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An Introduction of Employee Turnover
Employee turnover is defined by Cambridge Dictionary as the rate at which employees leave the company and are replaced by new ones. Employee turnover rate is calculated by taking the number of separations during a month divided by the average number of employees, multiplied by 100. All employees should be counted in determing the average number of employees, including temporary employees and those on furlough, but not independent contractors. For example, if four employees have left the company in one month and the total average number of employees in the company is 50, the employee turnover calculation is 4/50 =0.08 X 100 or 8%.
In contrast , the employee retention rate is the percentage of employees who remained on staff from the beginning to the end of a time period. It is calculated similarly to the turnover rate, by taking the number of employees who stayed for the whole time period, dividing it by the number of employees you had at the start of the time period, and multiplying by 100. For example, here is how to calculate employee retention rate for a company in which four out of 80 employees left the company and 76 remained: 76/80 = .95 x 100 or 95%. The average turnover rate is between 15.1% and 19%, but depends upon industry. A good overall turnover rate is 10% according to DailyPay. To determine what is a good employee turnover rate for your industry, consult 2018 turnover statistics by industry.
Types of Employee Turnover
Voluntary Turnover vs. Involuntary Turnover
Voluntary turnover occurs when an employee decides to leave the company; involuntary when the employee does not make the choice. An employee choosing to retire or to find a new job that provides more suitable pay, working conditions or duties are two voluntary turnover examples. While involuntary turnover typically results from the company’s dissatisfaction with the worker, voluntary turnover means that the company has lost an employee it wished to keep. For this reason, voluntary turnover is often costs a business in lost productivity and recruiting and hiring costs.
Employee Turnover vs. Attrition
The employee turnover rate definition includes both involuntary and voluntary departures. Attrition, however, involves natural voluntary departures, such as retirement or resignation. Human resource departments are tasked with filling positions where turnover has taken place, but a company may choose not to replace those who leave by attrition. In fact, attrition sometimes is used as a way to reduce staffing levels gradually over time. In these cases, attrition is less costly than turnover, according to DailyPay.
Functional Turnover vs. Dysfunctional Turnover
Just as attrition sometimes benefits a company, functional turnover does so as well. Functional turnover occurs when underperforming employees leave the company, according to BizFluent. This often occurs in firms that have “up or out” policies such as law firms, consulting firms or accounting firms. In these firms, employees who fail to progress are released and the best employees remain. Dysfunctional turnover, however, is the opposite and is costly to the company. Dysfunctional turnover occurs when good employees leave.
Employee Turnover Statistics
Employee turnover is a major concern for most employers; in fact, 87% of employers have said they want to improve retention. Improving retention is challenging, however. More than half of employees in the United States are looking for another job, according to Gallup.
The effects of employee turnover can be damaging. For one thing, employee turnover is costly; the Center for American Progress found that replacing an employee may cost anywhere between 16% and 213% of the employee’s annual salary, depending upon the skill level, specialization level and salary of that employee. For another, productivity suffers. A new employee make require up to two years to become as productive as an existing staff member, according to Deloitte and Touche.
Turnover rates vary by industry with federal, state and local governments having the lowest rates and hotels, staffing, fast food and supermarkets having the highest rates, according to DailyPay. A study on 2018 turnover rates by industry shows that the hospitality and leisure industry group had the highest average turnover (63.3%) The following are additional highlights from the Bureau of Labor Statistics Report on Employee Turnover Rates by Industry 2018.
- Financial activities firms had an average turnover rate of 28%
- Manufacturing had an average turnover rate of 32.6%
- Education and health services had an average turnover rate of 32.5%
- Trade, transportation and utilities had an average turnover rate of 49%
- Governments had an average turnover rate of 18.7%
In addition to variations in the employee turnover rate by industry, there are variations by region. According to the BLS, the South had the highest turnover rates in 2018 (48%), followed by the Midwest (44.9%), the West (43.8%). The Northeast had the lowest turnover rate (37%)
Top Reasons for Employee Turnover
There are several causes of employee turnover. One key reason employees leave their jobs is for career growth and advancement. Advancement does not need to occur annually, but if employees perceive no clear career path or that little movement exists in those jobs above them in the hierarchy, they will look elsewhere. Better compensation packages, which could include salary, benefits and other perks, also lure employees, as do better work-life balance. Statistics show that male employees are more likely to leave for better compensation, while female employees value work-life balance more, according to Forbes. The opportunity to work remotely is one important aspect in the work-life balance continuum; companies that offer this have 25% lower turnover than those that do not.
Inability to fit well into company culture also drives employee turnover. Culture is a broad term which can cover anything from work rules and dress codes to relationships and recognition. Different employees prefer different work cultures, but, in general, cultures that provide appreciation; collaboration; and a fun, engaging environment win out. For example, 21.5% of employees who don’t feel their work is recognized adequately interviewed for another job within three months, as opposed to 12.4% that do feel recognized who interviewed, according to a study quoted in Forbes. If employees feel a strong sense of community and empathy, they also are more likely to stay, according to Forbes. Open communication in which feedback goes both ways (from management to employees and from employees to management) also is valued.
How to Reduce Employee Turnover
Clearly, successful companies are those that understand employee turnover causes and effects and how to reduce employee turnover.
The following are successful strategies to reduce employee turnover and improve retention.
- Provide good onboarding. According to the Society for Human Resource Management, onboarding is a “magic moment” when new employees decide whether to be engaged or not. In fact, 69% of employees will stay at their jobs for at least three years if they experience great onboarding, SHRM says. Good onboarding includes introducing them to at least one member in each area of the business that they can go to for help, according to Forbes. It also includes an explanation of all the acronyms and other lingo that will be used on the job.
- Invest in initial and ongoing training. According to Go2HR, about 40% of employees who fail to receive adequate training will leave their jobs within a year. Training helps employees to learn new skills and improves employee psyche because employees realize the company is investing in their careers, according to an article in Training Magazine. Training, including one-on-one coaching, also helps employees further hone existing skills. It is a bridge that can lead to increased employee retention and satisfaction.
- Develop strong hiring practices. Companies lose 25% of all new employees the first year. This suggests the importance of careful recruiting and selection. Avoid hiring the first qualified person, says Forbes. Instead of merely looking at educational requirements and specific experience, look also for transferable skills that can be used in the new job. Hiring practices also should take into account how well individuals will fit in with the culture. The key pillar of culture is the company’s mission and new hires should believe in it, according to Forbes. To better judge whether prospective employees’ values align with the organization, companies might ask open-ended questions such as “What Is Most Important to You at Work? Companies might also provide opportunities for prospective employees to meet with team members informally over lunch during the interview process.
- Focus on the employer-management relationship. Forbes quotes a TINYpulse report that says that 40% of employees that do not rate their supervisor’s performance highly have interviewed for a new job in a three-month period, compared to 10% for those that do rate their supervisor highly. Using feedback from team members as part of a manager’s performance appraisal may be one way to focus on this important relationship and provide a high employee turnover solution, according to Forbes.