The Employee Turnover Formula & Why It Matters

What Is Employee Turnover?

Employee turnover is the percentage of workers who leave your organization, the employment relationship ends and they are replaced by someone new. This is not the same as employee attrition. When attrition occurs, the position is not filled with a new employee. There are two types of employee turnover: involuntary turnover and voluntary turnover.

Voluntary turnover is when an employee quits or leaves on their own terms. This could include but is not limited to, poor working conditions/culture, insufficient career planning that is offered, or poor compensation. These are all causes of turnover that can be avoided. You can fix what you can control.

Involuntary turnover is when an employee is fired or laid off by the company. Downsizing might need to take place for an organization’s survival. Illness and death are also reasons and reasons that you can not influence. Every company has some rate of turnover because not everyone stays all together, forever, at the same job.

Acknowledging The High Cost of Employee Turnover

employee turnover formula and cost caculations

Knowing the cost of turnover is enough motivation to try and avoid it. With a high turnover rate, a company is subject to indirect costs and direct costs. Indirect costs include paying recruiters to find you a new employee and direct costs include revenue lost while you were understaffed. The higher the turnover rate, the higher these costs will be.

Don’t just expect to pay money. Other losses include time, knowledge, and morale. You will spend valuable time recruiting and training new employees. In addition to this loss, employees take knowledge when they leave. That knowledge will take time and money to regain through more training and experience.

How To Measure Employee Turnover

Measuring employee turnover can help you examine reasons for undesirable departures. Plus, some employee turnover formulas can help you estimate your cost-to-hire for budget projections, training requirements, or estimating staff time devoted to recruitment activities. Basic turnover rate calculations are relatively simple:

If your company employs 100 employees and 15 employees are fired or quit, your turnover is 15%.

Detailed calculations can provide a deeper understanding of employee turnover. For example:

Five (5) employees leave in January.
One (1) employee leaves in May.
Four (4) employees leave in November.
Your annual turnover rate is 10%. Your average monthly turnover is 8.3%.

This allows you to pinpoint the months that saw higher turnover and gets you one step closer to identifying the root cause. There are additional employee turnover rates you can use to calculate how well your company retains its employees.

Employee Turnover Rate Formulas

Calculating Overall Turnover Rate

TR = (T/((O + E)/2)) X 100

TR is the turnover rate, T is the number of terminated or otherwise departed employees, O is the size of your workforce at the onset of your period, and E represents the ending size of your workforce. For example, if you have 75 employees at the start of the period and 85 at the end, your average number of employees is 80. If 16 employees left, that’s 16/80, or 20%.

Overall employee turnover only tells you if your turnover is high or low for your industry or based on your own trends. It is also important to consider particular groups of employees. For example, approximately 22% of staff turnover occurs in the first 45 days of employment. However, new employees who went through a structured onboarding program were 58% more likely to be with the organization after three years. If you’ve implemented changes to your orientation process, this employee turnover formula will help you determine if those changes have had a positive impact.

Calculating New Employee Turnover Ratio

NR = (NE/T) X 100

NR is the new employee turnover ratio, T is the number of terminated or otherwise departed employees, and NE is the number of new employees (with your organization for less than one year) that separated from your organization during the same period. If the percentage of new employees who left vs. more tenured staff is a high figure for your industry, you may have some problems retaining new staff. Consider new onboarding and training plans.

How To Interpret Your Employee Turnover Rate Measurement

After your employee turnover rate has been calculated, it is important to use it to guide your employee retention strategy. You should also note that turnover rates vary by industry. To find employee turnover information for your industry, consult industry trade journals or the U.S. Bureau of Labor Statistics. This will provide a benchmark for understanding your own turnover rates.

However, much like any other KPI, it’s more important to monitor your own rates over time. This will help you identify trends, issues, and opportunities. What happened during the months that your company had a high employee turnover rate? What internal and external factors played a role?

  • 32% of employees leave for career advancement or promotion opportunities.
  • 22% of employees leave based on pay and benefits.
  • 20% of employees leave due to lack of fit for the job.
  • 17% of employees leave as a result of management or work environment.

employee turnover

Have You Been Hit by the Resignation Tidal Wave?

The year 2021 has seen the highest quit rates in decades. In July of this year, more than 4 million US employees handed in their resignation letters and started looking for other opportunities. According to the US Bureau of Labor Statistics, there were almost 11 million job openings at the end of July. 

To understand this trend dubbed The Great Resignation, the Harvard Business Review published findings from an analysis of over 9 million employee records from 4,000 companies. The report produced two key takeaways:

  • The highest increase in resignation rates is with employees aged between 30 and 45.  
  • The tech and healthcare industries have been hit the hardest by the resignation wave. 

With or without these findings, the sudden surge in resignations has employers reevaluating the way they hire workers. But most importantly, they are looking for ways to improve working conditions and employee satisfaction to reduce turnover in the first place. 

How To Improve Your Employee Turnover Rate

1. Hire the right people

Take preventative action and hire the right people. Even though many candidates might fit the bill skill-wise, you need someone who will also easily adapt to your company’s culture and other employees. If you have an employee who isn’t meeting expectations, they may be hurting the company beyond the scope of their individual role by having a direct negative impact on the productivity of others and reducing morale. Replacing them with someone who will actually be able to do the work is the only way to solve the problem. Start at the root and prevent this by hiring strong candidates from the get go.

2. Communicate your expectations

Always be on the same page as your team. Accommodating your employees’ needs is important because it makes them feel valued. Let your team know that everyone’s voice is heard. Open lines of communication can also give you a heads up if someone is thinking about leaving. If you know in advance, you might be able to fix the issue and help them stay. If your company is remote or hybrid, it is important to do check-in calls with employees consistently to get a read on their employee satisfaction.

3. Flexible work arrangements

Your employees or potential hires also have to be aware of your expectations regarding remote or hybrid work. However, you also need to be aware of their needs. Have an open conversation with your employees where you’ll communicate your expectations related to remote or hybrid work. Also, listen to the feedback you get from them. To reduce your turnover rates, you might have to show some flexibility by allowing employees to work remotely if they wish.  

4. Strengthen team connections

In remote work conditions, it’s easy for your employees to distance themselves from one another. Keeping your team connected and empowering them to keep socializing with each other will strengthen the team spirit. This will eventually result in increased productivity and cooperation. You can achieve this by holding regular meetings with your team, including everyone in the decision-making process, and organizing team building activities. Companies that treat their employees with team building activities have demonstrated better communication, planning, and problem-solving skills. 

5. Reconsider salary and benefits

An employee will leave a company because they feel they are not receiving enough salary (or benefits) based on performance and responsibilities, or sometimes based on need. These are crucial factors in retaining employees, especially for millennials joining the workforce. Typically the better the benefits, the lower the turnover rate. This holds true with offering a flexible schedule and tuition assistance. Make sure to stay up to date on the competitive average salaries in your field and be generous with deserving employees, or it will only cost you when they leave.

6. Engage employees

Good salary and benefits are not enough to keep your employees. If you want a low turnover rate, you must work on engaging your team. If they aren’t happy with the workplace culture and are bored at work, they just might decide to leave. At the very least, they’re likely already less productive. Engagement tools will help you reach your employees and make them feel better about coming to work. People have no reason to leave if their needs are met and they’re happy.

In the context of engagement, take into account the overall employee experience. Consider how your employees feel on a day-by-day basis while working for your company. This involves not only the overall company culture but also the tools and applications that they have to interact with daily. Does your company provide the right equipment or software that makes your employees’ work lives easier? Combining this with an encouraging working environment and good team collaboration, you’ve created a positive employee experience.    

7. Be a good leader

Oftentimes, employees leave managers, not companies. There are many negative effects of bad management on employees and a high turnover rate is one of them. At the end of the day, you have a lot of say and control over what happens within your company. If not, consider the fact that your team has even less power. Great management enhances the success of everyone on the team.

 

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