Employee Turnover: What It Is, How to Calculate It and How to Reduce It

Employee turnover is a key issue for any company wishing to remain both competitive and efficient. High employee turnover can not only affect productivity but also employee morale and the company’s reputation in the market. In this article, we will delve deep into what turnover is, how it is calculated, the implications of having a high turnover rate and, most importantly, how to effectively reduce it.

What is Employee Turnover?

Employee turnover refers to the movement of employees entering and leaving an organisation over a given period of time. This phenomenon can be voluntary, when an employee decides to leave their position for one of any number of personal reasons, or involuntary, when it is the company that decides to terminate the employment relationship. Although both types of turnover have different causes and effects, the impact on the organisation is significant in both.

Voluntary Turnover

Voluntary turnover occurs when an employee decides to leave the company of their own accord. There are a great variety of reasons why this might occur, such as the search for better job opportunities, a current unsatisfactory work environment, personal reasons or family issues. Voluntary turnover is of particular concern to companies, as it can be an indication of the existence of internal problems, e.g. poor work environment, lack of development opportunities or inadequate compensation packages.

Involuntary Turnover

In contrast, involuntary turnover occurs when the company itself decides to end the employment relationship. This can also be due to a variety of different reasons, including in-house restructuring and dismissal due to poor performance or inappropriate behaviour. Although sometimes unavoidable, involuntary turnover can also be costly and disruptive to the organisation.

How to Calculate the Employee Turnover Rate

Calculating the employee turnover rate is essential to be able to understand the impact it has on the organisation. A simple and widely used formula for calculating the turnover rate is:

Turnover Rate = (Number of employees leaving the company / Total number of employees) x 100

For example, if a company has 200 employees and 20 leave the organisation in a year, the turnover rate would be:

Turnover Rate = (20 / 200) x 100 = 10%

This provides a clear picture of how many employees are leaving the company in relation to the total workforce. However, it is always important to contextualise this number. For example, in sectors such as hospitality or retail, where temporary hiring is common, a high turnover rate may not necessarily indicate a problem.

Interpreting the Turnover Rate

Once the turnover rate is calculated, interpreting it correctly is of crucial importance. A low turnover rate generally indicates job stability and a good talent retention policy. On the other hand, a high turnover rate may be a sign of problems such as poor employee selection, unsatisfactory working conditions or a lack of development opportunities. 

There is no single ideal turnover rate that applies to all industries, as this will vary depending on the sector, company size and other contextual factors. However, all companies should be on the lookout for a sudden increase in their turnover, as this could be a symptom of an underlying problem.

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How does a High Employee Turnover Rate affect a Company?

Having a high employee turnover rate can have several negative consequences for a company. Some of the most significant ones include:

1. Direct and Indirect Costs

One of the most significant aspects of employee turnover is cost. Every time an employee leaves the company, it generates costs associated with the process of selecting, hiring, training and onboarding their replacement. According to a study by the Society for Human Resource Management (SHRM), the average cost of replacing an employee can range from 50% to 200% of the employee’s annual salary, depending on the employee’s skill level.

2. Impact on Morale and Productivity

A high turnover rate can negatively affect the morale of employees who remain in the company. Seeing colleagues leave the organisation on a frequent basis can lead to insecurity, decreased motivation and consequently a reduction in productivity. Moreover, the constant coming and going of employees disrupts team cohesion, which in turn affects collaboration and efficiency.

3. Loss of Knowledge and Experience

Every time an employee leaves the company, they take with them a significant amount of knowledge and experience. This is particularly harmful in key roles or industries where specialised knowledge is vital. Replacing this experience is not only costly but can also take time, during which the company may suffer a decline in the quality of its product or service.

4. Damage to the Company’s Image

A high employee turnover rate can also damage the company’s reputation, both internally and externally. Current employees may then feel insecure and unmotivated, while potential candidates may view high turnover as a sign of a poor work environment. In today’s market, where employer branding is crucial to attracting talent, this can have a significant negative impact on a company’s image.

How to Reduce the Employee Turnover Rate

Reducing the employee turnover rate is a top priority for all HR departments. Here are some effective strategies that can help achieve this:

1. Improving the Recruitment Process

An effective recruitment process is key to reducing employee turnover. Ensuring that the candidate not only meets the technical requirements but also fits in with the company’s culture and values is essential. This can be achieved through better, more in-depth interviews, well devised competency assessments and efficient reference checks.

2. Fostering a Positive Work Environment

The work environment is a determining factor in employee retention. Fostering a positive organisational culture, where respect, collaboration and recognition are promoted, can make employees feel valued and engaged. It is also highly important that any problems that may arise, such as conflicts between employees or work-related stress, are quickly dealt with.

3. Offering Development and Career Opportunities

Employees who feel they have growth opportunities within the company are less likely to seek employment elsewhere. Implementing professional development programmes, offering mentorships and creating personalised career plans can be effective tools for retaining talent.

4. Reviewing and Adjusting Compensation Packages

While emotional salary is becoming  increasingly important, the significance of fair and competitive compensation packages should not be underestimated. Conducting regular salary reviews and ensuring that employees feel their work is adequately rewarded is essential for reducing turnover.

5. Implementing Wellbeing Programmes

Employee wellbeing is another crucial factor. Programmes that promote work-life balance, such as flexible working hours, remote work or additional benefits like health insurance, can significantly contribute to employee satisfaction and, consequently, their retention.

6. Listening to and Acting on Employee Feedback

Finally, one of the most effective ways to reduce employee turnover is to listen to employees. Conducting satisfaction surveys, holding regular meetings and creating open communication channels allow the company to identify problems before they become reasons for employees to leave. Furthermore, demonstrating that actions are taken based on the feedback received reinforces employee trust and commitment.

Conclusion

Employee turnover is a crucial indicator of an organisation’s health. Understanding what it is, how to calculate it and how it affects the company is fundamental for any leader or HR professional. More importantly, implementing effective strategies to reduce turnover can save the company a significant amount of resources and contribute to a healthier and more productive work environment.

In the long term, investing in employee retention will not only improve the company’s financial results but also strengthen its reputation as an employer of choice. In an increasingly competitive labour market, companies that manage to maintain low turnover rates will be the ones that stand out and thrive.