How to Calculate (and Combat) Employee Turnover

By Michael Kutch
July 14, 2017

Hiring an employee is like making an investment. They can either add value to your company and appreciate over time, or drain your funds, time and resources. A positive ROI will materialize when they grow and become adept in their work. But if they don’t work out, it can have a massive negative impact on expenses and productivity.

When it comes to bringing on new employees, it takes a lot of time and effort. Around 30 percent of companies reported that it takes at least a year or more to get someone fully up to speed. This usually doesn’t include the time it takes to advertise the position, surf through applicants, interview, integrate and train your employees.

Determining your turnover rate is important because it helps you understand how well your company retains the employees it spends all this time and money recruiting and onboarding. While employee turnover is inevitable, there are some ways to combat it and reduce its effects.

What Is Employee Turnover?

Employee turnover occurs when an employee leaves a company and their position either becomes irrelevant or needs to be filled. When calculated, it’s displayed as a percentage that can be broken down into two separate categories for deeper analysis.

Types of Turnover

There are a few ways an employee can leave a company or a position, they can be laid off, retire, quit, relocate or be seasonal (ex. go back to school, only available during the summer).

  • Voluntary turnover occurs with attrition —when an employee leaves a company on their own terms. So, when someone quits, retires or works seasonally, it falls under voluntary turnover.
  • Involuntary turnover occurs when a company lets an employee go (aka he or she is fired).

Why Measure Employee Turnover?

Measuring employee turnover can help you answer essential questions like, ‘Why are employees quitting?’ and ‘Why are we getting rid of so many people?’ Calculating employee turnover can also help identify costs for budgeting purposes. These costs can vary across industries since there’s a difference between training a warehouse forklift operator and a lawyer.

Turnover can be very costly, especially when about “one-fifth of workers voluntarily leave their job each year (Tweet this Stat) and an additional one-sixth are fired or otherwise let go involuntarily”. If your company is constantly turning over positions each year, it can significantly affect your wallet (as you may already know).

The Allied Workforce Mobility Survey found that “companies spend on average $10,731 per hire, taking on average 51 days to fill an open position(Tweet this Stat). Turnover costs vary from year to year and can be considerably more expensive for highly skilled positions.

The Center for American Progress found that turnover costs are around 20 percent of an employee’s annual salary (Tweet this Stat), while higher job titles, like senior and executive type roles that have “stringent educational credential requirements” can cost up to 213 percent of their annual salary. For example, “the cost to replace a $100k CEO is $213,000“. Spending around 20 percent of an employee’s annual salary to bring on a new employee is a relative benchmark across industries.

Keep in mind that you may be required to pay severance to employees that are leaving – due to involuntary turnover. This is another expense that can make a dent in your books.

How Do You Calculate Employee Turnover?

Divide the total number of employees who left by the average number of active employees during a period (ex. month, year).

To calculate voluntary or involuntary turnover, instead of using the overall number of employees who left, use either those who left through attrition or who were let go.

What’s a Healthy Turnover Rate?

There’s no exact “healthy turnover rate”, especially as it varies each year, but a few companies have provided reliable benchmarks. The 2016 Human Capital Report found an average turnover rate of 15 percent, and “Bernadette Kenny reports in ‘Forbes’ magazine, any rate below 15 percent annually is considered healthy and no cause for alarm. This means that a company of 200 workers can lose 30 individuals within a calendar year without it becoming a problem.” It is important to note that if that 15 percent includes all your top performers, then you have a problem.

CompData Surveys found an average turnover rate of 17.8 percent across all industries in 2016. This “features data submitted by more than 30,000 organizations”. Manufacturing and distributing had a rate of 12.2 percent and Banking and Finance had a rate of 18.1 percent. Here’s a look at turnover trends from 2008 to 2009 from Compensation Force:

The U.S. Department of Labor has a vast accumulation of the current rates and numbers for layoffs, quits, turnover, job openings and more for part of 2017. They provide great insight that’s curated by industry.

How to Combat Employee Turnover.

Now that you’ve got a solid understanding of your turnover rate, it’s time to discover where it occurs most, calculate the associated costs, and figure out ways to improve that number.

Combating turnover relies on you hiring the right employees. While there’s no universal definition for the ‘right employee,’ it can broadly be defined as someone who’s a good fit for the role and company culture. They should get along with fellow employees and work in a field that they’re passionate about. This should lessen the chance of them quitting, or needing to be let go. It’s good to know a potential candidate’s plans for the future and any aspirations they have for their professional career before hiring them. So, asking the right interview questions is a sure-fire way of finding the right employees.

If you find a certain department (or role) is facing a high turnover rate, it’s important to get feedback from the employees currently in the department to learn what they find dissatisfactory and what they believe needs improvement. Another key step is learning why people are leaving a position. Whenever you fire an employee or an employee quits, make sure you conduct thorough exit interviews. You must know why they’re leaving or why you’re letting them go. This will help you identify any problems and work to fix those for any current and future employees.

Utilizing competitive financial wellness, benefits and salaries, along with flexibility, good business sense and support, will keep employees content and motivated. It’s important to note that turnover is inevitable, especially with today’s modern workforce staying at companies for much shorter periods of time. Also, keep in mind that new hires with fresh minds come in with new ideas and perspectives that can help the company innovate and stay ahead of the game!

Ready to Lower Your Turnover Rate?

When making a financial investment you need to consider all the variables and data, and having a killer culture is one of the most essential. It’s not something that comes from the flick of the wrist. Culture is the attitude your employees bring to work, and it forms naturally, over time, starting with top-level executives. Take cooking, for example, you throw in a bunch of ingredients and, depending on the variety and amount, your dish can come out extremely different. The same is true with culture, your main ingredients (top level management) make up the bulk of the meal and steer the general direction of the dish. The rest of the company makes it salty or sweet. Or, in our case, spicy!

Lay down a strong foundation and know who your company is, not just by what your product or service is but by who you are as a group of people. This environment retains incredible employees and attracts the best potential candidates. What are you waiting for? Get out there and make bank on your next investment!

 

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