the job market
- Lack of career advancement
- Lack of training, support, or resources
- Lack of vision or communication
Individual cases of employee turnover aren't necessarily a cause for alarm. But, trends that come from aggregated data around employee turnover should be taken seriously by senior management at your organization.
Note the reasons for each departure, and track trends throughout the year. If you're noticing that one or two reasons keep surfacing, this is a good indicator of a problem.
How can you reduce employee turnover?
Once you've identified the problem, now you can start to take steps to alleviate the issue and reverse any negative employee turnover trend you're experiencing. Typically, reducing employee turnover comes down to address one of the following:
Let's dig more into each.
As the old saying goes: "People don't leave companies, they leave managers." While this might not always be true, it does address a very real factor in employee turnover. Employees are more likely to leave a company if their direct managers - or senior management - aren't living up to their expectations.
If you're noticing a higher level of turnover from a single department, or manager, then it's likely time to assess that manager's performance. It's also critical that you provide support to your management team, provide them with the training, direction, and resources they need to perform at a high level.
This should include:
- Setting clear expectations for managers and employees
- Providing training and coaching on management best practices
- Prioritizing and encouraging strong supervisor-staff relationships
- Mandating clear and open communication
- Establishing a management framework that empowers employees to contribute their unique skills and insights, rather than micromanages them
- Monitoring staff engagement and morale and taking steps to improve both
- Ensuring that all staff have the resource, training, and employee development opportunities need to perform their jobs at a high level for the long term
Above all, your organization should ensure that all employees, regardless of seniority, are treated fairly and with respect by their managers and peers.
High employee turnover - especially when it occurs within the first year of employment - is a strong indicator of a flawed hiring strategy.
If you're hiring the right people and screening for the right reasons, then new employees should stay with the company longer. If they're not, then it's time to look take a look at the following questions:
- Are you hiring people who are clearly in alignment with your company culture, mission, and values?
- Are you actively screening candidates for fit?
- Have you standardized your cultural screening process?
If the answer to any of those questions is "no," then it's likely that you'll want to revisit your screening process to ensure that you're hiring the right types of people that will be more likely to stay on for the long term.
One way to start is to look at employees who have been there for more than three years. Find what they have in common, and focus on those traits in your screening.
Did you know that structured onboarding processes offer a 58% higher likelihood that employees will stay with your organization for three or more years? There's a reason for that, and it starts with making your new hires feel welcome and part of the team.
Strong onboarding provides a variety of turnover-reducing benefits, including:
- Increasing employee engagement
- Setting expectations and goals early
- Quickly integrating new hires into the team
- Showing strong interested in and commitment to new employees
- Showing commitment to providing the tools and training needed to do the job well
- Communicating the company values, vision, mission, and history
First impressions count for new hires. If your organization isn't willing to take the time to properly onboard and train new employees, then don't be surprised if they're quickly out the door.
Like with most problems in an organization, employee turnover usually has clear symptoms and causes. Tracking your employee turnover rate, its associated costs, and identifying underlying reasons will help you continuously stay ahead of potential problems and mitigate them early.