How To Calculate The Employee Turnover Rate (With Example)
By Indeed Editorial Team
Published 22 September 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Employers use a variety of metrics to determine the effectiveness of the overall management of an organisation. They use these metrics to devise strategies, policies and best practices to help retain top talent at the workplace. If you are a recruiter or HR professional, you can benefit from understanding an essential metric known as employee turnover rate. In this article, we discuss what employee turnover rate is, find out how to calculate the employee turnover rate with an example, look at various types of turnovers and list some strategies that an organisation can use to retain its employees.
What Is The Employee Turnover Rate?
The employee turnover ratio measures the percentage of employees that leave the workplace during a specific period. Employees may leave an organisation because of various factors such as lack of recognition, unfair treatment, unhealthy work environment, reduced compensation, lack of development and growth opportunities and unchallenging work. These metrics may vary by the type of industry, job role, geography and external factors. The external factors may include local economic conditions, labour market conditions and supply and demand.
How To Calculate The Employee Turnover Rate?
Follow these steps if you want to know how to calculate the employee turnover rate:
1. Calculate the number of employees
The first step is calculating the total number of employees on the company's payroll. HR systems require maintaining the total employee headcount periodically. It is preferable to prepare a report at regular intervals within a month, starting from the beginning of the month, middle and end of each month. Using more data points provides higher accuracy when calculating the turnover rates. Consider this example:
A company prepares an employee headcount report thrice a month. They perform this activity at the beginning of the month, mid-month and end of the month. According to the report, the employee headcount on March 1st is 140. On March 15th, it is 145. The employee headcount on March 30th is 148.
2. Calculate the average number of employees
The second step in the process is to add the head counts of all the reports generated in a month. After performing the addition, divide it by the total number of reports prepared that month. This gives the average number of employees. Below is the continued example:
Total headcount is the addition of employee head counts calculated using three reports. Here, the total is 433. Divide this sum by the total number of reports used. Here, the total number of reports used is three. After dividing 433 by 3, the average number of employees is 144.33.
Average number of employees = (140 + 145 + 148) / 3 = 433/3 = 144.33
3. Find the number of employees who left
Calculate the number of employees with termination dates within that month. When calculating the number of employees who left, include voluntary and non-voluntary turnovers. Exclude leaves, sabbaticals and retirements in the calculation. The net calculation gives the number of employees who left. Continuing the previous example:
Two employees are on maternity leave. One employee is on a three months sabbatical. A company policy violation has resulted in the termination of two employees. Three employees left voluntarily. One employee is on sick leave. In this example, excluding those on maternity leave, sick leave and sabbatical, the number of employees who left is five. This includes three voluntary and two involuntary turnovers.
4. Find the employee turnover ratio
The next step is to divide the number of employees who left by the average number of employees calculated in the second step. This gives the employee turnover ratio for a particular month. You can calculate the employee turnover rate as a percentage by multiplying this number by 100. Find the calculation below:
Employee turnover ratio = 5/144.33 = 0.034
Employee turnover rate = 0.034 x 100 = 0.034 x 100 = 3.4%
The monthly employee turnover rate for March is 3.4%.
5. Find the annual turnover rate
Most companies want to determine both monthly and annual employee turnover rates. To determine the annual turnover rate, add the monthly turnover rates, starting from January until December. It is essential for companies to aim for an annual turnover rate of less than 10%.
Why Is It Important To Calculate The Turnover Rate?
An organisation's employee turnover is a good indicator of the effectiveness of its human resources management system. Organisations can use this metric to improve their human resources management, compensation and benefits structure, individual managers and employee training programmes. A higher turnover rate is detrimental because:
Costs of hiring new staff: Companies incur advertisement, onboarding, training, recruitment and other additional costs when looking for a replacement.
Low employee morale: A higher turnover rate has a negative impact on the remaining employees' morale. This may lead to additional stress and lowering of productivity.
Negative brand image: A higher turnover rate is unfavourable for the company's public image.
Delays in business processes: With experience employees leaving the company, several critical tasks may halt. It can be difficult for new employees to adjust to the company culture and be up-to-date with ongoing projects.
Types Of Employee Turnover
Here are different types of employee turnovers at an organisation:
Involuntary turnover is when a company terminates the contract of an employee. Companies may do so for several reasons, including unsatisfactory performance, counterproductive work behaviour, failure to meet deadlines, poor results or violating company policies. Involuntary turnover can also result from layoffs and downsizing, which may reflect a company's management and financial operations. Some methods that companies can use to reduce involuntary turnover are:
Hiring suitable candidates for the job role
Providing quality training to new employees
Conducting a skills gap analysis to determine candidates who require additional training
Creating strict disciplinary action policies at the workplace to address misconduct
Creating a proper budgeting plan to avoid lay-offs at a later stage
Voluntary turnover refers to turnover that occurs when employees voluntarily leave their jobs. It is possible to leave a job for various reasons, such as dissatisfaction with the job or compensation, a career change or acceptance of another offer. While involuntary turnover results from an employee's poor performance, voluntary turnover often involves competent employees leaving their positions. Voluntary turnover can be costly to a company because of the cost of recruiting and hiring new employees. Some methods that companies can use to reduce voluntary turnover are:
Providing tuition assistance, access to quality courses and training programmes that help employees improve their skills
Providing a personality assessment test to candidates to test if their personalities are compatible with the job positions
Matching compensation with standard industry rates
Providing flexibility in the workplace
Retirement is also a part of voluntary turnover, but most companies prefer allotting a separate category. Companies do not include retirement turnover as part of their analysis of employee turnover rates. Though retirements are inevitable and not under a company's control, there can be instances where a senior employee may choose to retire early. It is essential for the management to learn the reasons for an employee's early retirement and take measures to retain them.
Strategies To Lower Employee Turnover Rate
Various techniques can help HR professionals understand the workforce better, including descriptive and predictive analytics. An organisation can use HR analytics to identify factors that contribute to turnover. Utilising this information, they can devise various retention strategies. The following are some strategies:
Choosing the right candidate for a job
Offering fair compensation and benefits
Providing employees with flexibility, such as remote work
Maintaining a healthy work-life balance
Providing development opportunities for employees
Example Of Calculating The Employee Turnover Rate
Here is another example to help you learn to calculate the employee turnover rate at an organisation:
A company prepares an employee headcount report twice a month. They perform this activity at the month's beginning and the month's end. According to the report, the employee headcount on April 1st was 140. The employee headcount on April 30th was 148. Two employees are on maternity leave. Two employees retired. One employee has been terminated for violation of company policy. An employee left voluntarily. The company wants to calculate the monthly employee turnover rate.
Total headcount of employees = 140 + 148 = 288
Total number of reports generated in April = 2
Average number of employees = 288/2 = 144
Total number of employees who left = 2
When calculating the number of employees who left, include only voluntary and non-voluntary turnovers. Exclude cases of leaves, sabbatical, retirement and temporary employees not on the company's payroll.
Employee turnover ratio = number of employees who left / average number of employees = 2/144 = 0.0138
Employee turnover rate = employee turnover ratio x 100 = 0.0138 x 100 = 1.38%
The employee turnover rate in April was 1.38%.
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