Organizations are more likely to enjoy strong, sustained performance when their workers are motivated, productive and continually striving to reach new goals. Yet every year, a percentage of workers voluntarily leave their jobs.
For most companies, it’s just about impossible to eliminate all employee turnover. No matter how thoughtful an organization's recruiting strategy, not every employee will be a great fit, or they might receive an offer too compelling to turn down. Moreover, new employees can inject energy and fresh ideas into an organization.
But excessive turnover drives up costs and diverts time and attention from organizational goals. It can lead to a loss of institutional knowledge and hinder efforts to foster corporate culture. Fortunately, most of the drivers behind employee turnover are preventable and fixable. Steps to reduce turnover include rethinking recruiting strategies, enhancing career advancement opportunities and providing more training and development offerings.
What Is Employee Turnover?
Employee turnover reflects how many workers depart a business, whether by their own choice or involuntarily. Turnover can happen because a competitor offers an employee a raise or because a few staff members were laid off or let go due to poor performance.
Companies often measure employee turnover rate as a percentage. It’s calculated by dividing the number of employees who leave in a year (or another time period) by the average number of employees at the organization during the same period.
For example, say 10 employees out of a workforce of 150 left last year. The turnover rate would be about 6.7%, based on this calculation:
10 / 150 x 100 = 6.7%
Human resources (HR) professionals and managers can then quickly find out if the organization’s turnover rate is in line with that of industry peers through a wide array of online benchmarks, and/or the organization's goals. If it's not, they can take steps to lower turnover, such as boosting employee engagement and developing stronger managers. Management may have also set a goal for the turnover rate that HR wants to meet.
Employee turnover is one of several key performance indicators (KPIs) organizations use to measure how well they’re performing because it can have a lasting impact on a business’s success. It can be just as important as other key financial and customer-related metrics.
Why Does Employee Turnover Matter?
Employee turnover impacts organizations in multiple ways, many of them negative. For starters, it imposes costs, beginning with the time and resources used to replace departing employees and onboard and train new employees.
Turnover also carries softer costs. Although these softer costs are harder to quantify, they can have a tangible impact on an organization. They can include reduced morale and a poor reputation among attractive job candidates. Turnover also diverts resources that otherwise could be spent pursuing the organization's primary goals.
Moreover, if employees regularly leave because they see limited advancement opportunities, the organization is losing ambitious and potentially high-potential workers. Indeed, the top reason employees leave is to pursue better job opportunities.
Why Is Measuring Employee Turnover Important?
Businesses need to measure employee turnover because of its costs and potential to dampen morale and divert attention from the organization’s goals. So, it’s important that management establishes a starting point so it knows when there’s a problem.
Calculating employee turnover also allows companies to see how their turnover rate compares to industry peers and how it changes over time. Those that track their turnover rate will know if it’s high or suddenly starts climbing, so leaders can identify potential causes and then try to stop any trends.
What Is a High Employee Turnover Rate?
It’s difficult to determine what qualifies as a high employee turnover rate, as it varies by industry and job function. For instance, turnover in the retail industry averages about 37%. That’s much higher average than the 22% average turnover rate for all U.S. companies, according to workforce research firm Mercer. So, retailers with turnover rates of, say, 30%, are beating their industry average, even though their rate exceeds that of many other sectors.
12 Employee Turnover and Retention Metrics and KPIs to Track and Measure
Indeed, organizations that thoughtfully deploy “people analytics,” i.e. use employee data to help optimize business and management decisions, achieved a three-year average profit 82% higher than other firms. To accurately and thoroughly measure employee turnover, companies should monitor several different metrics, including the following:
Overall retention rate: The retention rate is the inverse of the turnover rate, as it measures the percentage of employees who remain with an organization over a certain period. It’s expressed as the average number of employees minus the number who left, divided by the average number of employees again. Using the numbers in the example above, where 10 employees out of a workforce of 150 left in the last year, the retention rate would be 93.3%:
(150 – 10) / 150 x 100 = 93.3%
To be sure, not every employee will stay forever, no matter how stellar the organization. However, it's possible to implement policies that boost employee satisfaction and the employee experience to increase retention. This includes offering a variety of career development opportunities and frequently informing employees know how their efforts help the organization reach its goals.
Overall turnover rate: The overall turnover rate is a starting point for assessing how well an organization is holding onto its workers. The turnover rate is the inverse of retention. It measures the percentage of employees who have left the company over a given time frame and is calculated by dividing the number of employees who left by the average employee number. In the case of a company that has an average of 300 employees and 20 employees left in the year, it would be calculated as:
20 / 300 x 100 = 6.7%
Suppose this ratio is higher than the industry average or what the organization has determined is acceptable. In that case, management will want to examine the potential drivers of turnover, such as lack of career development opportunities, poor work-life balance, difficult manager behavior and job characteristics.
Turnover differs from attrition, which occurs when employees leave voluntarily and the organization decides not to backfill their positions.
Employee happiness/satisfaction: Even before staffers submit their resignations, those who consider moving on may lose motivation and interact negatively with coworkers or even customers. Their actions can impact the organization's performance and make the jobs of other employees more difficult.
By watching for signs that employees are unhappy, management can intervene before workers leave. HR should conduct surveys or interview members of a certain team about their experience if multiple colleagues have left in a short period. There are several steps leaders might take, including talking with the employee to see if it's possible to address an issue that may be prompting them to consider leaving, showing appreciation for their work and offering support.
Voluntary turnover: Voluntary turnover, as the term implies, refers to employees who leave an organization on their own, whether for a position at another company or to pursue opportunities outside the work world, like returning to school. The same formula applies here, just using voluntary departures: voluntary departures, divided by the average of the total number of employees:
Voluntary departures / average of total employees x 100 = Voluntary turnover rate
If employees frequently leave because they're finding more fulfilling opportunities at other organizations, management will want to review its recruiting, hiring and promotion practices. Perhaps recruiting efforts target employees who lack the necessary skills, or conversely, are more experienced than the positions actually require. More tenured employees leaving in higher numbers than feels appropriate may indicate a lack of advancement opportunities.
When employees of specific ethnic, racial, sexual or other identities quit in higher-than-average numbers, business should explore the reasons why. In addition to the costs associated with all turnover, the suggestion that the organization struggles to retain employees of diverse backgrounds can lead to image problems and legal challenges.
Involuntary turnover rate: Involuntary turnover measures employees who are fired, laid off or otherwise terminated. It’s calculated as the number of employees who left involuntarily divided by the average of the total number of employees for the time period. Using the numbers above, assume six of the 10 departing employees left involuntarily.
The involuntary turnover rate would be 4%:
6 / 150 x 100 = 4%
To be sure, few companies are entirely immune to the macroeconomic and geopolitical shifts that can prompt layoffs. However, it’s still valuable to measure and monitor involuntary turnover. A rate that's out of line with similar firms or has risen over time may signal shortcomings within the organization's recruiting and/or onboarding processes. For instance, perhaps managers are looking for candidates whose skills don't truly match the jobs for which they're recruiting.
(Note: Organizations should maintain records on involuntary turnover in case they're needed for future litigation.)
Average length of employment: The average tenure of an organization's employees is another metric that can provide insight into an organization's human resources initiatives. The U.S. Bureau of Labor Statistics tracks this statistic, making it relatively easy to understand how one firm compares to others within its industry or how it's changed over time. It’s calculated as the total number of years of employment for all employees divided by the total number of employees. If a company has 100 employees who have worked at the company for a combined total of 400 years, it would be calculated as:
400 / 100 = 4 years average length of employment
In January 2020, for instance, the median overall employee tenure for men was 4.3 years and 3.9 years for women. By industry, employees in manufacturing had the highest tenure, at 5.1 years. The lowest tenure occurred in leisure and hospitality at 2.3 years.
New employee satisfaction rate: Turnover among new employees tends to be even higher than for long-term employees, so it’s important to regularly monitor their satisfaction early on. According to the Work Institute’s 2020 Retention Report, top reasons for leaving within the first year are lack of career development, challenging job characteristics and poor work-life balance.
These employees leave too quickly for the organization to recoup the investment it's made in hiring them. HR departments can identify the top reasons their new employees fail to stick around through surveys and interviews, then take steps to lower new employee turnover.
New hire retention: A starting point for retaining new employees is identifying just how many are leaving. To calculate the new hire retention rate, divide the number of employees who leave within their first year with the organization (or whatever period seems relevant) by the total number of employees who left during the same period. Again, using the numbers above, assume five of the 10 departing employees had been with the company less than a year. The new hire retention rate would be 50%:
5 / 10 x 100 = 50%
Not only is the organization investing money in these candidates that it's unlikely to recoup, but if many new hires leave, the organization's reputation may take a hit.
A critical step in remedying this is examining recruiting processes and checking for mismatches between candidates and the jobs for which they're being hired. Companies should also examine their onboarding process to make sure it helps new employees feel welcome and prepared.
Turnover rate by department or manager (and by position): Reviewing turnover by department or manager can help identify the areas or people on which to focus. That way, HR is investing its time and resources in places that most benefit the organization.
It's also worthwhile to understand which job functions tend to have higher turnover rates, no matter the industry or company. Contact center and customer service jobs have the highest annual turnover rates, at about 17%. Armed with this knowledge, HR teams can brainstorm ways to improve retention in positions where it’s often more challenging to keep employees.
Retention rate for star employees: Not all turnover is equal. When top employees leave, the organization's cost tends to be higher than when low-performing employees leave. After all, star employees generally are the ones truly driving an organization toward its goals.
One way to account for this difference is to weigh the loss of a top employee more heavily than the loss of average or lower-performing employees when calculating turnover and retention rates.
For instance, if two of the 10 departing employees above were considered stars, the turnover rate increases to 8%.
8 + (2 x 2) / 150 x 100 = 8%
Typically, the steps that are key to retaining top employees are similar to those important for retaining any employee: recognizing the job they're doing and providing opportunities for development and advancement within the organization.
Retention rate for low performing employees: Retaining too many low-performing employees can impede an organization's performance. In fact, when these employees leave, more engaged and productive employees have a greater opportunity to excel. For these reasons, some organizations routinely identify those they've identified as the lowest-performing employees.
Before taking such a drastic step, however, HR professionals will want to identify employees who simply need more training or coaching to perform at higher levels. You could start by putting them on a performance improvement plan with clear expectations. That way, they can benefit from the employees' experience and often boost their loyalty and dedication without simply accepting the financial losses.
Cost of turnover: To capture the overall expense an organization incurs because of employee turnover as accurately as possible, it's necessary to sum up estimates of all hard and less tangible costs.
The hard costs typically include:
- Overtime pay and other costs incurred for the departed employees before their replacements are hired and know their jobs.
- The time and expense to recruit replacement candidates.
- The cost to onboard and train new employees.
The less tangible costs can include:
- A drop in employee morale when a team member leaves.
- A negative impact on the company's reputation. This is becoming a bigger risk, given the popularity of company review sites like Glassdoor and social media platforms in which former employees can air their thoughts on an employer.
- A dip in productivity while replacement employees get up to speed.
- A weakening of the company's culture.
Tracking and Measuring Employee Turnover Metrics With HR Software
Because employee turnover is a lagging indicator — that is, once an employee is ready to leave, it's usually too late to make changes that will keep him or her onboard —businesses benefit by tracking this rate in as close to real time as possible. They'll be better prepared to act to reduce unwanted turnover going forward.
HR professionals who have gained a solid understanding of the percentage of employees who are leaving and the drivers behind their decisions can take steps to improve employee retention. Often, this requires intentionally providing growth opportunities, maintaining an open dialogue, remaining alert to problems and recognizing employees' contributions.
Moreover, not only can these actions reduce employee turnover, but they often improve employee satisfaction and motivation. This can lead to happier workers, who studies show are more productive.
Software like a human resources management system (HRMS) can help HR departments monitor and reduce employee turnover and improve the organization's overall performance. For example, NetSuite SuitePeople allows HR to track hiring and termination trends, recognize employees' performance and streamline onboarding processes, among other useful functions.
Organizational leaders should pay close attention to employee turnover trends, as they often point to bigger problems that could derail the business’s success. By tracking some or all of the metrics covered here, companies can target improvements that will minimize the damage of employee turnover and allow them to retain their most valuable contributors.