January 27, 2022 by Andrea Rajic
The HR scope of tasks includes calculating the employee turnover rate. It is one of the essential metrics helping a company define and improve the managing style and culture.
According to Zippia's research, the average annual turnover rate in the US was 57.3% in 2020. This number seems pretty high, but many companies don't know what their employee turnover rate means and how it affects the business.
The following text explains employee turnover, how to calculate it, and why it is crucial for every organization. Let's start.
The employee turnover rate is the percentage of people who leave the company during a specific period. Most companies calculate employee turnover rates monthly or annually.
When calculating the turnover rate, organizations usually include the number of voluntary and involuntary turnover and retirements. However, internal movements, such as promotions and transfers, don't go into this calculation.
Voluntary turnover happens when an employee leaves a company. In most cases, employees leave the current company because they want to work at another one.
Involuntary turnover is an employer's decision that it's time for them and an employee to go separate ways. Simply put, involuntary turnover happens when an employee gets fired because they violated workplace policies or didn't deliver expected results.
Calculating a monthly employee turnover rate may seem straightforward because the "only" thing you need to do is divide the number of employees with the termination date within a month by the average number of employees and multiply that number by 100.
Still, determining each of these figures takes time, so we will break the entire process down into a few steps to (really) make it straightforward.
Companies should include all staff members on their payroll when calculating the number of employees.
Besides full-time employees, your staff comprises temporary workers (on company payroll) and employees on leave of absence, temporary layoff, or furlough. Therefore, they should be included, too.
However, this calculation should not include temporary workers and independent contractors on an agency's payroll.
For the sake of accuracy, every company should set their HRIS (human resource information system) and payroll system up to report the total number of employees. Furthermore, employers must run these reports at regular intervals, for instance, at the month's beginning, middle, and end.
Suppose you create the reports twice a month, at the beginning and end of the month. To calculate the average number of employees, add the numbers from both reports and divide that number by two.
Example: XYZ had 158 employees at the beginning and 149 at the end of the month. The average number of employees in this company for the month is (158+148)/2 = 306/2 = 153.
The list of separations during a month comprises voluntary and involuntary terminations. Remember, team members temporarily laid off or on leave of absence should not be included.
Let's say you had five separations in a month, and your average number of employees was 153. Then, if you divide the number of separations by the average number of employees, you get the following result:
5/153 = 0,033
As mentioned at the beginning, the employee turnover rate is a percentage of employees who leave a company, in this case, for a month.
Therefore, to calculate the employee turnover rate, we will use the result from step number 4 and multiply it by 100.
0,033 x 100 = 3,3%
Finally, our result says the monthly employee turnover rate in our XZY is 3.3%.
Once they calculate their employee turnover rate, many companies don't know what that number means, whether high or low, and how it affects their organization.
The best way to determine whether your employee turnover rate is good or bad is to compare it with the average turnover rate within your industry. If your number is higher than your industry's average, that's a clear sign you need to make some changes.
Still, aiming for a zero turnover rate is impossible because people will leave for various reasons. You can, however, look for patterns within your company to establish why and when people mostly go.
Another thing to remember is that sometimes it is inevitable to fire someone. If you have an employee who does more harm than good, it is better to end the collaboration.
On the other hand, if you are losing your top talent, that can be detrimental to your company. Finally, there's no such thing as an ideal employee turnover rate, or healthy turnover rate, as many call it. It all depends on the situation and its context.
To analyze your employee turnover rate, you must answer these three questions:
''Who'' is the most critical question you need to ask yourself because it can determine your company's destiny. If low performers leave, that's a good thing because you get the chance to dive into the talent pool and hire the most qualified candidates.
However, if top performers leave, that is a red flag because you are losing valuable people that could contribute to your company's long-term growth.
Here's a question you could ask your former employees during an exit interview. They could help you determine your management's weak sides and establish how to improve them.
For instance, employees might leave because they don't feel appreciated or valued, or your company culture doesn't resonate with their beliefs.
These are all crucial segments you could discuss with your HR and make the changes to inspire new potential employees to come and stay.
You can also revise your benefits and compensation plans because people will leave if they get a more attractive offer from another company.
In addition, the changing business climate encourages employees to seek more flexibility; if you don't offer such a perk, that may be another reason for employees to look for another employer.
It is essential to keep track of when people are leaving. Also, focus on new hires. Keeping track of new hires' turnover rate can tell you a lot about your recruitment and onboarding process and help you make relevant changes.
If, for instance, a considerable number of new hires leave because they find their duties different or more complex than they expected, that might be a sign that you need to revise your job descriptions and, again, the recruitment process.
Remember, every candidate wants to present themself in the best light during a job interview, but you must ''show your true colors.'' Otherwise, you risk losing some exceptional individuals shortly after accepting your offer.
Employee turnover is one of the most important metrics because replacing an employee is an expensive endeavor regardless of how big the company is and the industry it operates.
According to the SHRM (The Society for Human Resource Management) research, direct replacement costs can reach as high as 60% of an employee's annual salary. Remember, replacing a team member doesn't end once the new hire joins your company.
A company must invest a lot of financial means and time first to find an adequate candidate. The next phase is onboarding and then training. In addition, companies must count the time necessary for a new hire to get familiarized with how the company operates.
Finally, inexperienced employees will need more time to adapt to the work dynamics, and they will be less productive in the beginning.
Many companies have acknowledged that employees are the most valuable part of the organization, so they adopt an employee-first approach to ensure each member knows how valuable their role is.
The prerequisite for attracting and keeping the top talent is providing benefits packages that include flexibility.
Remote work has become a new norm, and people who aspire to grow professionally and still achieve a work-life balance would like to have an option of working from wherever suits them best.