A Step-by-Step Guide to Calculating Employee Turnover Rate

Employee turnover rate is a hot topic these days and for a good reason.

According to a recent McKinsey study, 40% of the employees^[1] surveyed said they were considering leaving their jobs in one year. And as the Great Resignation continues to wreak havoc on companies, employers worldwide are scrabbling to reduce turnover.

That said, employee turnover has become a scary word in the workplace. A high turnover rate is not only costly for organizations; it also delays business plans and developments.

The good news; knowing your employee churn rate can help you address the issue and boost retention. But how do you calculate your employee turnover rate? This guide will discuss what employee turnover is, its impact on an organization, and how to calculate it.

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What Is Employee Turnover?

Employee turnover, sometimes called employee churn, refers to the total number of workers who leave a company over a certain period. There are two types of employee turnover:

• Voluntary turnover
• Involuntary turnover

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Voluntary Turnover

As the name implies, voluntary turnover is when employees leave the company willingly. This could happen for several reasons, including retirement, moving to a more competitive company, or quitting to start a business.

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Involuntary Turnover

Involuntary turnover happens when it isn't the employee's decision to leave the company. For example, if an employee is terminated due to absenteeism, poor performance, or violating the organization's policies, that's involuntary turnover.

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Effects of High Turnover

One of the biggest concerns for organizations worldwide is high turnover rates. A high employee turnover rate can negatively impact a company in many ways, including.

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1. Decreased productivity

Employee productivity can be significantly affected when the churn rate is high.

The reason? Employee turnover leads to the loss of talent and experienced staff who have worked with the company for years.

New hires may take time to familiarize themselves with the company and may not operate in the same capacity as former employees, leading to lower productivity.

Moreover, if employee turnover is high, you'll likely spend more money on recruitment and training rather than focusing your resources on increasing employee productivity.

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2. High Costs

High turnover rates negatively impact a company's bottom line. Picture this, the average cost of hiring a new employee is $4,000^[2]. If the employee turnover rate is high, you could end up spending over $50,000 a year on recruiting and training new staff.

Moreover, you'll be paying the new employees higher salaries for a longer time before they can become as experienced as other employees in your company.

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3. Lower Company Morale

One of the biggest problems businesses face due to employee turnover is decreased morale.

This often stems from overworked employees who have had increased workloads due to staff shortages. New employees are not immune, either. They may also suffer from low morale and burnout as they work off hours to familiarize themselves with the system and clear the backlog.

When employees leave the company, management needs to find ways to boost the remaining employees' morale lest it exacerbate, affecting more employees.

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4. Lost Sales

Loss of productivity due to increased employee turnover eventually leads to a decrease in sales. When employee turnover increases, the company losses revenue that could have been gained by a motivated and efficient workforce.

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How to Calculate Employee Turnover Rate

Now that you understand what employee turnover is and its impacts on an organization, how do you calculate it? Follow these steps to calculate the employee turnover rate.

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Step 1: Define the Time Period

The first step in calculating the employee turnover rate is to define the time period. Generally, turnover rates should be calculated annually but can also be done more frequently.

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Step 2: Calculate the Average Number of Employees for that Period

How many employees did you have during that period?

To get this number, you'll need two pieces of data: The number of employees on the first day and the number of employees on the last day. You can easily obtain these figures through your payroll system. Include both part-time and full-time employees.

Once you get this data, add the two employees' total together and divide by two to find the average number of employees for the given period.

Av. No. of Employees = (No. of employees on the first day + No. of employees on the last day) /2

For example, On 1st January 2022, ABC company had 250 employees. At the end of 2022, the company had 272 employees. And 20 employees left during that period. In this case, the average number of employees is equal to.

(250 + 272) /2

= 261

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Step 3: Calculate the Turnover Rate Percentage

Next, use the average number of employees for the period to calculate the employee turnover rate. Here's the formula for calculating the employee turnover rate.

Employee Turn Over = (Number of Employees Who Left/ Average No. of Employees) x 100

Let's go back to our earlier example.

Employee Turnover Rate = (No. of Employees who Left / Average No. of Employees) x 100

                                         =  (20 / 261) x 100

                                          = 7.6%

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What Is a Good Turnover Rate?

When it comes to turnover rates, it's difficult to pinpoint a benchmark or a golden number. You'll need to look at your number from a few different lenses to understand what it means to you.

But for most companies, an average turnover rate hovers around 15%. Organizations should aim for a 10% or less turnover rate. But for most companies, this number falls between 12 and 20%.

Note that turnover rates vary by industry.

Some industries, like retail and wholesale, have high turnover rates, sometimes exceeding 50%. Others, like companies in the energy sector, usually have low turnover rates, as low as 11%.

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In Summary

Employee turnover rate is the number of workers who leave a company in a given time period. High turnover rates are detrimental to the growth of a business and result in low productivity, high costs, low sales, and delayed development projects.

While turnover rates vary by business and industry, experts recommend aiming for a 10% or lower rate to optimize business performance and foster growth.

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[1] https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/the-great-attrition-is-making-hiring-harder-are-you-searching-the-right-talent-pools

[2] https://www.businessnewsdaily.com/16562-cost-of-hiring-an-employee.html