Employee turnover: Learn to calculate and improve yours

Having a high employee turnover rate can be a huge problem for any business. As many companies are going through the Great Resignation, it is crucial for employers to calculate the company’s turnover rate and understand how it is affecting business operations.

In this article, HRD explores why employee turnover is an issue, what causes it and how businesses can reduce their turnover rate.

What is employee turnover?

Generally, in business, employee turnover describes the rate at which employees leave an organization and are replaced by new hires. It is typically expressed as a percentage of the total number of employees in a given time period.

It is an important measure of organizational health because it indicates how well employers are able to retain and satisfy the needs of their employees.

• A high volume of employees leaving can be a sign of dissatisfaction with the organization, its practices, or its leadership, and can lead to increased costs for the organization in terms of recruiting and training new hires.
• Conversely, a low volume can indicate that employees are content, and that the organization is successful in its efforts to create an environment where employees feel valued and respected.

What are the four types of employee turnover?

Employees leaving can be caused by various reasons. Generally speaking, HR professionals look at four different types of employee turnover:

1. Voluntary turnover

This is the most common type of turnover seen in businesses. It refers to when an employee leaves a company willingly out of their own choice. It is usually either because they have found a new job or for personal reasons.

Voluntary turnover can be either positive or negative for a company, depending on the circumstances.

• For example, if an employee leaves to pursue a better opportunity, it may be seen as a positive outcome for both the employee and the company.
• On the other hand, if an employee leaves due to dissatisfaction with the company or their job, it may be a negative outcome.

Conducting exit surveys or exit interviews help shed a light on the true reason an employee is resigning. It also helps employers better understand whether the employees are leaving due to a negative reason against the company or not.

2. Involuntary turnover

Involuntary turnover refers to the situation where a company lets go of an employee rather than the employee choosing to leave of their own accord. This can happen for a variety of reasons, such as:

• Being fired for poor job performance
• Lay offs
• Restructuring
• Other changes within the organization

Involuntary turnover can be disruptive for a company, as it may require the organization to find and train a new employee to replace the one who left. It can also be costly, as it may involve severance pay or other expenses associated with terminating an employee's employment.

While it may be hard to ignore the need of an involuntary turnover, employers can make the layoff smoother for employees by giving them adequate time to transition out of the company and to begin their job search. This reduces the risk of creating bitter ex-employees that could damage the image and reputation of the company for its clients and future employees.

3. Internal turnover

Internal turnover refers to the movement of employees within a company or organization, rather than the loss of employees through departure. This can include:

• Promotions
• Lateral moves to different departments or teams
• Transfers to different physical locations

This type of movement can be a positive development for an organization, as it can provide opportunities for employees to develop new skills and advance their careers within the company. It can also help to fill vacancies and address staffing needs within the organization.

However, if internal turnover is too high, it can negatively affect the company and may require the organization to invest time and resources into training new employees to take on new roles. High levels of internal turnover can also lead to a loss of institutional knowledge and expertise, as experienced employees leave their current positions.

4. Retirement

Retirement refers to the situation where an employee leaves a company or organization due to reaching the age of retirement. Retirement is a normal stage in an employee’s professional career. It does not cause that many problems compared to the other three types. 

Retirement age varies by country and can be influenced by factors such as:

• Government regulations
• Industry norms
• Individual employment agreements.

How do I calculate employee turnover rate?

It may seem intimidating for many but, in reality, it is easy to calculate the employee turnover rate. To calculate the monthly turnover, you should divide the number of employees who left in a month by the average number of employees the company has in the month. From there, the subtotal is then multiplied by 100.

To find the average number of employees, add the number of staff a company has at the beginning of a month to the number of employees remaining at the end of the month. The subtotal is then divided by two.

For the annual turnover, divide the total number of employees who left in a year by the average number of employees in a year. It is then multiplied by 100 to reveal the percentage of the annual turnover rate.

It's important to note that the turnover rate can be calculated for a specific period, such as a month or a year, or as an average over a longer timeframe. It can also be helpful if turnover rates are calculated for specific departments or job roles within your organization to get a more detailed understanding of your employee retention patterns.

What is a good turnover rate?

Ideally, business and HR leaders want to keep the employee turnover rate in their organization as low as possible. According to industry insiders, a 10% turnover rate is considered good, especially if the attrition comes from bottom performers.

But some experts say that because different industries have varying degrees of employee turnover, it is often difficult to come up with “one-size-fits-all” magic number. For organizations that want to determine the overall healthiness of their turnover rate, the best way to start is to compare the rate to their industry’s average. Apart from the industry, staff turnover rates change month to month and year to year.

Recent modelling by the employee engagement platform Reward Gateway revealed the following stats:

• The retail sector has one of the highest average turnover rates at 57%
• For manufacturing, the figure is 20%,
• The financial services industry has a turnover of 19%
• Technology industries have a median employee turnover of 18% 

One thing to note, however, is that employee turnover rate is not the only measure of success in retaining staff. Quality is still more important than quantity. Your business is on shaky ground if there is a revolving door for high-performing employees. This can also indicate management issues. On the flipside, it can be beneficial for your company is you lose poorly performing staff. However, too much bad performers can likewise reflect problems in the recruitment process.

In the end, a healthy employee turnover rate is one that allows your organization to continue running smoothly and presents your business a lot more opportunities than headaches.

What are the factors that cause employee turnover?

There are several reasons that can push employees to voluntarily quit their jobs:

• It can be for personal reasons like having an opportunity to further their careers elsewhere
• Health issues that require them to take time off
• Organizational reasons such as poor compensation, ineffective managers, or a negative work culture.

In terms of involuntary turnover, it can be a result of poor employee performance and organizational restructuring. Here are some of the most common causes of employee turnover.

• Overwork: Employees who consistently feel overwhelmed with the sheer volume of work they need to finish with limited time will start looking elsewhere for a different opportunity.
• Lack of feedback or recognition: As industry experts say, the only thing worse than bad feedback is getting no feedback at all. Employees who receive little to no guidance on how to develop their skills or are blindsided by a negative review are more likely to look for better opportunities elsewhere.
• Compensation issues: Compensation and benefits are among the top reasons why employees leave an organization. Workers are likely to leave their current jobs for a pay rise somewhere else.
• Bad managers: We have all heard a lot about toxic managers – they are abusive, take credit for other people’s ideas, and play favorites. And worse, they can cause even the best-performing employees to jump ship. These leaders, however, are easier to spot compared to managers who are simply bad at their jobs. This type of leaders, while not as abrasive as their toxic counterparts, can likewise cost companies great talent.
• Lack of opportunities for development: Most employees who do not see their careers advancing within the company will leave for an organization that presents better opportunities for career growth.
• Poor work-life balance: A flexible work arrangement is a key contributor to work-life balance. Companies that are not open to offering their employees with this kind of set-up – which has gained popularity in recent years – may lose staff to organizations that provide workers with better flexibility.
• Bad hiring practices: Short-term retention rates signal issues in your hiring and onboarding procedures. If your organization finds itself having to terminate poor performers often, this can indicate that your hiring process is problematic.
• Toxic company culture: If your employees dread going to work, it is a sign that your company breeds a toxic culture. This is often a result of a combination of the factors listed above and it can cost companies a significant amount of money due to otherwise preventable employee turnover.

A deep understanding of the reasons for employee turnover is an essential part of talent management. Because of this, it is best for you to encourage departing staff to participate in an exit interview. This can help your organization find ways to fix addressable issues.

However, it is equally important for HR leaders to get honest responses in these interviews. This can be done by assuring all leavers that their responses will be confidential and will in no way impact how the company will respond to requests for references or confirmation of employment. 

Which jobs have the highest turnover rate?

While organizations across all industries are experiencing some level of employee turnover, there are certain sectors and roles where staff are more likely to leave. A 2022 year-end report found that employees who have the highest probability of quitting are those who went remote during the pandemic but are now being forced to shift back to in-office arrangement.

The report adds that workplace flexibility has become “intrinsically tied to employee satisfaction,” especially following the height of the COVID-19 pandemic when workers had more autonomy on where and when they conducted their jobs. But when businesses start to roll back this flexibility by requiring employees to go back into the office, this has resulted in higher attrition.

The table below details the top 10 jobs where employees were most likely to say, “I quit,” according to the report.  

How can you prevent employee turnover?

Employee turnover is a costly issue that many organizations constantly face. Industry figures show that the cost to replace an entry-level staff is between 30% and 50% of their annual salary, a mid-level employee at least 150% of their salary per year, and a high-level or highly specialized worker about 400% of their yearly wage. This is why it is imperative for businesses to do whatever it takes to attract and retain top employees.

Here are some of the most effective ways your organization can prevent employee turnover.

• Hire the right talent: It all starts in the hiring process. Make sure that the role and the responsibilities it entails are clearly understood by the recruiters and the candidates. The ideal candidate, however, should not only be a fit to the position, but also for the company’s culture.
• Create a positive onboarding experience: Onboarding is often the new hires first introduction to your company’s culture, so it pays to give them a positive experience. This can leave a lasting impression on the employee, which can influence them to stay with your organization longer.
• Recognize and reward employees: Recognizing employees is one of the most effective ways of keeping them engaged. Make sure your program offers them true, real-time employee recognition that celebrates their achievements and efforts. Workers who feel recognized and thanked also feel more connected to your organization and are less likely to leave.
• Encourage a healthy work-life balance: A flexible work arrangement has increasingly become more popular with the onset of the pandemic and organizations who offer staff this kind of set-up are more likely to attract and retain top talent.
• Offer opportunities for learning and career growth: Employees value career development. They also value learning opportunities that allow them to strengthen existing skills and build new ones. To reduce voluntary turnover intentions, it is crucial for your company to offer a clear career path and invest in staff training.
• Cultivate a culture of respect: A workplace culture that demonstrates and cultivates respect goes a long way not just in retaining staff but also in bringing out the best in every employee.
• Keep compensation and benefits updated: Make sure to offer employees fair and competitive renumeration, along with raises that keep up with their performance. Compensation and benefits are among the top determinants if an employee will stay with or leave a company.
• Monitor toxic employees: This is something that needs to be addressed as soon as possible because as the saying goes “one bad apple spoils the bunch.” A toxic employee has a negative impact on workplace morale and can push high-performing staff out the door. And sometimes, you just have to make the hard choice of letting people go, especially if no matter what you try to do, it just isn’t going to work out.

Are there other measures that you think companies should consider to reduce employee turnover? What do you think is the best way to attract and retain top talent? Share your thoughts in the comment section below.