In today’s job market, employees switching jobs--or “job hopping,” rather than staying with the same company for decades--is the norm. Millennials are currently the largest demographic in the job market and the most likely to transition jobs...quickly! According to a recent study of the Millennial generation, nearly 40% of these workers have held four or more jobs since graduating high school or higher education. While it’s inevitable that employees will leave, high employee turnover is extremely costly to employers. In the recent job shortage, it’s even more damaging.
The cost of turnover for the average company is approximately 33% of an employee’s salary, according to Nick Otto, former senior editor of Employee Benefits News. With the average U.S. salary hovering around $45,000 a year, that cost results in about $15,000 per employee that walks out the door. The financial impact stems from a variety of factors--from advertising and recruiting costs, to training new employees and rebuilding institutional knowledge. The Society for Human Resource Management offers a cost calculator to understand the specific impact on a business.
Balancing employee retention with the cost and inevitability of turnover could mean difference between the survival or death of a business, especially for small businesses. Each business should understand the line between a healthy and detrimental turnover rate, how to calculate that tipping point, and the root causes if turnover is too high.
Employees can turnover for many reasons, but these typically fall into one of two categories: voluntary or involuntary. Entrepreneur and business.com writer, Joshua Stowers, defines employee turnover as “the loss of talent in the workforce over time” and includes both voluntary and involuntary termination. While talent acquisition expert, Roy Mauer, suggests that terminations and layoffs (involuntary) should not be included in turnover calculation, Stowers argues that accounting for both types of turnover offers a clearer picture.
Each business needs to determine whether or not to parse out voluntary and involuntary shifts in personnel, and that may depend on what the business hopes to accomplish by calculating turnover. Does the business want to examine patterns and frequency? Do they want to compare themselves to industry trends? Or could they learn something by determining the ratio of involuntary to voluntary turnover? The first step in calculating a healthy turnover rate is to determine the reason for measuring it and then what kind of turnover a company is trying to understand.
What can appear to be turnover, may not actually qualify and should not factor into turnover rates. Attrition refers to when “an employer will not fill the vacancy left by the former employee,” and this can sometimes include situations such as layoffs. The reasoning and impacts are usually different, so they should be measured differently. A company that needs to layoff employees to downsize a company, for example, is a distinct problem from employees routinely quitting. Dr. Brian Dik, a vocational psychologist, offers more tools for understanding the differences between the two, as well as pros and cons that can impact a business, including:
Just as businesses should distinguish between involuntary and voluntary turnover, they must also differentiate attrition from turnover to make a more accurate assessment of company dynamics.
Similarly, turnover and retention rates are slightly different issues that require a company to thoughtfully analyze internal issues. Although they go hand-in-hand and together reflect the stability of a business, each of these rates should be analyzed independently.
Sharlyn Lauby is the president of ITM Group Inc., which helps companies address turnover, and she explains the distinction: "I think of turnover as the rate people are leaving the organization and retention as the rate people are staying. The reason they're not the same number is because it's possible to have positions within the organization that are a proverbial revolving door. Those positions will impact the turnover number but they don't impact the retention number."
Retention rate is calculated by taking the number of employees who remained at a company over a given period (a year, multiple years, a quarter) and divide by the number of employees at the beginning of that period, then multiply by 100.
Mauer uses the formula for calculating turnover as the “number of separations during the measurement period divided by the average number of employees during the measurement period, multiplied by 100.” (SHRM also offers a more precise turnover cost calculator for members.)
Turnover = (Employees who left ÷ Average number of employees) x 100
Once that number is in hand, businesses should examine what they have to determine if the rate is healthy or not. Remember, distinguishing between the number of employees who left, the role within overall company dynamics, and the number of employees who stayed are all aspects of the calculation - not just the raw numbers.
Knowing the cost of turnover will help a business understand the impact of the rate on their bottom line and work culture. Hard numbers and direct cost of losing an employee (the $15,000 previously indicated) can also include “payouts for accrued vacation time and unused sick time, contributions to healthcare coverage, higher unemployment taxes, and severance pay.”
Cost will also depend on the position. Losing a lower-level team member compared to a more senior-level employee both must be considered. Belinda Wee, associate professor at the Husson University School of Business and Management, says “Losing an entry-level employee costs a business about 50% of that employee's annual salary. Losing a technical or senior-level employee costs a business about 125% of the employee's annual salary..."
Employers should use the formula previously suggested, but also the comparisons of income rates and roles. Losing employees in different types of roles will impact the severity of the turnover rate differently.
More subjective and indirect impacts should also be considered to accurately assess the health of a turnover rate. Business technology company, Bonusly, offers another calculation tool and suggests companies factor tangential costs: “[The] side effects of turnover, such as decreased productivity, knowledge loss, and lowered morale can also incur incidental costs.” The quality of employee-- whether the employee was a lower-performing team member versus a top performer -- will also determine how great an impact that turnover has on the company. It may actually have been more time costly to keep an employee who was not fulfilling their role. Companies should use both objective numerical information and subjective cost insights to determine overall impact.
It’s tempting to want ‘a magic number’ for a healthy turnover rate, but each business must examine their own numbers and subjective impacts, as well as industry averages. Rates can vary widely, depending on the industry. For example, jobs in retail, technology and media have much higher turnover rates than federal government positions. Get familiar with the industry standard, consider the ‘new normal’ in rapidly evolving workforce dynamics.
Some industries also naturally have seasonal turnover and fluctuations that need to be taken into account. Turnover in these contexts may not necessarily be unhealthy, just require that organizations and businesses “define [types of] positions and time frames," according to Lauby. "One additional thing to consider is when organizations have a large on-call, seasonal or contingent workforce, there needs to be a discussion about how to calculate turnover for those employees. If the company doesn't draw a distinction, then the numbers will be skewed when those seasonal workers leave."
Depending on the industry, there may be some benefits to turnover. When employees leave, it can mean that existing talent advances for promotions, or the vacancy attracts recruiters and new personalities that can help a company grow. The right kinds of transitions can also mean that low performance or dissatisfied employees can be replaced with new talent who can shift the work culture more positively.
After calculation and assessment, if a company finds that their turnover is actually too high and negatively impacts the business, they should address solutions as soon as possible. The most important step is to try to understand why employees are leaving. The reasons can range from a poor working environments to harmful management practices or not enough opportunities for advancement.
Other key areas to consider include:
While unhealthy turnover can be devastating in the current economy, rates can be calculated and managed skillfully. Companies who consider broad context and honest analysis of internal issues will set themselves apart as healthy work environments where employees want to stay.