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HR Metrics: How and Why to Calculate Employee Turnover Rate?

Anja Zojceska | 12/16/2018 | Tutorials

Employee turnover rate is one of the most important HR metrics. In this blog post, you will learn everything you need to know about employee turnover rate. You’ll find out what employee turnover means, how to calculate an employee turnover rate and why is it so important.

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What is employee turnover?

Employee turnover (sometimes also called staff turnover) is a measurement of how many employees are leaving a company. 

When employees leave, a company has to replace them with new employees. 

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Voluntary vs. involuntary turnover

Employees can leave a company for a variety of reasons, both voluntary and involuntary.

Voluntary turnover happens when employees willingly leave a company, usually because they go to work in another company.

On the contrary, involuntary turnover happens when it wasn’t employees decision to leave a company. In other words, involuntary turnover happens when employees are terminated due to a poor job performance, absenteeism or violation of workplace policies.

The importance of employee turnover for an organization

Employee turnover is one of the most important and commonly used HR metrics.

Employee turnover is usually mentioned in a negative context. This is because of high costs related to high turnover rates. 

A high employee turnover rate is an expensive problem. When employees leave, a company has to replace them with new hires. Replacing employees costs a lot of money. According to The Society for Human Resource Management (SHRM) research, direct replacement costs can reach as high as 50%-60% of an employee’s annual salary, with total costs associated with turnover ranging from 90% to 200% of annual salary.

Why is it so costly to replace employees?

The reason why replacing employees costs so much money becomes much clearer when you consider all the expenses associated with employee replacement. First, you need to find and hire new employees. Then you have to onboard new hires and train them. You should also count in the ramp up time. Inexperienced employees tend to be less productive. Not to mention the time wasted to find, hire and train new employees until they are fully productive. 

What is a healthy employee turnover rate?

Due to the high cost of replacing employees, employee turnover usually has a negative connotation. However, employee turnover isn’t necessarily a negative thing.

If the high turnover is the consequence of the fact that poor performers are leaving a company, it can actually be a good thing. On the other hand, if top performers are leaving, this can be detrimental for a company. This is why it is hard to say what is a healthy turnover rate - it depends on a company and its specific situation. Thus, an employee turnover should always be evaluated contextually. 

Average employee turnover rate

Another thing that makes it hard to determine a healthy turnover rate is the fact that employee turnover rates vary greatly from one industry to another. According to the U.S. Bureau of Statistics, the average turnover rate in the U.S. is about 12% to 15% annually.

According to LinkedIn, an average annual worldwide employee turnover rate is 10.9%.

An-average-worldwide-employee-turnover-rate

However, some industries, such as retail and hospitality, have above the average turnover rates. This is mostly because they typically rely on students and part-time workers who eventually move on to other jobs. 

If you’re interested in the average turnover rates for different industries, check out the employee turnover statistics provided by Daily Pay

What is the employee turnover rate?

Employee turnover rate is the percentage of employees who left a company within a certain period of time.

An employee turnover rate is usually measured and calculated on monthly and/or annually basis. 

How to calculate employee turnover rate?

Employee turnover rate is calculated by dividing the number of employees who left the company by the average number of employees in a certain period in time. This number is then multiplied by 100 to get a percentage.

Here is the formula:

Employee-turover-rate-formula

The average number of employees is calculated by adding the number of employees the company was employing at the beginning of a certain period and the number of employees the company was employing at the end of a certain period, and dividing the result by 2.

This means that in order to calculate the employee turnover rate, you actually need 3 variables:

1. The number of employees who left (voluntary and involuntary) the company in a certain period of time

2. The number of employees the company was employing at the beginning of a certain period.

3. The number of employees the company was employing at the end of certain period.

That being said, here is the final formula for calculating employee turnover rate:

Employee-turover-rate-how-to-calculate

If you prefer to watch a video, here is a 2-minute video tutorial that will teach you how to calculate an employee turnover rate (example included!).

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