You hear it from companies all the time: "our most important asset is our people." And it's true, even though companies may not always treat their workers that way.
But even if a company doesn't act like a worker is all that important, they soon recognize their value when turnover rates go sky-high and their profits take a big hit.
Can you relate? If so, now’s the time to act. Knowing what your turnover rate is and understanding what it means about your business is vital to human resource planning. It's possibly the most fundamental workforce data point that a business owner should know off the top of their head.
With a turnover rate in hand, you can make some big decisions about things like performance measures, employee development, and tweaking hiring processes to improve your company.
Overview: What is the employee turnover rate?
Employee turnover refers to the departure of workers from an organization, whether voluntary or involuntary. Companies may have high turnover rates for a variety of reasons, ranging from low pay to no career path to bad management.
A high employee turnover ratio is bad because it’s expensive to replace employees: one report found that it cost on average $4,000 to hire a new employee and it takes 24 days to find that individual, meaning lost productivity over that period — and that doesn't include the cost of onboarding or the expertise loss from the employee who left.
Since all labor in America is at-will employment with few protections for workers, you can’t expect much in terms of unquestioning loyalty from your workforce just by hiring them, so you have to work extra hard to get employees to stick around.
How can you calculate the employee turnover rate for your small business?
But how do you figure out what your own turnover rate is? It's a simple calculation: just divide the number of employees who have left in a given time frame (annually is probably best) by the average number of employees, and then multiply it by 100, and you have your turnover percentage.
What does a good employee turnover rate look like?
The average turnover rate is around 19%, and if you can bring that number down even slightly, it could have a huge impact on your business's bottom line.
So if you average 50 employees, and you have seen five depart in the last year, your turnover rate is 5 / 50 x 100 = 10%, which would be a pretty good turnover rate compared to national averages.
On the other hand, if you have 200 employees, and you have 50 of them leave over the course of a year, your turnover rate is 50 / 200 x 100 = 25%. That’s a high turnover rate and you’re likely struggling to get any momentum as a business.
What does your employee turnover rate tell you?
Depending on your company’s situation, your turnover rate tells you one of the following four things about your workforce planning:
1. You’re hiring the wrong employees
Situation: Your turnover rate is high, and it’s mostly due to involuntary departures, which means you’re sending out termination letters to people left and right.
What’s going on: If you’re encountering a situation where you have a high turnover rate, but it’s mostly due to involuntary departures and most people choose to stay with your company if they can, then you have a good work environment but you’re not doing a very good job of hiring the right people.
You may think you’ve landed the right person, but once they begin the job, it quickly becomes apparent that they are out of their depth.
Solution: This is most likely a sign that you just aren't spending enough time vetting candidates. You're hiring someone who may spend years with your company, so you need to carve out the time to do the hiring process right.
If you're trying to do it all yourself, maybe this is a sign that it's time to outsource this work to a hiring manager who can properly examine candidates.
Or, maybe you need a new process that analyzes not just skills but company fit and other compatibility factors. You also might want to examine the performance metrics you’re currently using to see if it’s a good way to evaluate your employees.
2. You need an employee development plan
Situation: Your turnover rate is high, and it’s mostly due to voluntary departures: employee retention is bad, and they’re bolting as soon as they find a better opportunity.
What’s going on: If people are leaving your company in droves, then employee satisfaction is low and they just don't see you as a good fit. Maybe you pay too little, or perhaps they see it as a dead-end job.
Solution: Start conversations with managers and employees about how they would like to develop professionally, and begin drafting career paths that incorporate this feedback. However, keep in mind that if your pay is too low, a career path will not fix this.
People ultimately work to pay their bills, and if you aren’t meeting that fundamental need, don’t expect them to stick around when there are better options.
3. Things are good, but people still bolt fairly often
Situation: Your turnover rate is below average, but there are still a lot of voluntary departures: You’re hiring the right people, but they’re not always sticking with you.
What’s going on: Even if your turnover rate is low, that doesn’t mean things can’t be improved. If you still have a decent number of voluntary departures, then you’re doing a good job of hiring the right people, but they still sometimes find better opportunities out there.
You can’t completely eliminate this, but you can seek to drive down this rate even further.
Or, perhaps you could be treating them better. For example, do you sometimes over-obsess about time theft to a point that you are borderline harassing workers about their activities at work?
Are you not effectively handling conflict management, leading to toxic work environments? These are things that could drive them to look to continue their careers elsewhere, even if they like the compensation and benefits you offer.
Solution: Again, an employee development plan will help you out here. Chances are you already have one if your turnover rate is this low, but perhaps it’s time to take a second look at it.
Ask your employees what they think about their current career path and any improvements that could be made. Talk to your managers about how employees are progressing, and find out what’s wrong if they aren’t.
4. Things are great, but you can still improve your hiring process
Situation: Your turnover rate is below average and most of your departures are involuntary: People love working for you, but sometimes you hire the wrong people.
What’s going on: If your turnover rate is low and people almost never leave voluntarily, that’s great. It means that you’ve created a workplace that is the envy of most companies.
But if you’re still having to fire people fairly often, don’t just blow that off as nothing. Doing this is not only harmful to you as a company, it’s also disruptive to the lives of the employees you brought on who turned out to be a bad fit because you didn’t do proper vetting.
Solution: Go back to your hiring process and see what can be improved. Maybe you need a full-time hiring manager, or perhaps the process needs to be lengthened so more people can interview the candidate, giving you a more rounded look at who they are and if they’ll be a fit.
Use HR software to track turnover rates
It's important to get HR software, not just because it can better strategically manage human resources, but because it can monitor key HR metrics and other people analytics such as turnover rates so that you can spot problems before they become critical.