What is the Employee Turnover Rate?
The employee turnover rate refers to the proportion of employees who leave a company during a certain time period. The employee turnover rate includes both voluntary and involuntary separation and excludes internal movements (promotions and transfers) and employees who are on furlough or leave of absence.
Calculating the Employee Turnover Rate
The formula for the employee turnover rate is as follows:
- Employees separated includes voluntary and involuntary separation.
- Average number of employees is the average number of employees employed over a specified time period.
Example of Employee Turnover Rate
The HR department of Company A would like to determine the employee turnover rate for the month of January. Company A runs monthly headcount reports and reported the following figures in its first quarter:
- January headcount: 142
- February headcount: 145
- March headcount: 143
In addition, the company reported the following information in the month of January:
- Terminated three employees for unlawful conduct
- Two employees on unpaid furlough
- One employee transferred to another division of the company
The January employee turnover rate for Company A would be calculated as follows:
Note: The number of employees separated is three because employee transfers and employees on furlough are not included in the employee turnover rate calculation.
Therefore, Company A saw an employee turnover rate of 2.09% for the month of January.
Employee Turnover Rate in Various Industries
The employee turnover rate by itself does not provide much insight. Therefore, it should be compared with the average within the company’s industry. It should not be compared across industries as the turnover rate differs significantly in various industries.
The following employee turnover rate figures are provided by CompData Surveys:
Importance of Employee Turnover Rate
To every company, high employee turnover is undesirable and can have a significant adverse impact. Therefore, it is in the best interest of the company to reduce the rate of turnover. Here are several reasons why a high employee turnover rate is detrimental:
1. Costs of hiring
When an employee leaves the company, the company incurs costs to find a replacement. Costs include recruitment costs, advertising costs, administration costs, background check costs, and testing/interviewing costs. In addition, there are costs of lost productivity when the employee is attending a training program.
2. Decline in morale
A high employee turnover rate results in an unfavorable effect on the morale of the remaining employees. Existing employees may face additional stress, resulting in lower productivity.
3. Brand image
Companies with a high employee turnover rate may suffer from an unfavorable public image. For example, working in the fast-food industry is seen as undesirable due to its notoriously high turnover rates.
4. Lower productivity
In addition to lower existing employee productivity due to decline in morale, additional productivity is lost as existing employees must teach new employees how to adapt to the organizational culture of the company and the new position.
Ways to Reduce the Employee Turnover Rate
It is crucial to monitor the employee turnover rate and to find ways to lower the turnover rate. Here are five ways to reduce the employee turnover rate:
1. Hire the “correct” people
Although the hired employee may have skills that match the position, it is important that the employees fit with the company’s organizational culture. If employees do not fit in or adapt to the company culture, they will not be happy. Ways to address this issue are to employ behavioral and situational tests and to show the employee the workplace and company culture.
2. Establish a competitive pay structure
Employees want to be paid equitably. It is ideal to conduct market research on the pay and benefits offered by competitors for similar positions. However, providing employees with a higher salary is not enough; it is important to understand the benefits that employees want and to take that into consideration when determining an employee’s pay structure.
3. Provide feedback
Employees need to be acknowledged and given praise when due. Show appreciation whenever applicable and create a positive work environment where employees can succeed in. Employees that feel desired and respected are more likely to stay with the company.
4. Provide a career path
Employees want to progress in their career. If employees are unable to progress in their job, they will search for another job in which they can progress. A career path should be provided to employees to give them a sense of direction and what they can attain if they stay with the company.
5. Offer flexibility
In today’s society, a flexible work schedule is highly desirable. In fact, studies have shown that a flexible work arrangement has a positive impact on employee retention. Allowing employees to choose their work time and providing a flexible work schedule gives employees the ability to balance their work and personal life and hence improves employee satisfaction.
CFI offers a wide range of financial analysis, accounting, and financial modeling courses. To keep learning and advancing your career, the following resources will be helpful: