Employee turnover rate refers to how many people in your company leave during a period of time. Some organizations only look at those who quit, others look at those who were fired, and some look at both. The best practice is to look at both employee turnover rates since they each tell you something very different about your business.
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How to Calculate Employee Turnover
The basic formula for calculating employee turnover is:
Step 1: Find your average number of employees.
((# of employees beginning of year) + (# of employees end of the year))/2 = average # employees
Step 2: Find the turnover rate.
(the # of employees who left your company) / (Step 1’s answer) = turnover rate
In step 2, you could drill down to just those who quit, those who were fired, or both. Just repeat the same steps using the number who quit instead of the overall number, or the number of people who were fired instead of the overall number.
Turnover Rate Example
For example, if ABC Plumbing started 2016 with 10 people, ended 2016 with 16 people, and had 6 people quit during 2016, their turnover rate is calculated by:
- 10 + 16 = 26
- 26/2 = 13 = average number of employees
- 6/13 = 46% = employee turnover rate
Anything over 20% is considered a very high turnover rate. The goal is to be 10% or less, depending on your industry.
The Cost of Employee Turnover
SHRM estimates that the average cost per hired employee in the US is $4,129, plus it takes nearly 42 days to find them. If you add on job posting costs and the time of the people hiring them (i.e. the CEO taking time to interview people), you start to really rack up a bill. This is in addition to, according to ADP and Moody’s Analytics, for every employee between ages 25-34 who changed jobs in 2016, they also got an average 10% pay raise. Not to mention the cost to train them up until they are finally a full-on working employee, which can take from 30 days up to a year for some roles.
Why does this matter? Because, let’s take an example $40,000 marketing coordinator role and see what happens if you hire someone and they quit within 6 months:
- You hired Sally at $40,000 per year ($20/hour) for a new Marketing Coordinator role. You, as the business owner, make $100,000 per year for math purposes ($50/hour).
- It took you 30 days to find her, and you paid Indeed $250 for advertising the job (which led to 20 hours of sifting through resumes). You also interviewed 10 other candidates on the phone (5 hours), and 5 other candidates in person (5 hours), plus you had 3 rounds with Sally (3 hours). This is calculated as $250 + (33 hours x $50)= $1,900.
- Sally was a new grad, so you had 3 different people training her, averaging about $35/hour and spending 30 hours hours total per week with her the first month, and tapering off from there. Let’s estimate that to 200 hours x $35/hour over the 6 months time frame = $7,000.
- Sally’s salary over 6 months (with no benefits) = $20,000.
- Sally’s cost = $28,900 (not counting the opportunities you lost/ business development you and your colleagues didn’t get to do).
- Sally quits and gives you a 2 week notice; you have to start the process over and decide, “No more new grads!”. So you pay for Billy who has more experience and hire him at $50,000.
- This results in the cycle to start over, $1,900 in recruiting costs + $7,000 in training costs + $25,000 for Billy’s salary = $33,900 (plus the lost client hours or opportunities lost).
- Total cost of Sally’s turnover = $28,900 + $33,900 = $62,800, plus the lost client hours and opportunities!!!
If you have a high turnover rate, this could be potentially the largest expense to your business.
But why do you have high employee turnover? Figuring that out is the key to solving the problem.
Top 7 Reasons You Have a High Employee Turnover Rate
The below 7 reasons tend to be the main causes of high employee turnover rates. Remember, it can also be a combination of reasons that might need to be addressed, like hiring the wrong people and non-competitive compensation.
1. Hiring the wrong people
If you haven’t looked at your recruitment process, this could be where things are going wrong. Are you posting jobs in the right places? Asking the right interview questions? Assess your process from tip to toe and see if there is something missing or that needs to be changed.
2. Poor employee onboarding
If you have the right people hired, then perhaps you need to look at the first 90 days of their employment and how they are oriented and trained… or if they are trained at all! Ask current employees about their experience becoming a part of your company by doing an employee engagement survey and include questions on onboarding.
3. Poor management
It’s possible that whoever is managing the new employees is culpable for them leaving. There could be a million reasons why they are a poor manager (lack of time, lack of desire, lack of training, or more severe issues). But if people are leaving because a manager is a problem, you need to know. This can also be uncovered by an employee survey or remedied with employee recognition ideas.
4. Lack of career path
Some businesses, like a restaurant or a small medical office, simply can’t offer a career path for people. Maybe you don’t have any open manager spots or maybe you don’t even have any middle management roles. You could try to change employees’ job titles (i.e. Senior Administrative Assistant), and allow people to take on new responsibilities, like interviewing candidates or other “management” style tasks. However, if you never change people’s job titles, job tasks, or have promotions, these all could be contributing to your turnover rate.
5. Compensation or benefits isn’t competitive
In the end, money talks and things are more expensive these days between school debt and rising costs of living in almost every major city. If you aren’t providing compensation and benefits comparable to your competitors, you will lose employees over it. Check out your competitor’s job postings online, or consider even talking to them if you have a good relationship.
6. Company culture issues (i.e. gossiping)
Especially if you are losing long-time, good employees, you might need to take a long hard look at your company’s culture. Did something change? Is there something toxic going on? Talk to your people, and conduct exit interviews. If there is something going on that is causing people to question wanting to work for you, you need to know, no matter how painful that is.
7. Something funny’s going on (i.e. harassment or other illegal practice)
Worse than reason #6, you might be missing something bigger going on in your company. Maybe there is a manager flirting with new hires or maybe there’s an accounting practice that is a bit off. Things happen— but it’s your job and it’s your business. You need to look into every nook and cranny if you think something funny is going on, not just because it could cause you legal trouble, but also because it’s the right thing to do.
There may be other reasons that contribute to a high turnover rate, but these 7 each on their own have the ability to make employees leave. Smaller factors like old cubicles or a poor desk set up, old equipment, stodgy rules like a strict dress code— those can also play in as well, and we’ll explain how to find those out next.
How to Fix Your Employee Turnover Rate: Too Many Employees Quitting
If you have too many employees quitting, you may need to look at any of the 7 reasons we listed above as being the possible cause. To do this, you should try the following techniques:
- Conduct exit interviews- when someone quits, have them fill out a survey or sit down with you to tell you why they are quitting. Here is a guide on how to conduct an exit interview. You could also do an anonymous survey, like we talked about earlier.
- Try a salary survey- if your inkling is that you are losing people to higher paying competitors, you might need to conduct a salary survey to see what others are paying for the same role in your city. You can easily do this on Payscale, Glassdoor, and Indeed. If you can’t afford to pay more money, you may need to change your expectations in recruiting, or at least change the job title and requirements.
Both of these methods should be done in order to find out the most information possible on why you have high employee turnover due to quitting.
How to Fix Your Employee Turnover Rate: Too Many Employees Being Fired
If you are firing people for behavior or performance at an alarming rate, you still have an employee turnover problem, and worse- you may be hurting your name and your company’s name in the job market.
If you have too many employees being fired, you might need to address the following issues:
- Are you recruiting the right people? Look at your hiring process. Where is it going awry that people you offered a job to and thought were a good match are now being fired. What can you add or take away from the process? Consider creating a structured interview for the open roles in order to tighten up hiring candidates quickly.
- Do you need to update your employee handbook? Are you firing people for reasons like dress code violations, taking long lunch breaks, or requesting too many days off? You might need to update your employee handbook if you are losing people for reasons that don’t necessarily impact the bottom line of the business or that aren’t necessary for business workings (like dress code).
- Are you onboarding and training people in the right way? Are you continually frustrated that employees don’t seem to get it and don’t get it quickly? If this is a continual problem, it may be how you onboard and train your new people that is failing. Take your group of top performers and create a proper employee onboarding program with their help, as well as assign mentors and buddies to new hires that are not just managers for training.
Involve your managers (if you have them) in this process as well. They might have some insight being your “boots on the ground” that you do not have as the business owner.
The Bottom Line
Having a high employee turnover rate, be it for employees quitting, employees being fired, or both, is an expensive and damaging problem to have for any company. Fixing the problem (or problems) as soon as possible will save your company time, money, and from losing more good people.
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