The ultimate guide to employee turnover rate

As leaders, you strive for returns for your business. That’s why you calculate the ROI for every investment. You invest equally in your employees. You dedicate resources to hiring, training, nurturing, and retaining them. But how can you calculate the returns of investment toward employees?

Through employee turnover.

Let’s take a look.

It is the number of employees who leave an organization within a specified period, say in one year. It is also known as the employee turnover rate and includes voluntary and involuntary termination like layoffs.

The ideal employee turnover rate is 10% if you want to focus on business growth rather than hiring new employees frequently. But that seldom happens. Most businesses experience a turnover of 12 to 24%, so a rate of up to 15% is acceptable.

Employee turnovers are never 0% as people are bound to leave a company. But the rate shouldn’t be too high as it affects workplace culture and business performance.

However, the rate varies between industries and roles. For example, employee turnover can be as high as 94% in nursing homes or as low as 15.2% in energy. In any case, 0% turnover is not a feasible goal as you need to let the poor-performing employees go.

Employee turnover is often confused with employee attrition. But both terms are quite different. Here’s how they vary.

1. Employee attrition

Employee attrition refers to an employee life cycle and includes all eliminated vacancies that won’t be refilled. Reasons for employee attrition could be:

• Internal employee transfers
• Retirement
• Prioritizing family over work
• Relocation
• Death
• A business decision like a company downsizing 

This is a long-term decision that doesn’t require a replacement. That’s why it incurs less cost than employee turnover. You can reduce employee attrition by:

• Asking for referrals
• Providing growth and learning opportunities
• Adopting a flexible work model that allows employees to work from anywhere, even after retirement, and offers a work-life balance

However, employee attrition also provides some benefits:

• Reduces the cost of labor and diverts resources toward the existing workforce
• Supports cultural change and introduces new dynamics in the work environment

2. Employee turnover

Turnover is the rate at which employees quit your organization due to termination or resignation and need to be replaced. This includes all employee exits. There can be many reasons behind employee turnover, like an unhealthy work environment, merger or acquisition causing loss of confidence in the company’s leadership, or finding better opportunities.

In case of employee turnover, you need to refill the position, which incurs costs. So if your average hiring cost is $4,000, hiring after a turnover would cost around $4,129. 

You can reduce employee turnover by:

• Managing employee expectations by providing clear job descriptions from day 1
• Offering competitive packages and perks
• Communicating frequently with your employees to gather their genuine feedback or employing Amber to do this for you

But employee turnover isn’t all that bad. Employees who exit make space for fresh (and better) talent to come in as a replacement. This increases workplace efficiency, morale, and business productivity.

There are various reasons behind employee departures that make up the different types of employee turnover. Here’s a list.

Employee turnover is of four types—voluntary, involuntary, functional, and dysfunctional.

1. Voluntary Turnover

It happens when employees choose to leave your company. Here are the leading causes:

• Better opportunities outside your organization
• Job abandonment for more than 3 days in a row
• Personal reasons like giving up the job to raise a child
• Returning to studies or enrolling in a degree program
• Voluntary relocation to another city or country

This list does not include retirement or internal transfers. A retired employee does not leave for any other company, and an internal transfer creates a temporary void in a department.

2. Involuntary Turnover

This refers to the situation when employees are terminated from their jobs. Their main causes include:

• Below average performance
• Unacceptable background checks like false records or failed assessments like drug tests
• Insubordination
• Policy violation
• Organizational restructuring or downsizing

3. Functional turnover

It is the turnover of low-performing employees. It benefits you as an employer and enhances business productivity. Poor performers have a low job satisfaction rate that forces them to quit. Their exit leads to a healthier work environment. While layoffs are a common cause of functional turnover, they also occur when a non-performing employee voluntarily leaves you before you fire them.

For example, an employee realizes that they have been consistently getting poor appraisals and get another job before the final warning, or they leave for personal reasons.

4. Dysfunctional turnover

It occurs when the best-performing employees leave you. The causes range from job dissatisfaction to better opportunities or personal reasons. This is the worst kind of turnover that you need to avoid for business progression.

So how do you calculate the employee turnover rate? Here’s the formula.

You need three pieces of data to calculate turnover:

• Total number of employees working at the beginning of a period like the start of the financial year.
• Total number of employees working with you at the end of that period
• Total number of employee exits in that duration

Then you can calculate the employee turnover rate as follows:

Turnover =   Total number of employees exiting in a period    X 100

                       Average number of employees during that period

Where the average number of employees in a period =

[Total number of employees in the beginning + Total number of employees in the end]

                                                                    2

For example, if you have 200 employees in the company in a quarter and 20 of them leave in that period, your employee turnover rate would be:

[20/200] x 100 = 10%

This does not include temporary hires like summer interns or employees on temporary leave in the number of employees.

High employee turnover has many adverse effects on your business.

1. Disrupts the business

The workflow gets disrupted as employees begin to depart voluntarily or involuntarily. Completing organizational activities becomes problematic in the absence of adequate manpower. This ultimately affects business performance.

2. Hurts your bottom line

An increase in employee turnover can cause bottom line expenses to rise. Because your company has to invest in resources to find and train a replacement whenever an employee quits. These costs include advertising expenses for job openings, screening and interviewing candidates, and onboarding.

These expenses escalate gradually, especially with a high turnover. And then, they affect business profitability and the availability of resources for other critical initiatives.

3. Lowers employee morale

Excess workload due to a shortage of people in the workforce and a high turnover can lower employee confidence in your company. They tend to become more anxious and insecure about job stability. This can lead to lower productivity and stunted business growth.

4. Damages workplace reputation

High turnover can get you bad reviews online and a poor reputation through word of mouth. This influences your hiring and retention rates as new candidates deflect from applying to such organizations, and existing employees start looking out. It affects their views about job security and reduces confidence in the leadership. Only 17% of such employees recommend the company to a friend.

5. Discourages other employees

When your existing employees see most of their peers switching, it adds to their anxiety. It pushes them to look out for themselves. Whether the exits are voluntary or involuntary, upset employee confidence disrupts their performance and all business functions.

There are mainly 6 reasons why companies face a higher turnover rate.

1. Better opportunities

Employees leave for different jobs for various reasons. Sometimes the new company offers better growth opportunities than you; it is in a preferred location or is known for a better work culture. Or it is one of the most basic reasons, more money. Or at times it is one of the most basic reasons—below-benchmark compensation or inadequate benefits.

2. Low employee engagement

Many companies struggle with employee engagement because of its complex nature. Every employee is different, and thus their needs also vary. And connecting with every employee becomes more difficult as the company grows in size. Keeping employees happy is equally challenging if you employ a hybrid work model.

3. Poor work culture

Many companies struggle to create an inclusive and growth-inducive work culture. It combines many positive things like growth opportunities, rewards and recognition, appreciation mechanisms, team camaraderie, and top management.

In any case, a poor work culture becomes a major reason for employees to leave voluntarily.

4. Poor leadership

This often leads to workplace relationships going sour and trickling down from the top management. And then company policies influence employee management. When done wrong, they lead to a jump in employee turnover.

5. No work-life balance

Long working hours and a paucity of breaks disrupt the work-life balance. Employees don’t put up with such cultures for long and leave the organization sooner.

6. Organizational changes

Abrupt or even planned changes at times push employees to leave the company. New top management, mergers, acquisitions, and financial issues triggering the dread of downsizing are among the top reasons. But, above all, these changes are initiated mainly by you, the employer.

There are certain steps you can take to curb turnover.

1. Continuous listening

Your employees can have many reasons to be unhappy and quit. Listening to their woes timely can save you an exit and ultimately reduce turnover. Alternatively, you can rely on Amber to connect with each employee individually and uncover the reasons behind job dissatisfaction.

2. Proper onboarding and training

A robust interview process and a well-trained hiring team can bring aboard ideal candidates that perfectly fit the post. Managers and supervisors should be skilled in identifying and hiring the right fits.

3. Competitive employee benefits

This includes a compensation package per market standards and benefits that encourage employees to stay. Perks like student loan management, paid vacations, dental care, flexible work timings, upskilling, and career growth opportunities offer them a work-life balance and ample reasons not to look for other jobs.

4. Timely appreciation

Rewards and recognition programs that spot good performance in real-time and reward it timely make people stay. In fact, creating a work culture of timely appreciation can save a company of 10,000 employees up to $16.1 million in annual turnover costs.

5. Compare departmental turnover rates

This analysis helps pick out the roles and profiles (like gender and age group) that are more likely to resign. It can also spot the source of the problem leading to low job satisfaction in targeted groups.

You can reduce employee turnover by predicting it correctly and on time. Here’s how you can do that.

Prevention is better than cure. And prediction is better than analyzing what went wrong. You can use predictive analytics to forecast future employee turnover.

Predictive analytics uses previous statistics, AI, ML, data mining, modeling, and statistical techniques to forecast the future turnover rate. You can apply predictive analytics tools to analyze your existing employee data, and previous statistics like average tenure, reasons for leaving, overall employee experience, and job satisfaction score to forecast the impact of your actions.

Hewlett-Packard (HP) employed predictive analytics to calculate the at-risk employees and managed to save approximately $300 million. 

AI and ML-enabled tools can also take the load off your shoulders by identifying at-risk employees and predicting turnover. They can also help you reduce the turnover rate.

By embracing AI-enabled tech to monitor employee turnover, you can bid goodbye to guesswork and the challenge of supervising each employee’s genuine feedback. Instead, AI empowers you to reduce employee turnover by enabling accurate prediction and highlighting growth opportunities within the organization.

AI tools undertake the following steps to help you monitor and reduce employee turnover:

• Accurate prediction of employee turnover. It can bridge the gap between job requirements and ideal candidates through advanced resume analysis
• Streamlined hiring. AI-enabled chatbots can guide applicants through the application and onboarding process, thus making it smoother. That creates a great first impression. Plus, you can rely on AI to gather new employees’ feedback on the hiring procedure
• Advanced employee mood readings through:
• AI-enabled chatbots like Amber
• Employee Net Promoter Score (eNPS) survey that shows the true picture of what your employees think of your company and helps identify at-risk employees
• Analyzing employee attendance and frequency of leaves
• Examine employee communication behavior to predict business performance
• Identify avoidable resignations
• Engage employees for an enhanced experience that makes them stay

1. Higher job insecurity

Employees are more likely to quit when they are insecure about their job security and the availability of alternative job vacancies.

2. Less hiring opportunities

Companies slow down recruitment or freeze hiring altogether during a recession. This causes increased competition and reduces turnover as employees are scared to quit without a job in hand.

3. Lower compensation

Companies often reduce compensation when trying to cut costs during a tough market scenario. This pushes employees to look elsewhere for better jobs.

4. More workload and burnout

Tough market conditions increase employee workload and lead to employee burnout. This often pushes employees off the hook and they quit.

5. Increased focus on retention

Companies often strive harder to retain existing employees during a recessionary phase. Their initiatives to enhance the employee experience reduce turnover.

Employee turnover was a problem three years ago; the pandemic brought the avalanche of the Great Resignation upon HR leaders like you. While you take many steps to keep your employees engaged and happy, knowing everything about your expected employee turnover can help you mitigate the risks. AI can help you evaluate your current position and identify and plug loopholes.