If you’re an employer, it’s crucial that you know how to calculate the employee turnover rate at your organization. This metric measures employee turnover within the organization—typically on a monthly or annual basis.
High turnover rates, whether by attrition, involuntary turnover, or voluntary turnover, are an indication of a company’s overall health. Turnover rates are also a proxy for company culture and employee satisfaction.
In this post, we will:
- Define employee turnover rate
- Walk through how to calculate it
- Review different methods to calculate employee turnover rate
- Cover what a healthy employee turnover rate looks like
What is employee turnover rate?
The employee turnover rate is calculated as the percentage of employees who leave the organization (voluntarily and involuntarily) during a specific period of time; it’s typically calculated as a percentage.
Some people consider the employee turnover rate as one indicator that demonstrates the efficacy of human resources management. It’s also considered an indicator of the health of the overall company.
People often confuse the employee turnover rate with the employee retention rate, but they aren’t the same; here’s the difference between employee turnover rate and employee retention rate:
- The employee turnover rate is the rate at which employees leave an organization within a designated period of time, while
- The employee retention rate is a measure of how many employees remain in an organization throughout a designated period of time.
Why is employee turnover rate important?
To fully understand the impact of employee turnover, let’s look at some of the problems high turnover rates can cause. Among the most common effects are:
- Lack of employee engagement. When employees are highly engaged, they connect with each other and believe in the company’s mission and values. With high turnover rates, remaining employees can be skeptical and wary; morale may suffer. Also, frequent departures may cause remaining workers to look elsewhere only compounding the turnover rate.
- Higher operating costs. With high employee turnover rates come considerable costs for recruitment, hiring, onboarding, and training. Not to mention the time commitments that recruitment and the onboarding process. There are costs of employee turnover associated with bringing teams up to speed with new members. As employees are asked to do more work to cover for departed colleagues, quality and efficiency suffer.
- Poorer customer relations. Longtime employees of an organization create bonds and connections with customers. When employees leave regularly, customers aren’t able to form the relationships that spur more business. The loss of a key employee to a competitor can even mean the loss of customers who follow.
- More overwhelm. When an organization continually asks employees to cover for those who have left, the effect can cause high levels of stress. The remaining employees can become discouraged and overwhelmed, leading to higher absenteeism and missed deadlines.
What can employee turnover rate reveal about an organization?
However, in general, high turnover rates may indicate that there is something wrong within the company. Until leaders at an organization can understand the underlying causes of the high rates and work to address those causes, the problem will persist.
The main drivers of a high turnover rate are the following:
- Poor compensation. When companies do not pay a competitive annual salary or wage, top performers may look elsewhere. Don’t forget about benefits; it’s important to include coveted employee benefits within a competitive compensation package.
- No career advancement. When employees, especially top talent, are stuck in their roles with no chance to progress internally, they begin looking for other opportunities.
- Poor work-life balance. Employees want to enjoy their time away from the office without continual pressures or too much time spent at work. They want nights, weekends, and vacations to themselves.
- Lack of vision. Employees want to work for employers with a vision—a clearly articulated vision—and values that guide the company’s work.
- Bad managers. Leaders play an integral role in the day-to-day experiences employees have; poor managers are often the reason why employees leave.
Once a company begins measuring the employee turnover rate, the work begins to change the organization in order to reduce employee turnover. This work should be based on an examination of the underlying causes of a high turnover rate.
To gain this knowledge, organizations can use a variety of tools to gather feedback on the employee experience. Surveys can help to identify issues that are prompting employees to leave. Exit interviews are another important source of information as departing employees may be more apt to share uncomfortable insights.
The actions that come next are critical. Organizations and leadership must commit to rectifying the identified issues. That may mean an in-depth look at compensation structures—including pay and benefits, like healthcare and paid time off. Or, it may include taking steps to improve employee morale, building stronger teams, and recognizing great employee work.
How do you calculate employee turnover?
Before calculating your employee turnover rate, it’s important to set standards.
First: determine which separations from the organization will count. Make sure to cover questions like:
- Will you include voluntary resignations?
- Will you include involuntary terminations?
- Will retirements be included?
- Are part-time employees included? in the population you track?
- Will you include new hires that were recruited during your designated time period?
Keep in mind that employees who are furloughed or on leave should not be counted. Also, internal promotions and transfers are not included in an employee turnover metric.
Next: determine your time period; make sure to consider:
- How frequently will you measure turnover? (Monthly and annually are the most common.)
- What frequency will give you the data you need to reveal key information about your company culture and employee engagement?
Once you’ve defined the employee types you plan to count and the timeframe you plan to use, you’re ready to do your calculation!
Calculating monthly employee turnover
To define the monthly employee turnover rate, take the number of employees separated and divide it by the average number of employees. Multiply the result by 100 and use that as a percentage.
- Determine the total number of employees at the beginning of your designated time period.
- Determine the total number of employees at the end of your designated time period.
- Add those numbers together and divide by two. This is the average number of employees at your company within your designated time period.
- Determine the number of employees who have separated from the company (remember that the criteria you use for separation must be considered and defined ahead of time in order to build your formula).
- Divide the number of separated employees by the average number of employees and multiply the result by 100:
Number of separated employees/Average number of employees = X
X*100= your monthly employee turnover rate.
Calculating annual employee turnover
The annual turnover rate formula is very similar. Take the number of employees separated during the year and divide it by the average number of employees. Again, multiply the result by 100 and use that as a percentage.
Here’s an example.
On January 1, your company has 100 people employed. On December 31 of the same year, your company has 120 employees. Take the 100 and add 120, for 220. Divide that figure by two for an average number of employees of 110.
Now, during the year, your organization sees the following actions:
- 2 employees choose to retire
- 8 employees leave for other jobs
- 4 employees hired for the holiday rush are terminated after the season
- 6 other employees are fired for cause
- 2 employees are on family medical leave
- 2 employees are on short-term disability leave
- 10 employees are hired
There are only three groups of employees to count in your calculation. Those employees are those who retire, leave for another opportunity, or are fired for cause.
Your total number of employees separated is 16 (2 retirees plus 6 fired staff plus 8 resignations for other jobs).
To calculate the annual turnover rate, divide 16 by 110, or 0.145. Multiply by 100 to get a 14.5 percent rate.
Are there different ways to calculate the employee turnover rate?
There are different approaches to calculating employee turnover rates. Not only do different organizations use different criteria to define “separated employees,” but there are also numerous ways to build the formula. (For example, not all formulas use average employees.) Here is alternate way to calculate turnover:
# of separated employees during timeframe/# of employees at beginning of timeframe = X
X*100 = employee turnover rate
In 2018, ISO 30414 was adopted as a universal norm for calculating the turnover rate. In this case, employees hired are included in the rate calculation.
Using our template above, the total number separated remains the same – 16. However, let’s assume the 10 hired employees are now included in the end-of-year total. The average number of employees changes from 110 to 115.
That brings the new rate to 16 divided by 115, with the result multiplied by 100. That rate is 13.9 percent.
|Note: Another method that exists calls taking the number of annual separations and divide that by the average number of employees in each month. This method is frequently shared on the Internet but the logic is faulty. This method is not recommended.|
What is a good employee turnover rate?
The determination of what is a good turnover rate varies by industry and region. What might be a good rate in one profession may be considered problematic in another.
There is no standard measure for employee turnover rate. However, Business.com suggests companies should aspire to a turnover rate no higher than 10 percent annually. The site notes that most companies have an annual rate of between 12 percent and 20 percent.
Employee turnover is a key performance metric and an indicator of the strength of an organization. High employee turnover rates have a disruptive impact on multiple aspects of a business. By understanding the causes of a high turnover rate, companies can take proactive steps to remedy the issues.
At Gusto, we understand the importance of robust human resources programs. We work with companies across industries, delivering platforms and services that improve employee experiences. From human resources to benefits to talent management, our services can help make work better at your company.