What is Employee Turnover and Why Does it Matter?

Gusto Editors

Employee turnover defines how many employees leave an organization within a specific time frame. It’s an important indicator of a) how healthy the workplace is, and b) how long the average employee can be expected to remain with the company.

Employee turnover rate is a metric that measures employee turnover. The rate includes both voluntary turnover and involuntary turnover to give a full picture of organizational departures. 

In this post, we will:

  •  Define employee turnover 
  • Explain why it’s important
  • Outline the leading causes 
  • Explore the costs of turnover
  • Demonstrate how to calculate turnover rate
  • Describe how to prevent it
  • Discuss what a good turnover rate is

What is employee turnover? 

Employee turnover is a measurement of how many employees leave the organization over a fixed period of time. It’s a benchmark used to express the rate at which employees leave. It’s often accompanied by an analysis of why employees leave so that organizations can develop strategies to improve employee retention.

When there are high rates of employee turnover, an organization can suffer in multiple ways. If talent frequently departs, the quality of work and operations often suffer. Also, organizations can end up with considerable operating costs for recruiting new employees, retraining, and covering for gaps in teams.

Conversely, low turnover rates are optimal, resulting in more experienced workforces and processes. Experienced employees understand their jobs, their customers, and company processes better.

Gustomers can grow and develop dream teams with easy-to-implement talent management tools. Here’s how.

Why is employee turnover important? 

Having a good employee turnover rate has multiple benefits for any organization. Here are some of the core reasons a positive employee turnover rate helps your business:

  • Reduced Costs. When you have a low annual turnover rate, your costs are lower throughout the business. With fewer resignations, you have fewer new hires to recruit and train. Fewer resignations also result in higher efficiency and productivity.
  • Production Consistency. With teams that are established and functional, production is more streamlined, consistent, and accurate. There’s less rework, and employees are not being pulled in different directions, leading to poorer quality outputs.
  • Stronger Customer Relationships. When your employees have been around for many years, they forge deeper relationships with your customers. Consistency in the workforce helps customers stay connected to your brand and provides familiarity in ongoing interactions. When top talent leaves, it will take a while for new employees to forge those strong relationships.
  • Better Morale. Teams that work together are often more connected to one another. When turnover is low, teams don’t have to take on additional workload or wonder when open positions will be filled. This improves employee satisfaction.

What are the leading causes of employee turnover? 

There are many causes for a high employee turnover rate. The good news is that these problems are often solvable, although solutions may require time and money. If you’re seeing high rates of employee turnover at your company, it may be worth taking the time to understand the reasons why workers are leaving; this way you can begin to pinpoint solutions.

Below are some of the leading causes of turnover:

1. Inadequate compensation

Poor compensation and benefits are a leading reason why employees leave. When the total compensation offered by others in the industry or region is dramatically different, employees are more apt to find competing opportunities.

Benefits are a key part of total compensation, and the costs of those perks have also risen. With skyrocketing healthcare and medical insurance costs, many employers are passing a portion of those cost increases onto their employees. That reality makes it difficult to keep themselves and their dependents covered.

Stopping attrition caused by noncompetitive compensation and benefits can be expensive. However, when compared to the costs of replacing employees, an investment in compensation and benefits is likely warranted. Remember, compensation and benefits are top motivators for candidates.

2. Lack of career development opportunities

If your organization does not provide a clear pathway for advancement internally, employees will naturally look elsewhere. Career development is a powerful motivator: with career progression comes increased compensation (typically), making the desire for new opportunities a potent incentive to stay at a company.

Employee development needs to be a core element of the organization’s talent management strategy. With clearly defined, well-thought-out career paths, employees can see the work necessary for promotion.

They can also see where they are strong in skills necessary for new roles. They can see where they need to expand or fine-tune their skill set to be considered for promotion.

Organizations also need to commit to promoting from within the company. If employees do not see qualified colleagues being given career advancement opportunities, they may be enticed to look elsewhere.

3. Lack of work-life balance

Work-life balance has become increasingly important post-pandemic. Because remote and hybrid roles are more common, boundaries tend to be more fluid. However, employees expect and deserve concrete start and stop times, and guidelines that protect them from intrusive, off-hour work communications. Employees should also be empowered to take their earned vacation time without being pinged by colleagues or supervisors.

Without these guardrails in place, employees are more likely to suffer from burnout.

Unfortunately, in organizations with a high turnover rate, there are often additional burdens placed on the employees who remain. When an employee leaves, those workers may need to take on additional work obligations for a long period of time. Such a work environment can lead to resentment among employees, leading them to look for new jobs.

4. Lack of purpose

Many employees firmly tie their identity to their work. High performers, in particular, often want to work for organizations with well-articulated visions and values. 

When an organization has a purposeful meaning, employees tend to be more motivated and inspired. Engaged employees become powerful extensions of the brand itself.

However, the opposite is also true. Employees who do not believe in the mission and core values of a company will often be dissatisfied. Be sure to clearly communicate the purpose and passion that drives your organization. 

5. Poor managers

Here’s an old adage that rings true: People don’t leave bad jobs; they leave bad managers. Poor managers are the top reason why employees leave. Many of the aforementioned reasons—poor compensation, career progression, and work-life balance—can be attributed to managers not advocating for their staff.

Good managers will empower their employees and help them be their best selves at work. Great managers find what’s unique about each person and leverage it to strengthen the employee and the company.

6. Lack of innovation

Employees want to solve problems, make an impact, and be a part of change for the better. They want to be a part of organizations that seek to innovate and explore.

When employers do not encourage innovation, employees can feel stagnated. The lack of interest in innovation may look for work with companies that are looking to do more. Or, employees will leave to start their own companies.

Employees working for companies that fail to innovate may also be concerned about job security. Companies that do not strive to change, evolve, and rethink are more apt to be eclipsed by the competition.

6. No camaraderie

The most effective employees are those that think of themselves as not just colleagues, but teams. These employees focus on collective success, not individual accomplishments. They are willing to lend support, insights, and help when asked by their teammates.

Building teams takes trust, confidence, and time. Teams need to see that their colleagues are team players and ready to contribute gladly when asked. These bonds take time to develop and strengthen, but greatly improve the employee experience.

Organizations that provide opportunities for teams to grow and evolve are more likely to find success. That means having team-building activities regularly, from icebreakers to retreats. These activities should be focused on building core skills and teaching teams how to work better together.

A lack of camaraderie can have a significant impact on team success. And the lack of cohesion can worsen if staff turnover rates are high. Building rapport and strong teams through deliberate team-strengthening work is essential.

7. Lack of diversity

Mandy organizations today put effort into diversity, equity, and inclusion programs. This work is foundational and when done correctly will lead to better business outcomes. Understanding the demographics of your employees helps you identify where there are gaps.

While hiring a diverse population is a good thing, if efforts are not made to boost inclusion, diverse hires may struggle. If certain demographics aren’t well represented at your company, some employees may feel isolated and misunderstood. Biases, unconscious or conscious, can hamper how connected they are to their colleagues and teams. 

Employees need to value different backgrounds, perspectives, and ideas. They need to make every employee feel they are valued and important—otherwise, retention rates can falter.

8. Poor workplace culture

Company culture plays a major role in how employees feel about their work, their colleagues, and their employer. It goes without saying that no one wants to spend eight hours a day in a toxic environment. In order to gain an understanding of how your employees feel about the culture try implementing systematic surveys and one-on-one meetings.

Fixing a bad culture often takes a deliberate and significant effort. In some cases, it may mean removing certain bad elements from the workforce.

Here are some of the symptoms of a toxic work culture:

  • Prevalence of gossip
  • Reluctance by managers to address conflict
  • Poor or vague communications
  • Unhealthy competition among coworkers
  • Lack of ownership and accountability
  • Poor support from leadership
  • Unequal distribution of work
  • Lack of communication
  • Unprofessional or inappropriate conduct
  • Micromanagement
  • Arbitrary accountability to rules

What are the costs of employee turnover? 

Costs include:

  • Severance pay or other exit packages
  • Recruitment costs, including advertising costs to post jobs
  • Talent acquisition management, including time spent with hiring managers and search committees
  • Time spent in hiring activities including reviewing resumes, conducting Interviews, and checking references
  • Welcome and referral bonuses
  • Onboarding and training

The costs of employee turnover can be widespread and impact every facet of your company. Turnover costs have significant impacts on the bottom line and how the organization operates.

If positions go unfilled for long periods of time, the impact may be felt across the organization. With high turnover rates and multiple open positions, the strain on existing teams will persist, and in turn, those conditions can lead other employees to look for new jobs themselves. An organization with high turnover rates will face lower productivity, new employee errors, and may risk the loss of customers.

How do you calculate employee turnover? 

Calculating your employee rate is simple. Most organizations calculate their turnover rate on both an annual and monthly basis. For both metrics, you’ll have to have several pieces of data:

  • Employee count on the first day
  • Employee count on the last day
  • Total separations, voluntary and involuntary, that occurred between the two dates

How to calculate annual turnover 

Here is the formula for calculating the annual turnover rate:

Employees who left during the year / (sum of the employees at the beginning and employees at the end of the year X 2)

Multiply that ratio by 100 to get the annual turnover rate.

How to calculate monthly turnover

The formula for the monthly turnover rate is similar:

Employees who left during the month / (sum of the employees at the beginning and employees at the end of the year X 2)

You can use the rates in multiple ways. Ideally, you will calculate the rate regularly and assess over time the average number of employees leaving during a period.

How do you prevent employee turnover?

An easy way to understand the reasons employees leave is to conduct exit interviews. 

Here are some of the strategies that help organizations lower their rate:

  • Assess compensation and benefits
  • Create career development paths
  • Ensure healthy work-life balance
  • Offer flexibility
  • Launch employee recognition programs
  • Review and embrace the company mission, vision, and value statements with your teams
  • Hire for a diverse workplace
  • Fix poor company culture
  • Celebrate employee accomplishments
  • Train managers to be empathetic and look for turnover signs
  • Offer learning and development programs

What is a good employee turnover rate? 

While there is no one standard benchmark for all companies (it varies by industry, region, and number of employees will apply—within smaller companies, a few departures in a year can skew the rate), according to Business.com, companies should generally aim for a 10 percent annual turnover rate.

Employee turnover has many causes, and the collective impacts are widespread. However, there are remedies that can—over time—shift the rate lower. At Gusto, we help organizations develop policies and programs that improve and enhance HR, benefits, and talent management.

Gusto Editors Gusto Editors, contributing authors on Gusto, provide actionable tips and expert advice on HR and payroll for successful business management.
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