Calculating Employee Turnover Rate: A Comprehensive Guide

Routine health checks are to people as employee turnover rates are to companies. 

While routine health checks help catch issues that could have gone unnoticed, frequent monitoring of the employee turnover rate is a reliable metric of a company’s well-being. It objectively assesses an organization’s efforts toward ensuring employee satisfaction.

Calculating employee turnover rate provides valuable insights into the reliability of a company’s workforce. It also helps identify factors that affect turnover while giving the push to build strategies to enhance talent retention.

Organizations must understand employee turnover statistics well to guarantee better workplace optimization.

This article will explore the importance of employee turnover rate and its relevance to business performance. We’ll also provide a detailed guide on calculating the cost of employee turnover.

First, let’s see why employee turnover rate is important.

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Why Is It Important To Know Your Employee Turnover Rate?

In any viable business, employee turnover is inevitable. According to a report by the U.S. Bureau of Statistics, an average of 4 million workers in the U.S. leave their job voluntarily every three months.

Employee turnover is the number of employees leaving a company within a specified time. It is a measure of company separations, which means the employees who no longer work for the company for various reasons. These separations can be voluntary or involuntary.

Employee turnover is unavoidable, and a high turnover rate bears significant costs. So, the more frequently HR teams monitor employee turnover rates, the better because, in addition to the costs, high employee turnover also impacts an organization in the following ways:

• Reduced productivity: When various experienced employees leave, valuable knowledge is often lost, which affects productivity and may even cause a temporary halt in progress, leading to inefficiencies. Frequent turnover also reduces team cohesion, and the time lapse between the exit and replacement of employees puts undue pressure on the remaining workforce due to unequal task distribution.

• Low employee morale: Employee morale is important and should always be handled sooner rather than later. When an increasing number of employees leave a company within a short time, it affects the rest of the team. The employees who remain part of the company may feel less motivated to work and become increasingly wary of their job security. 

• Bad company image: High employee turnover is typically bad PR. It discourages potential employees and signals company instability, indicating urgent issues. More often than not, concerns about inadequate employee remunerations in contrast with the job description or problems of poor human resource management are causes of employee turnover.

In contrast, a low employee turnover rate has net positive outcomes for an organization. It saves costs, improves organization morale, and safeguards its reputation.

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What Are The Components Of Employee Turnover Rate?

Essentially, there are two main components of an employee turnover rate based on the two forms of employee separations. These include:

• Voluntary turnover implies employees leaving an organization on their own through resignation or retirement. When it is via resignation, it usually indicates employees’ dissatisfaction. The pursuit of improved work-life balance, better career options, and enhanced welfare packages are common reasons for employee turnover.

• Involuntary turnover involves employees leaving their positions due to terminations, seasonal layoffs, or downsizing. Several factors can cause these separations, including poor employee performance, dwindling financial capacity, and economic downturns.

Additionally, employee turnover calculation involves two major variables, namely:

• The total number of separations during the period under review
• The average number of employees during the time

The calculation results in a percentage that provides an actionable estimate of an organization’s overall turnover rate. It also provides a yardstick for HR managers to evaluate the impact of workflow policies and highlight aspects of organizational structure requiring urgent attention.

How To Calculate Employee Turnover Rate?

There are important steps to follow for employee turnover calculation. These steps guarantee the validity of the value obtained from the calculation. They include:

1. Gather Relevant Data
2. Choose the Calculation Period
3. Determine the Total Number of Employees
4. Identify the Number of Employees Who Left
5. Apply the Employee Turnover Rate Formula
   
   

1. Gather relevant data.

Relevant data is essential for a seamless calculation. Compile a comprehensive list of important information, including details of both voluntary and involuntary departures. Ensure you obtain accurate information to prevent calculation errors.

2. Choose the calculation period.

Employee turnover is calculated based on a specified time duration, whether monthly, quarterly, or yearly. It can be done more frequently, but the key is to select a calculation period that aligns with your organization’s reporting protocol and analysis needs.

3. Determine the total number of employees.

Before delving into the final turnover calculation, you’ll need the average number of employees for the given time under review. The result is derived by adding the total number of employees at the start of the period and at the end, then dividing this sum by a factor of 2.

For instance, if you are looking to obtain an average number of employees in October, and from your database, the total number of employees on the first day of October was 225, while on the last day of October, it was 275. Then:

The average number of employees for October is = (225+275) / 2= 250

4. Identify the number of employees who left.

Next, determine the number of separations before applying the employee turnover rate formula. Only the number of employees left within the review period is required.

Additionally, these separations may include reasons for voluntary and involuntary employee exits, which is why accurate data gathering is essential.

For instance, if two employees resigned, two were laid off, and one retired in October, the total number of separations in October would be 5.

5. Apply the employee turnover rate formula. 

After getting all the necessary data, apply the turnover formula. The formula for calculating the average employee turnover rate is:

Employee turnover rate (%) =  (Number of separations / Average number of employees) * 100

Therefore, the employee turnover rate for October will be: (5 / 250) * 100 = 2%

How To Interpret Your Calculated Employee Turnover Rate

It’s not just enough to calculate the turnover rate. Proper interpretation of the result is what makes the calculation serve its purpose.

You can interpret your estimated turnover rate by: 

1. Analyzing the Result.
2. Benchmarking Against Industry Standard.
3. Identifying Trends and Patterns.

1. Analyzing the result

It’s important to analyze your results to clearly understand their implications for your organization. If the turnover rate is high, it indicates dissatisfaction among employees, whereas a low rate signals high employee engagement and satisfaction.

2. Benchmarking against industry standards 

Using industry benchmarks also adds more insights into the turnover rate. The ideal turnover rate varies across industries. For most industries, a turnover rate of 10% is considered acceptable. 

For instance, according to the U.S. Bureau of Statistics, retail industries can experience turnover rates as high as 60%, while companies in the hospitality industry can experience turnover rates as high as 74%. In logistics, however, turnover rates hover around 46%.

3. Identify trends and patterns. 

Trends in turnover rates also help to understand employee turnover over time. This information can help the organization formulate proactive retention policies and manage employees efficiently.

For instance, if turnover rates peak at specific times of the year, companies can schedule team-building activities during these periods. Similarly, the launch of new welfare programs and training exercises can also fit into these periods.

Common Employee Turnover Questions

There are various questions to help you understand how calculating employee turnover rate impacts your organization. Since we can’t address them all, here are three important ones.

1. What’s the #1 reason for employee turnover?

Several factors cause employee turnover, many of which are organization-specific and peculiar to specific industries. 

Irrespective of these reasons, a central underlying theme evident in the different causes of employee turnover is reduced employee engagement and job fulfillment. According to a recent study, highly engaged employees are 40% less likely to be job searching than disengaged employees.

Ideally, when employees feel less engaged or not recognized for their work input, they tend to seek job opportunities elsewhere where they think they’ll be more motivated to work and be appreciated.

Hence, prompt awareness of low workforce morale can be instrumental in reducing employee turnover.

2. Is employee turnover good or bad?

Employee turnover can be positive or negative depending on the reasons for the exits and the context of interpretation. The key for every organization is to achieve a balance - less of the bad and more of the good.

Employee turnover is good if it helps remove poor-performing employees and provides opportunities for higher-skilled workers to take up these positions. Moreover, turnover is part of an organization’s natural staff cycle, allowing newer ideas and talents to come into the fray.

On the other hand, employee turnover is a bad development when it causes a significant drop in an organization’s productivity, negatively affects workforce morale, and incurs additional costs.

3. What does a 10% employee turnover mean?

A 10% employee turnover rate means approximately 10% of an organization’s employees left within a specified period, depending on the time under review. It could be in a month, a quarter, or a year.

It’s good business practice for organizations to aim for a 10% turnover rate annually. Though organizations often have turnover rates between 12 - 20%, a 10% rate falls within the normal limits for most industries.

It’s still possible to get lower rates. So, organizations with 10% turnover rate still need to seek out reasons behind departures so that emerging issues can be quickly nipped in the bud.

What are strategies to address high employee turnover?

High employee turnover is a drawback that must be tackled head-on. The most effective way for an organization to reduce its turnover rate is to adopt strategies that boost employee retention rates.

These strategies include:

1. Prioritize employee engagement.
2. Schedule routine professional development and training programs.
3. Maximize employee compensation and benefits.

1. Prioritize employee engagement

Engaged employees are satisfied employees, and satisfied employees are loyal. 

A major step towards ensuring employee engagement is cultivating a culture of open communication and trust in the workplace. This culture provides a sense of psychological safety, encouraging employees to air their submissions freely. In turn, you can use feedback to emphasize their value to the organization.

When employees are underutilized, they become disengaged and have increased bench time, which affects productivity and poses the risk of a high turnover.

A resource management tool is a great way to address employee disengagement issues effectively. It also enables organizations to assess employee engagement levels in real-time using information on task and project involvement obtained from employees’ dashboards. 

It also identifies the overuse of employees to avoid burnout. Plus, information made available by these tools guides decisions on flexible work hours, helping to promote work-life balance.

2. Schedule routine professional development and training programs.

According to the World Economic Forum, by 2025, approximately 50% of an organization's workforce should have undergone professional development and skill acquisition training.

Designing employee training programs is a fantastic way to boost retention rates and avoid high employee turnover. It’s a potent incentive that signals to employees that the organization is committed to their career progress. 

To ensure compliance, always monitor employees’ progress, keeping in mind their capabilities at any time. It also informs you of the skills which they lack so you can motivate them accordingly. 

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3. Maximize employee compensation and benefits.

It’s important to optimize the remuneration and welfare packages of employees. Essentially, it ensures they receive remunerations that correlate to their skills and align with industry standards even more.

Companies can address high turnover rates by offering employees a comprehensive compensation and benefits plan that includes bonuses, salaries, pensions, and healthcare insurance. This demonstrates how an organization prioritizes employee satisfaction.

Additionally, rewarding high-performing employees encourages them to remain productive and engaged, reducing the chances of top talents leaving the company. This also helps to motivate non-performing employees to become active.

Assembly has a host of employee reward ideas you can try.

Using Employee Turnover Rate To Assess Employee Satisfaction Effectively

You can liken employee turnover calculation to a reality check, a reflection of the disposition of most of an organization’s staff towards its workforce. It can be positive or negative depending on how high or low the rate is.

So, it’s only proper for every organization that wants to thrive to prioritize frequent and proper employee turnover evaluation. The necessary steps include gathering relevant data, selecting a calculation period, estimating the total number of employees, culling the number of former employees, and applying the employee turnover formula. 

It forms the basis for appropriate employee retention strategies to improve turnover rates and ensures that pertinent issues threatening employee satisfaction are quickly identified and resolved.

In other words, employee turnover rate is a critical performance metric that determines the effectiveness of human resource management.

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