Turnover rate reveals critical insights into a company’s culture, recruitment strategies, and long-term viability. Calculating and tracking this metric helps reduce costly employee departures and improve workplace retention.
By Brad Nakase, Attorney
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One of the most reliable measures of a company’s viability over the long run is its turnover rate. In it, you’ll get an in-depth analysis of your business’s culture, recruitment strategies, and employer branding. If you want to stay ahead of big business disasters, you must track this metric.
As a company owner or manager, you should educate yourself about the meaning of staff turnover, the formula for calculating your turnover rate, and the proper way to evaluate the data.
A company’s turnover rate is the proportion of its workforce that has departed within a given time frame. People usually talk about it in terms of the employee retention rate, which is the percentage of original workers that stayed from the start of a certain time to its end.
Actually, two distinct kinds of turnover exist. First, there’s voluntary turnover, which happens when workers voluntarily quit their jobs. The second kind of employee departure is known as “involuntary turnover.” This occurs when an employee is fired by their employer for reasons such as chronic underperformance, lowering team output, betraying the company’s principles, or damaging the culture.
A company’s turnover rate may be defined as the proportion of its workforce that has departed within a given time frame. People usually talk about the retention rate (the percentage of employees who are still with the company) when they bring up the turnover rate.
Because high turnover may be so expensive for businesses, measuring and monitoring turnover regularly is crucial. One way it hurts your employer brand is by making it seem like you’re always looking for new employees. This makes it tougher to fill open positions. In the end, this raises your cost-per-hire since more recruiting resources are required to entice qualified applicants.
A detrimental cost-of-vacancy includes income loss, productivity reduced, and staff morale diminished, all of which increase the length of time a position is empty. To sum up, reducing employee turnover is critical to the success of your business in the long run.
The technique for determining your turnover rate during a specific time period just needs three pieces of data: the initial and final employee counts, as well as the total number of separations that took place inside that period.
Rate of employee turnover = (number of departures divided by average number of employees) * 100
To find the average number of employees, we add up the two headcounts. Finding the average number of workers over that time period and dividing it by the total number of employee separations is the next step. Although it may sound hard, the technique is actually rather simple.
One way to illustrate the concept of turnover rate is with the following example:
Twenty-five people were working at XYZ Tech Company as of January 1, 2021. Throughout the remainder of the year, the firm employed 25 individuals and let off 15. There were a total of 135 workers on January 1, 2022.
Step 1: Set the time frame.
At the very least, you should assess your turnover rate once a year. Knowing your turnover rate will be useful in discussions about strategy and finances. However, you should aim to measure your turnover rate more regularly in order to closely monitor the satisfaction of your employees and the general well-being of the company.
Establishing a precise time frame for your analysis is the very first step. You should use the starting and ending dates of the previous year and the current year, respectively, to get your yearly turnover rate.
Example
For the year 2021, we are trying to determine the turnover rate of XYZ Tech Company.
Consequently, the time frame would be January 1, 2021 through January 1, 2022.
Step 2: Calculate the Average Number of Employees Over the Given Time Period.
Throughout the specified time frame, what was the average number of workers (EE) you had? Two pieces of information are required to arrive at this figure: the total number of workers on the first day of the specified period and the total number of staff members on the final day.
You may easily get this data by looking up the total number of employees on both days in your payroll system. Payroll must include all employees, whether they are working full-time, part-time, or on a direct-hire basis. When an independent contractor leaves your employ, it is because their contract is over, not because of turnover. So, leave them out of the calculation. Their inclusion will cause your results to be skewed.
The next step is to combine the two employee totals. Take the total and split it in half.
The formula for the average number of EE is to divide the sum of the two days’ EE counts by 2.
Example
There were 125 people working for XYZ Tech Company as of January 1, 2021. There were 135 workers by year’s end in 2021.
½ of (125 + 135)
(260 divided by 2)
The average number of employees comes out to 130.
Step 3: Count all the separations.
If you want an accurate turnover rate, you have to keep track of every employee that leaves. Include any separations, whether voluntary or involuntary, that took place between the start and finish dates of the specified time frame.
Employees on sabbaticals or other forms of temporary leave (such as parental, medical, or other types of leave) should not be considered separated. Even if they aren’t actively working with you, these people are technically still considered to be workers. Your separation total should also not include promotions or transfers.
Example
XYZ Tech Company had fifteen employee separations in 2021.
Therefore, the number of separations stands at 15.
Step 4: Figure out your turnover rate.
You may find your turnover rate by dividing the total number of employee separations throughout the specified time period by the average number of workers. You may express the amount as a percentage by multiplying that number by 100.
The formula for the turnover rate is as follows: [(number of employee separations) / (average # of employees)] multiplied by 100.
Example
In 2021, XYZ Tech Company had a yearly turnover rate of 11.54% due to 15 employee separations and an average of 130 employees.
0.1154 is the result of dividing 15 by 130.
Ratio of employee turnover: 11.54% (0.1154 x 100).
Fifth, check your turnover rate against market norms.
Of course, every company is unique, but comparing your turnover rate to industry norms may give you a good idea of how well your staff retention plan is working.
By way of illustration, XYZ Tech Company’s 2021 turnover rate of 11.54% was lower than the information sector average of 39.99 percent. However, before we can celebrate, we need to find the answers to other issues regarding employee turnover.
You may learn a lot about your turnover rate by looking at industry standards, but remember that every business is different. Turnover data analysis is thus best done by looking within.
A commonly acknowledged turnover rate in any business is 10% or below, however what constitutes a “good” rate will differ from one organization to the next based on its retention objectives. As an example, the government sector has a rate of 18.1%, according to the Bureau of Labor Statistics, but the leisure and hospitality sector has a rate of 84.9%.
At first look, a low turnover rate in comparison to industry standards could seem great. However, what happens if your top performers are the ones leaving? Answering these three questions will help you put your turnover rate in context, which will help you avoid making assumptions and missing widespread problems.
You should start by tracking the employee life cycle and your company’s cycle to find out when turnover is happening. Did a major shift, such as a reorganization of teams, take place before the turnover rate skyrocketed? Then the reorganization could have caused more trouble than you anticipated. This may indicate that there is a need to improve communication from the top and foster a more favorable work environment.
Also, think about how long they have been with the company before they left. Is it after several years or perhaps a decade that they decide to leave, or do they hardly make it to their first anniversary? If you have a high new-hire turnover rate, it’s likely because your recruiting techniques aren’t working. This might be due to a lack of qualified applications, inaccurate job descriptions, or an inadequate onboarding procedure.
When trying to figure out why employee turnover is so common at your company and how to fix it, timing is crucial information to know. Divide the total number of employee separations within one year of an employee’s start date by the number of workers who leave within that same year to get your new-hire turnover rate. In order to express the value as a percentage, multiply the number by 100.
Depending on the people leaving your organization, a low turnover rate might not be cause for celebration, as indicated above. If most of your best performers are leaving, it’s a red flag that something is wrong with the company’s culture, leadership, or possibilities for professional growth.
But if disinterested workers are the major cause of job turnover, you shouldn’t raise red flags just yet. If you want your organization to thrive, employee engagement is crucial. Disengaged workers undermine corporate culture, demotivate current employees, and make working for the company unpleasant for those you hope to retain. Your engagement outcomes can actually increase if you turn over undesirable employees.
Think about the kinds of workers you’re losing and what it says about your company before making any hasty judgments. You should also consider the responsibilities of employees who leave; for example, are you always replacing the same role? Does turnover just occur within a single team or department? In such case, it may not be indicative of a problem with the organization as a whole, but rather of an issue with the onboarding process for a specific position or with a single manager.
While it’s understandable to want to avoid a separation at all costs, doing so will only make things worse. An employee who is leaving can tell you a lot about your company and your rivals, so don’t fire them before you do your research. To get feedback and understand voluntary turnover, conduct exit interviews with engaged individuals who have voluntarily left their jobs.
Several workers may have felt that they hit a career ceiling or had major issues with their direct supervisors. Asking departing workers directly is the only surefire approach to learn their true motivations for leaving. After you do, you must act on the knowledge to prevent more turnover; what annoys one person may annoy their replacement, which might start a downward spiral of employee turnover. To complement your employee feedback process, do both exit interviews and stay interviews.
One of the most crucial KPIs for human resources and recruiting to monitor is turnover rate. Collect data on employee turnover at regular intervals across all departments to establish your own internal criteria. It is also important to monitor management turnover at various levels. When you have this data at your disposal, you can make informed decisions about how to improve your business and make it an attractive place to work for both current and future workers.
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