How to Calculate Turnover Rate
One fundamental truth of business is that employees leave and need to be replaced. In the world of HR, this is known as turnover. No matter what your industry, minimizing turnover should be high on your list of priorities as a manager or executive.
But before you can work to minimize turnover, you need to understand what it is and what causes it. Crucial to this understanding is the concept of employee turnover rate. You see it in discussions across industries, and across organizations large and small.
In today’s article, we’re going to break down everything that goes into turnover rate. We’ll show you what it is, how to calculate it, and how you can minimize it at your company.
What Is Turnover?
Turnover, in its broadest sense, refers to the process of replacing employees who leave with new employees.
Employees can leave for a variety of reasons. Some of the most common include:
In larger organizations, you may be looking only at turnover for the department that you manage. In this case, turnover can include replacing employees who move to a different office of the company or even a different sector.
No matter the reasons, high turnover is detrimental to your organization. Each time you have to replace an employee with a new hire, it costs your company thousands of dollars. A 2012 study from the Center for American Progress found that it costs around 20% of an employee’s annual salary to replace someone in a midrange position ($30,000 to $50,000 a year). For executive turnover, the cost is staggering: up to 213% of annual salary. For these reasons alone, it’s in your best interest to minimize turnover.
There are other costs beyond the numbers, however. High turnover also costs you time. You have to prepare a description of the position for potential candidates, post the job (or, in some cases, actively court qualified candidates), process and review applications, conduct interviews, make a decision, and then train your new hire. All to hope that after this lengthy hiring process, the employee sticks with your company.
Finally, a high turnover rate also has more intangible costs. It can result in bad press for your organization, making your company less attractive to top talent. And it can demoralize current employees--no one wants to work for an organization that people are voluntarily leaving.
The case for reducing turnover is clear. But before you can start reducing it, you need to get some hard data on the turnover rate for your company. In the next section, we’ll show you how to calculate turnover rate.
How to Calculate Turnover Rate
To calculate employee turnover, you need to divide the number of employees who left during the year by the average number of employees during the year, then convert that to a percentage. Expressed as a formula, it looks like this:
We know the turnover calculation formula can look a little intimidating, so let’s break down each of its parts, starting with the number of employees who left during the year.
For the purposes of this article, the number of employees who left during the year includes all employees who left for any reason. That could be retirement, death, termination, resignation, or even transfer to a different part of your company. As we mentioned in the previous section, you may or may not want to include all reasons for leaving depending on your reasons for calculating turnover rate.
Next, we have the number of employees at the start of the year. This needs little additional explanation, except that you should decide whether the “year” in question is the calendar year or your fiscal year (if different from the calendar year).
The number of employees at the end of the year includes employees who were hired or those who transferred to your department from another agency or part of the company. Again, the details of what you want to include in this number will depend on the type of your organization and your reasons for calculating turnover.
We divide the sum of the number of employees at the start of the year and the number of employees at the end of the year by 2 in order to get the average number of employees at the company over the course of the year. Finally, we multiply by 100 in order to get the number as a percentage.
Let’s put this formula into practice with an example. We’ll assume the following things:
Your organization had 100 employees at the start of the year.
10 employees left during the year.
You hired 3 new employees, resulting in a total number of 93 employees at the end of the year.
Using the turnover rate formula, we get the following:
This works out to a turnover rate of 10.4%.
To make things easier, we’ve also created a Google Sheet that will calculate turnover rate for you. Here’s a preview of what this looks like using the numbers in our above example:
Get the spreadsheet here. Feel free to make a copy of it and use it for your organization. Just go to File > Make a copy, choose a name for your new document, and then click Okay.
How to Minimize Turnover
Now that you have your turnover rate, you can work toward minimizing it. Having a turnover rate of zero percent is an unrealistic goal--you can’t control when people die or retire. And in some cases, firing people is necessary for the overall health of your organization.
Additionally, the turnover rate can vary from industry to industry. Highly seasonal industries such as leisure and hospitality, for example, tend to have higher turnover rates than the average. You should consult the industry average turnover rate to see if your company’s particular turnover rate is cause for concern. To see the relevant industry average, consult the Bureau of Labor Statistics Annual quits rate by industry and region.
Turnover due to employee resignation is the biggest cause for concern. As a manager, you should focus most of your energy on reducing this aspect of turnover (known as voluntary turnover rate). After all, it’s the one most in your control.
To minimize employee resignation, you need to understand reasons that people commonly resign. There are as many reasons as there are employees, but common reasons for resignation include the following:
Lack of challenge
Toxic company culture
Lack of autonomy
Lack of opportunity for advancement
Of course, the best way to find out why employees leave is to conduct exit interviews. This way, employees can tell you in their own words why they’re resigning. With this knowledge, you can work to prevent employees from quitting in the future.
If, in the course of conducting your exit interviews, you find that employees are leaving because of a lack of opportunity for advancement, then Twine can help.
We work with you to help you fill open roles with your best job candidates: people who have already chosen to work for you. We’ll make sure you retain your top talent, keeping them challenged, engaged, and productive. To learn more, set up a discovery call today.