A high employee turnover ratio can negatively impact the company's overall performance. Learn how to keep it healthy in our guide.
The last two years have been difficult for most of us. First, we went through life-changing experiences and saw our world crumbling right before our eyes. Then, as people from all walks of life bore the brunt of the pandemic and resulting lockdown, small and medium-sized businesses hurt the most. When things finally started opening up and life was returning to normal, these businesses experienced another phenomenon that was not foreseen by most.
As the pandemic came to a halt, they saw many valued employees quitting their jobs. Anthony Koltz, a management professor at Mays Business School at Texas A&M University, termed this post-pandemic phenomenon as Great Resignation when workers in record numbers left their jobs voluntarily.
According to experts, this increased employee turnover rate is a ripple effect of the pandemic, and companies need to develop innovative strategies to deal with the situation. However, before formulating a strategy, businesses need to know what employee turnover is, how to calculate employee turnover, what is considered a reasonable turnover rate, and how employee turnover varies according to the industry. This article will discuss all the details you need to know about employee turnover and its various aspects.
Employee turnover is calculated as the number of employees who leave the company within a specific time period. Typically, employee turnover is calculated annually; however, it can also be calculated monthly or quarterly. Employee turnover accounts for both voluntary resignation and forced termination. When an under-performing employee leaves the job or is fired, it is considered a desirable turnover. On the other hand, when a company loses an experienced and skilled employee, it is regarded as an undesirable turnover.
A healthy employee turnover rate is good for any company as it makes space for new talents. However, a high employee turnover ratio can negatively impact the company's overall performance. Especially when experienced and mid-level employees quit the organization, that may have a long-term effect on the business.
When employees leave the company, it is classified as voluntary and involuntary turnover. Voluntary turnover is when employees leave on their own volition and is usually caused by personal reasons. On the other hand, involuntary turnover is when employees are let go by the company and usually results from organizational choices made by HR management leaders.
Companies tend to calculate the annual turnover rate to get enough data points to analyze. However, when special events like Great Resignation occur, they can calculate it for a much shorter period to get a clearer picture.
Turnover calculation of annual rate, the organization need three numbers:
First, find the average number of employees who worked for the company by adding the number of employees at the beginning and the total number of employees at the end of the year and dividing it by two.
For example, if a company had 123 employees at the beginning of the year and 107 employees by the end of the year, the average is calculated as (123+107)/2= 115.
Now, to find the employee turnover rate, divide the number of employees left during the year by the average number of employees. Then multiply the result by 100 to get the percentage rate. So, if 13 employees leave during the year, the annual turnover rate is 13/115 x 100 = 11.3%.
One thing to remember: not all calculations of turnover include retirees, so it is worth noting whether your calculation includes these departures or not.
There is no magic number. The ideal turnover rate depends on many factors, including the industry in which the organization operates. Like, in a typical year, the national average rate in the hospitality industry stands somewhere between 25 to 30 percent, but it is around 9 percent in the banking sector.
A Society for Human Resource Management (SHRM) report suggests that the average turnover rate is around 19% in most industries. In general, the high-stressed and fast-paced industry with a comparatively lower rate of compensation experiences higher employee turnover rates than the other industries. The turnover rate also depends on the external socio-economic factors, as we saw during the post-pandemic period.
Although there is no ideal number from labor statistics, companies must track their employee turnover rates to improve performance. They should also consider the cost of employee turnover while strategizing. But, first, they should divide the overall employee turnover into three categories: voluntary turnover, involuntary turnover, and turnover among the employees considered high performers.
Simply looking at the employee turnover rates doesn't help understand what is happening in their organization. With voluntary turnover, it is more important to analyze who is leaving the organization voluntarily and the factors behind their decision to quit. It can be push factors, pull factors, or a combination of both. A push factor is linked to lack of job satisfaction, opportunities to grow within the organization, or low salary. Pull factors in employee turnover are external factors, where the employees are attracted to a position in another organization.
If a company sees high employee turnover among skilled and experienced workers, it is a matter of concern, and they should find out what they are doing wrong. On the other hand, organizations benefit from the high rate among the employees who don't match the standard—also, the level of experience of the employees who leave the organization matters. While an employee leaves an organization within the first year of their contract, it doesn't cost much; however, when an experienced employee quits, the impact is much more significant.
It requires time, money, and energy to hire and train a new employee. According to the estimates by SHRM, the average cost of replacing a salaried individual is equivalent to 6 to 9 months’ salary. This cost varies depending on the role and wage of the employee.
Reports by Built In suggest, for an hourly employee, the average turnover cost is $1,500, and for an employee in a technical position, the average cost is 100 to 150% of their salary. It can be even higher for a senior executive or management position.
In an article on employee turnover and retention, HR analyst Josh Bersin breaks down the factors contributing to the real cost of employee turnover. Those factors include:
Because they lack a comprehensive system to quantify the overall cost, organizations frequently fail to grasp the true cost of staff turnover. As a result, several departments must coordinate and communicate to determine the true cost of a greater turnover rate.
According to the November 2021 data released by the U.S. Bureau of Labor Statistics, a total of 6.3 million people were separated from their jobs in the U.S. It includes the turnover from layoffs, discharges, resignations, retirement, transfer, and other separations. In addition, the data shows among these 6.3 million separations, 4.5 million were voluntary. That means, during this month, 4.5 million employees quit their jobs.
The employee turnover rate varies widely across different industries. According to data released in 2020, the Accommodation and Food services industry experienced the highest turnover rate (130.7%), followed by the Leisure and Hospitality industry (130.5%). As these two sectors, along with Arts, Entertainment, and Recreation, were most impacted by the pandemic-induced lockdown, their turnover rate was the highest. However, even on a regular year, the rate remains high for these industries. The following table shows the industry-wise turnover rate for 2016 to 2020.
With the pandemic comes the remarkable resignation phenomena. However, aside from the employees being fearful for their safety, other reasons encourage employees to look for another career path.
Not being appropriately compensated by the organization is one of the top reasons for employee turnover. Employee salary is one of the concrete bases a company demonstrates an employee's significance. And without properly addressing this demand, employees will go of their own volition. Competitors who recognize your employees' talent can easily match their pay. Your top performers will not hesitate to accept higher compensation. As many as 53% of employees today would leave their current job if offered a better salary elsewhere.
With the global pandemic comes the increase in the number of organizations that allow flexibility in terms of work schedule and remote work set up has been the trend up until today. But not all jobs can be done in the comfort of your own home. Based on 2020 Bureau of Labor Statistics data, an estimate of 63% of US jobs still require employees' presence in the office. Long commutes, exposure to COVID cases, and time spent on site can trigger employees to consider looking for a more flexible work-from-home job. This accounts for 12 out of 100 employees who quit to search for a job that offers a better work-life balance.
But not all remote work entails good news. Some managers have their assumptions that remote work equates to more time working, contributing to the rise in the company's expectations from employees. A heavy workload can still affect employee retention. Job burnout, added with lack of social relationships (which will be discussed later), will surely not make employees happy - a whopping 74% of respondents to be exact.
Another factor for the high turnover of employees is the culture of their working environment. Studies indicate that 28% of new employees leave within the first three months because of the company's prevailing culture. The organization's set of values and priorities, objectives, attitude, and activities play a crucial role in determining if an employee is a good fit for the company and if they are aligned with their personal career goals at the same time.
A toxic culture also harms employee turnover percentage rate. Based on a study made, three out of 10 people report that their company has a toxic working environment. In addition, the presence of confusion, disorder, and even fear of failure hunts most organizations' workplaces contribute to the increase of staff turnover.
With remote work, one of the biggest challenges for organizations is to maintain connections and build digital work culture. The lack of cross-functional work relationships that transcends weekly huddles over video conferences often leaves the employees lost and detached from the workplace. This is amplified by virtual gossip, drama, and never-ending work politics, leaving employee engagement at only 36% according to a 2020 study. This lack of attachment also gives way to empty purpose: employees dreading to go to work, having little enthusiasm when asked 'what do you do?', and ultimately contribute to lost productivity.
Organization managers and business leaders have not offered sufficient recognition and support to their staff, given the current workflow and adjustments that are needed to adapt to the worldwide pandemic.
The lack of growth made 94% of employees quit their jobs and look for other working opportunities to provide them with the necessary learning and professional development. Keep in mind that if the salaried employee wants to stay, they will aspire for personal advancement and strive to progress inside the organization. If human resources or the administration cannot guarantee growth, or even support their employees in learning new skills or refreshing existing skills, then they will have to see their staff pack up and leave.
Are you currently undergoing a turnover problem? Or is your company about to face one? For companies to know if they are going to have a turnover issue or to confirm that they already have an existing employee turnover setback, here are a few indications to look for:
If you ticked one or more of the items above, evaluate and reassess the current people and career management system to avoid worsening the situation.
For staff turnover, organizations, especially human resources management, must be on guard of the following employee activities and movements:
If your star employee who rarely takes leave starts to come to work late or does not come to work, then there must be something up. Tardiness and absenteeism are one of the leading signs that your employee is considering quitting. This is because they do not feel motivated enough to come to work or feel irritated when they are on the job.
Some employees may be present physically in the workplace or reporting daily virtually, but are disconnected psychologically from their work - known as presenteeism. This is something that develops over time, and studies show that more than half of employees are unattached to their work and company, mentally separated from their tasks, and not actively engaged in company activities.
Are they already looking for other jobs? Are they currently studying and nearing graduation? Maybe taking care of marriage or maternity requirements? These may be personal reasons to take vacation leave, but watch out for significant milestones like these. They may become motivators and may ultimately lead to your employee leaving your company.
Decreased productivity or missed employee development programs are also considered red flags for employee turnover. Overdue work or major errors that are getting more frequent is an indication that the employee is not committed to providing excellent work. If they opt to skip development programs or promotions, then there is a possibility that they are not focused on growing within your organization, and they don't see your company working out for them in the long run.
Sudden drops in performance may also mean they are disappointed with the current setup. It may be about not being promoted or not being recognized or misplaced in a different department or area where they are uncomfortable. These employees may have considered looking for other opportunities for appreciation and career growth.
Breaking work routines like low engagement with office mates and regularly complaining about work may be a hint that your team member wants to voluntarily leave. When employees start to refrain from making friendly gestures and begin to pull away from coffee breaks and conversations, they may be planning to depart from your company.
Some employees, especially those with bigger personalities, tell their colleagues or you directly that there's something wrong. You may take it as a good thing that your employee is communicating, but the real problem lies within the content of their complaints or issues. More than 50% of employees did not feel their job satisfaction requirements were being met in a recent survey.
Poor management will definitely make employees leave, but there may be other reasons. It is up to the organization to decide what measures to implement to avoid these events. Taking a course of action to listen and give proper solutions to their troubles is ideal and will definitely help with employee retention.
Make up for high on-boarding costs by hiring the right talent. New job openings are opportunities to foster employee relationships and a chance to acquire new team members not only because of their employment or educational background, but because they are a good fit for your organization.
Make every interview process regular and not just check in during their exit interviews. This is a way to build strong company culture - whether virtually or face-to-face. Get creative with employee engagement that increases employee retention like Ask Me Anythings, Townhalls, and Annual Community Events.
The company should recognize high performers and top talent with monetary compensation and verbal or written appreciation. This will help boost their morale and set an example for other employees in the organization.
Encourage career growth and monitor a clear career path. Career development starts with taking care of employees through learning and development programs that are accessible and vital for their growth within the company.
Communicate frequently with your human resources management or directly with your employees. Connect with them and don't just listen. Implementing action and accommodating their needs like taking care of their children or elderly, handling double jobs, and even attending school will let them know they are taken care of not just as an employee but as respectable individuals.
Human capital management (HCM) software or HR software can help calculate employee turnover. This allows you to easily track down the numbers broken down into monthly turnover rates or in a categorized summary for annual turnover rate.
Employee turnover can seriously harm businesses, large and small. Keeping track of your human resources, through performance management, turnover tracking, and a proactive approach to addressing employee issues can all contribute to improved employee retention.
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