Employee Retention: What Does Your Turnover Rate Tell You?

By Joshua Stowers,
business.com writer
|
Mar 30, 2020
Image Credit: fizkes / Getty Images

Want to track your employee retention? Learn how to calculate your company's staff turnover rate.

  • You can calculate your employee turnover rate by looking at the average number of workers who exit your business during a specific time period and are replaced by new staff.
  • Your business should monitor and track its employee turnover to gauge how appealing your company is employees. It can also help you improve areas that may be causing workers to leave your company.
  • Your employee turnover rate helps you evaluate your risk of an employee leaving and recognize opportunities for retention when you hire new employees. 

Some level of employee turnover is natural for all businesses. While employees used to stay with one company for the majority of their careers, job hopping has become much more common for today's workers. 

If several employees have recently left your business, however, you may be wondering if that's normal or, if it's not, whether there's a problem that you need to identify and address. To get a clear picture, you first need to determine your employee turnover rate and see how that number compares with businesses nationwide. 

Once you're armed with the data, you can then come to conclusions about whether your employee turnover is a problem. If it is, you can take steps to figure out why employees are leaving and what you can do to make your organization a place where employees want to stay. 

What is employee turnover?

Employee turnover is the loss of talent in the workforce over time. This can take many forms of employee separation, including layoffs, location transfers, resignations, retirements, terminations and even deaths. 

Employee turnover should not be mistaken for employee attrition. Attrition is the loss of employees through a natural process, such as resignation, retirement or personal health. However, unlike with traditional turnover, these jobs will remain unfilled when the employee leaves.

Employee turnover is the voluntary or involuntary loss of an employee who leaves an open position that your business will need to fill. Turnover can be due to the same reasons as attrition, but it's generally viewed negatively and as a burden for employers. 

There are two standard types of employee turnover: 

  1. Voluntary: This refers to employees who willingly leave their jobs.
  2. Involuntary: This refers to employees who have been laid off or fired or whose employer has terminated their contract. 

How do you calculate your employee turnover rate?

To figure out if you have an employee turnover problem, you first need to determine your turnover rate. When calculating your turnover rate, you look at a set period of time – usually one year. Sue Andrews, HR professional and fellow of the Chartered Institute of Personnel and Development, says that to calculate turnover, you'll need three separate figures: 

  1. The number of employees who left in the time period (including both voluntary and involuntary leave)
  2. The number of employees at the beginning of the period
  3. The number of employees at the end of the period 

To calculate the average number of employees, you take the number of the employed at the beginning of the period and add it to the number of the employed at the end of the period. Dividing this figure by 2 will give you the average employee count. 

You can then calculate your turnover with this simple formula: 

Turnover = (Employees who left ÷ Average number of employees) x 100 

Why should a company track its employee turnover?

Your business should monitor and track its employee turnover to gauge how attractive your company is to employees and to help you improve areas that may be causing employees to leave your company. 

A high turnover rate can have a negative impact on your bottom line if you aren't prepared for it, according to Ellen Mullarkey, vice president of business development for Messina Group

"If you know that you have to hire several times a year, you should set aside enough time and money to do so," Mullarkey said. "It's not cheap, so you have to plan. Tracking your turnover rate can also let you know if your company is a good company to work for." 

Marc Prosser, CEO and co-founder of Choosing Therapy, believes there is both good and bad employee turnover. He said these are the differences: 

  • Good employee turnover: With good employee turnover, you can include employees who leave the company for a major promotion and employees who were on performance improvement plans. You want to be a company where people can learn and advance their careers. Your reputation as a business where workers can learn new skills and become more attractive to future employers will help your recruiting efforts. 
  • Bad employee turnover: Bad turnover is when moderate- or high-performing employees are leaving for lateral positions. This means you have a bad work environment or are paying under-market. If your bad turnover rate is more than 15% per year, you should take a close look at your compensation and company culture. 

Is there a tool to help you track this rate?

While some businesses choose to manually track their employee turnover rate, others opt for human resources outsourcing services or human resources software. 

HR software can help your business track its staff turnover, according to Bob Teasdale, sales and marketing director at Myhrtoolkit

"For example, our system generates an exportable staff turnover report that automatically calculates staff headcount at the end of each month and provides a turnover percentage," Teasdale said. 

Most HR software helps you track all employee information, including hire dates, leave requests, training, payroll and benefits administration. 

When making hiring decisions during the turnover process, you may want to consider an applicant tracking system that allows you to electronically track and manage all applicants throughout the employee recruitment process. 

How do you analyze your turnover rate?

Regardless of the tool you use, it's crucial for your business to make the purpose of its turnover analysis abundantly clear. Generally, employee turnover is an indication of your overall employee satisfaction – low employee turnover is a result of high employee satisfaction. 

Your goal should be to make sure employee morale and satisfaction are constantly growing within your workplace. Therefore, it's best to use a benchmark turnover rate to see if your rate improves yearly. You can also compare your turnover rate against national and industry averages. 

The SHRM Human Capital Benchmarking Report found that the average employee turnover rate in 2017 was 18%, and that less than 50% of organizations had a succession plan in place. 

While the rate of employee turnover varies by industry, an effective retention plan can help you retain talent and reduce turnover costs, no matter what industry you're in. 

What does your turnover rate tell you?

Your employee turnover rate tells you your risk of an employee leaving and your opportunities for retention when new employees come on board. This data also helps you see if your compensation is on par with the market, what your employees' work environment is like and how they view future opportunities in your business, according to Josh Dane, owner of Dane Salon Group. 

"We analyze employee turnover based on our estimates of our competitor turnover levels, as well as tracking period to period," Dane said. "If turnover is increasing, we need to figure out what is causing this." 

It's no secret that high turnover can be expensive for any business. Reducing employee turnover costs begins with determining your direct and indirect costs

Belinda Wee, associate professor at the Husson University School of Business and Management, said direct costs include the replacement of employees who left, such as the costs of background checks and training, while indirect costs are not as easy to quantify. One example of an indirect cost is the cost of finalizing paperwork when an employee leaves, which can include benefit paperwork and unemployment documentation. 

"Losing an entry-level employee costs a business about 50% of that employee's annual salary," Wee said. "Losing a technical or senior-level employee costs a business about 125% of the employee's annual salary to the business." 

Improving your retention rate begins with refining your employee onboarding process, evaluating the employee experience at your company and finding opportunities to enhance your company culture. These preventive measures can produce the yearly employee turnover rate your business wants and reduce the associated costs.

Joshua is a staff writer based in New York City. He is a former entrepreneur who started a fashion and art, print and digital publication called Elusive Magazine, serving as the features editor for several issues. Previously, he worked in product development for DirectTV and for a content agency that wrote for Verizon and Google. He is a New Jersey native in love with the city lights and skyscrapers.
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