Learn what causes employee turnover and how to improve retention.
- Employee turnover is the rate at which employees leave a company within a set period of time.
- Calculate employee turnover by dividing the number of employee departures by the average number of employees, and then multiply by 100.
- Reduce employee turnover by recognizing, investing in and communicating with your employees.
- This article is for new business owners who want to understand what employee turnover is and how they can reduce it.
Having some level of employee turnover is normal, but it is crucial to retain your top talent as much as possible. The best way to do so is to learn what your employee turnover rate is, identify what is causing it and implement key strategies to improve it.
What is employee turnover?
Employee turnover is when staff leaves your company – this includes both voluntary (e.g., an employee resigns, retires, or transfers) and involuntary turnovers (e.g., an employee is laid off or fired). Although some level of employee departure is expected, it is important to monitor your turnover rate to have better insight into employee morale and to make informed decisions.
If you are experiencing a high employee turnover rate, it may be time to make some internal changes. When evaluating whether your company has high or low employee turnover, consider what industry you're in; for example, hotels typically have much higher employee turnover than government jobs.
Key takeaway: Employee turnover is the rate at which employees depart from your company.
How to calculate your employee turnover rate
Employee turnover rate is the metric used to quantify your employee turnover. Turnover rates are measured and evaluated over a set period – typically one year. Businesses often calculate employee turnover rates for the entire company; however, you can also break it down by individual departments, teams or demographics. This can help better plan and budget for specific areas of your company.
"It can also be really useful to break your turnover figures down by other factors such as by team, by gender or by age," Sue Andrews, HR and business consultant at KIS Finance, told Business News Daily. "That way, you may be able to identify potential problems within specific parts of your workforce and take action to address any issues that you discover."
To calculate your employee turnover rate, you need three separate figures: the number of employees who left in a given time frame (both voluntarily and involuntarily), the number of employees at the beginning of that time frame, and the number of employees at the end of that time frame.
First, you must calculate the average number of employees during the set time frame.
- Average number of employees = (Number of employees at the beginning of set time frame + Number of employees at the end of set time frame) / 2
After you have the average number of employees, use the following formula to calculate your employee turnover rate:
- Employee Turnover = (Number of employee departures / Average number of employees) x 100
Key takeaway: To calculate your employee turnover rate, you need to first determine the time frame for when you want to calculate the turnover rate. Once you have that, you need the total numbers of employees at the beginning and end of that time frame. You also need the number of employee departures.
How does turnover affect your business?
Employee turnover can have a positive or negative impact on your business, depending on whether you have a low or high turnover rate. Businesses with low turnover rates tend to have more favorable reputations. A desirable turnover rate, somewhere around 10%, signifies high employee satisfaction, which, in turn, helps attract top talent.
Todd Brook, the chief solutions officer at the employee engagement platform Engagement Multiplier, said it's estimated that 67% of those costs are "soft costs," such as the opportunity cost incurred when a project slows or is delayed, as well as the cost of using internal resources to recruit, hire and train new employees.
"Thirty-three percent of the costs are 'hard costs', representing cash outflow," he added. "These costs include hiring temporary workers or outsourcing work as a result of employee departures, as well as the costs associated with hiring: advertising, recruiting fees, and the costs of drug tests and background checks."
Besides the monetary costs involved, high turnover also can have a huge impact on your ability to hold on to your most talented employees. If an underlying issue is causing top performers to resign, they will be taking their knowledge and experience with them. This can impact the quality of your products and services and tarnish your reputation.
"Your remaining staff may also feel under additional pressure if they need to take on extra work while you find a replacement, and this can lead to stress and burnout," said Andrews. "It can be all too easy to find yourself in a vicious circle of constantly losing staff as the working environment becomes less attractive."
Having a constant cycle of new staff members can distort your company culture as well. Employees tend to learn the values and rules of the workplace more effectively from their co-workers, rather than an employee handbook. Without long-term employees to set the tone, your company culture can disappear.
"Long-term employees become the ambassadors of this culture for new hires," said Matt Erhard, managing partner at the recruitment and executive search firm Summit Search Group. "If your company has difficulty maintaining long-term employees, there will inevitably be knowledge loss over time, since new hires won't get this cultural guidance from the old guard."
Key takeaway: High employee turnover can cost you time and money, and it can damage your company culture and reputation.
What causes employee turnover?
Some instances of employee turnover are inevitable and outside the company's control, like an employee retiring or relocating. However, many times, employee turnover is caused by unfavorable workplace circumstances that can be managed.
"Most of the controllable factors are based around the employee experience," said Erhard. "Employees are more likely to quit if they feel underappreciated and overworked, especially if their work stress is making it hard for them to maintain a good work-life balance or causing them physical or emotional distress because of improper work conditions and employee care."
Employee turnover can also be the result of poor management, negative company culture, lack of career opportunities and advancement, and inaccurate job descriptions. In addition, employees can become disengaged from their job over time, and what was once a good fit is no longer motivating.
"Disengagement is costly in and of itself, reducing productivity and contributing to increased rates of absenteeism," said Brook. "However, when disengagement actually leads to turnover, the problems compound for the employer – remaining staff have to pick up extra work, and one employee's departure can lead to others deciding to test the job market."
Key takeaway: Employee turnover is often caused by poor management, a lack of career advancement and poor work-life balance (employees feel undervalued or overworked).
What are some tips for improving employee turnover?
Before you can improve employee turnover, you must identify the reasons behind the turnover. Based on the problem, you can implement any (or all) of the following strategies to improve employee retention.
Prioritize your recruitment strategy.
The first step to a great company culture with low employee turnover is ensuring you are hiring the right employees for the job. Create accurate job descriptions and pay attention to your recruitment process.
"If you have a significant number of new hires that 'wash out' quickly after training (or don't make it through training), this is a sign you're not choosing the best candidates for the position," said Erhard. "Lowering turnover starts with hiring qualified employees who fit your company's values, then creating a culture that makes employees want to stick around for the long haul."
Invest in onboarding new staff.
After you've hired the right candidates, they need to be trained properly. Andrews said the first few weeks for new staff are key to whether they turn into long-term employees or leave as soon as they find an alternative.
"Invest time and resources in making sure they get a really thorough induction and are well supported in these early days," she said. "If they feel wanted and valued from day one, they are more likely to start to develop loyalty toward the company and want to stay with you, even in more challenging times."
Elicit and respond to employee feedback.
An important element of every successful business is great communication. Facilitate a company culture that thrives on open communication. In addition to giving employees feedback, you should ask them for it. Use meetings and employee surveys to gain insight into staff needs and concerns.
"Every company will have different challenges in this regard, but all the commonly cited reasons for quitting (e.g., poor work-life balance, workplace or management conflicts, lack of advancement opportunities, etc.) can be addressed by listening to the concerns of your employees and adjusting your policies and procedures accordingly," said Erhard.
Engage and recognize your team.
It is important to make sure your current employees feel engaged, motivated and valued. Encourage them to take on new projects, offer training and career advancement opportunities, and recognize employees for good performance. Employees who feel stimulated, valued and appreciated are more likely to stick around.
Regularly review pay and benefits.
Although employee compensation partly depends on your company budget, review and modify employee benefits and salaries as often as you can. The longer an employee works for your company, the more they can hone their skills and expertise – they should be rewarded for that. Offering competitive pay and benefits can make employees feel appreciated and keep them from seeking employment elsewhere.
"It's essential to keep your pay and benefits under review to make sure you're offering staff a competitive reward package," said Andrews. "If staff feel you are failing to recognize their worth and true market value then you face the risk of them leaving you for a competitor who is willing to invest in them."
Key takeaway: Improve employee turnover by prioritizing your recruiting and onboarding process, investing in your employees, and creating a culture of open communication, recognition, and feedback.