For any company’s HR department, the employee turnover rate is an important metric. Some don’t even know that the proper employee turnover rate can keep the business going and remain competitive. We’re going to guide you on how to calculate your employee turnover rates and by the end, you’ll get a better idea on keeping track of your financial prospects through hiring processes.
Why is the employee turnover rate so important?
Employee turnover rate is measuring the percentage of employees that leave your company in a particular time period. Your employees can be leaving your company in a couple of ways:
- Voluntarily like resignations, moving to another company, or retirement.
- Involuntarily through terminations and dismissals.
Employee turnover rates play an important role for your business because it’s a metric that concern the effectiveness of your HR management system and even your overall management. They’re also an influential factor to your business’s financials and reputation.
What kind of impact does the employee turnover rate have on your business?
Your employee turnover rate can have a couple of impacts on your business:
Turnover rates will cost you and that’s why you would usually hear employee turnovers being mentioned negatively. Replacing gone or outgoing employees takes a lot of money off your financials. So having high turnover rates can be an expensive problem due to equally high costs.
According to The Society for Human Resource Management (SHRM) research, direct replacement costs can reach as high as 50%-60% of an employee’s annual salary, with total costs associated with turnover ranging from 90% to 200% of annual salary.
It costs money to find and hire new employees, onboarding them, and train the new hires. Not only do inexperienced employees tend to be less productive, but the time taken to care for them are also time taken away from more productive work.
Your employee turnover doesn’t have to be something negative. If however high your turnover is but it’s only made up of poor-performing employees, that turnover can be a good thing for your company’s quality. But if a top performer leaves, then it could be a bit of an issue.
This is why – despite many trying to figure it out – it’s hard to say what the optimal and healthy employee turnover rate is. It all depends on your company and whatever specific situation you’re in. Evaluate your rate contextually.
But what more can the number you get do for your organizational quality? One way is to compare your turnover rate with the average for your industry. If for example, yours is higher than the average, you could conclude that your management isn’t effective and maybe there are some internal issues that need addressing.
Some industries have higher average turnover rates (like in hospitality or healthcare) while others have lower (insurance, utilities, etc.). But what is a fact for any industry is a 0% rate is unrealistic. People will leave your company eventually or relocate because of changing circumstances.
The formula for calculating the employee turnover rate
You calculate your employee turnover rate by dividing the number of employees you have left by the average number of employees you would have in a period of time. Then you multiply what you get by 100 to get the percentage.
The average number of employees is calculated by adding the number of employees the company was employing at the beginning of a certain period and the number of employees the company was employing at the end of a certain period, and dividing the result by 2.
Analyzing your average employee turnover rate
To understand your numbers better, ask yourself:
Identify who leaves you. If your top performers are leaving, then you should probably do something about it, otherwise, your company’s performance lowers. But if your low performers are leaving, you could gain better employee engagement, productivity, and profits.
Keeping track of when people leave can be very useful. Your new hire turnover rate can offer a lot of insight. It can tell you whether your recruitment methods are working.
If employees leave because they found their job duties different or more complicated than what they were expecting, maybe consider reviewing your job descriptions. Investing more time and money in developing a better orientation process and cultural mismatches are the reason employees leave.
Why do they leave?
By knowing the why you can change your company’s management style or policies in response. Exit interviews are a useful way to see whether people give similar reasons for leaving, or whether they offer useful suggestions for how you can improve. Employee turnover rates can uncover hidden problems within organizations.
A high turnover rate is a warning sign you shouldn’t ignore. Review your recruitment processes, change your compensation and benefits plan or incorporate a succession planning policy. If you respond to turnover issues proactively, you will improve your company and retain great employees.