How to Calculate Turnover Rate and What It Means
Turnover rate is by far one of the best indicators of your company’s long-term success. It provides a comprehensive assessment of your company culture, recruiting efforts and employer brand. Tracking this metric is vital to getting ahead of major business setbacks.
In this article, we’ll explain what employee turnover represents, how to calculate your turnover rate and how to interpret the results.
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Table of Contents
What Is Turnover Rate?
Turnover rate is defined as the percentage of employees who left a company over a certain period of time. It’s often described in relation to employee retention rate, which measures the number of employees retained from the beginning of a set period until the end.
There are two types of turnover. The first is voluntary turnover, or when employees choose to leave the company. The second is involuntary turnover, which happens when an employee is terminated by the employer. Involuntary separations or terminations occur when an employee consistently underperforms, undermines the productivity of their colleagues, no longer upholds the organization’s core values or detracts from the company culture.
Turnover Rate Definition
Measuring and tracking turnover on a regular basis is critical, as high turnover can be extremely costly for employers. For one, it negatively impacts your employer brand, and it’s harder to fill roles when you have the reputation of being a stepping-stone or revolving-door employer. This increases the amount of recruiting resources needed to attract strong candidates and ultimately inflates your cost-per-hire.
Furthermore, the longer the role remains unfilled, the more revenue is lost, productivity is slowed and employee morale is depleted — three elements of a damaging cost-of-vacancy. In short, controlling turnover has a direct impact on your bottom line and the long-term health of your organization.
How to Calculate Turnover
The formula for calculating your turnover rate over a given period of time only requires three pieces of information: the number of employees on the first day; the number of employees on the last day; and the total number of employee separations that occurred during that time frame.
The two headcount totals are used to determine the average number of employees. From there, simply divide the total number of employee separations by the average number of employees during that period of time. It sounds complicated, but the process is relatively straightforward. Make it even easier on yourself and use our free calculator to seamlessly calculate your turnover rate.
We’ll use the following example to explain how to calculate turnover rate:
ABC Tech — a Chicago-based tech company — had 125 employees on January 1, 2019. ABC Tech hired 25 people and experienced 15 separations during the rest of the year. On January 1, 2020, there were a total of 135 employees.
Step 1: Define the period of time
Turnover rate should, at a minimum, be calculated on an annual basis — you’ll need to know your annual turnover rate during strategic planning meetings and budgetary conversations. However, to keep a close eye on the happiness of your employees and overall health of your organization, plan to calculate your turnover rate more frequently.
The first step is to clearly define the time period you want to analyze. When calculating your annual turnover rate, your beginning and end dates should be January 1 of the past year and the current year, respectively.
We’re looking to calculate ABC Tech’s turnover rate for the year of 2019.
Period of time = January 1, 2019 – January 1, 2020
Step 2: Determine the average number of employees for the period of time
On average, how many employees (EE) did you have during the given period of time? To determine this number you’ll need two pieces of data: the total number of employees on the first day of the given period and the total number of employees on the last day.
This information is easy to obtain — simply check your payroll system to determine the number of individuals in your employment on both days. Include all full-time, part-time and direct-to-hire temporary employees on payroll. Do not include any independent contractors; their departure from your company is a result of their contract ending, not a form of turnover. Including them will skew your results.
From there, add the two employee totals together. Then, divide the sum by two.
- Avg. # of EE = [(# of EE on first day) + (# of EE on last day)] / 2
On January 1 of last year, ABC Tech had 125 employees. At the end of 2019, there were 135 employees.
(125 + 135) / 2
260 / 2
130 = Avg. # of EE
Step 3: Define the total number of separations
To accurately calculate your turnover rate, you must account for every employee departure. Include the total number of separations — voluntary and involuntary — that occurred between the beginning date and end date of the set period of time.
Do not count employees on temporary leave — parental, medical or otherwise — or sabbaticals as separations. These individuals are still in your employment even if they are not active employees. Additionally, don’t count promotions and transfers toward your separation total.
15 separations occurred at ABC Tech during 2019.
Total # of EE separations = 15
Step 4: Calculate your turnover rate
To determine your rate of turnover, divide the total number of separations that occurred during the given period of time by the average number of employees. Multiply that number by 100 to represent the value as a percentage.
- Turnover rate % = [(# of EE separations) / (Ave. # of EE)] x 100
ABC Tech had 15 employee separations and an employee average of 130 during 2019, giving the company an annual turnover rate of 11.54%
15/130 = 0.1154
0.1154 x 100 = 11.54% turnover
Step 5: Compare your turnover rate against industry standards
While every business is different, it’s important to gauge the success of your employee retention strategy against your competition by comparing your turnover rate to industry standards. According to a 2018 study, the average turnover rate for all organizations in the U.S. was 19.3%.
The Society of Human Resource Management provides industry-specific turnover rates so you can take a closer look at how you stack up against the competition.
As you can see, ABC Tech came in way under the tech industry turnover rate (20.9%) at a cool 11.54%. But that doesn’t necessarily mean cause for celebration. We’ll explain why in the next section.
Understanding Your Turnover Rate
Industry benchmarks are incredibly helpful for understanding your rate of turnover, but again, every company is unique. As a result, it’s more useful to look internally when analyzing your turnover data.
A low turnover rate compared to industry standards might look awesome at first glance, but what if it’s only your best employees that are leaving? To avoid making assumptions and overlooking pervasive problems, consider the context of your turnover rate by answering the following three questions.
When are people leaving?
First, determine when turnover is occurring, both within your business cycle and the employee life cycle. Was there a widespread change — such as a restructuring of teams — that preceded a significant spike in separations? If so, the restructuring may have ruffled more feathers than you initially thought. This could suggest a need to improve top-down communication efforts and build a more positive company culture.
At the same time, consider the tenure of departing employees. Are they choosing to leave after several years or a decade on the job, or are they barely making it to their one-year work anniversary? A high new-hire turnover rate indicates ineffective recruitment strategies; you may be sourcing the wrong candidates, your job descriptions could be misleading applicants or your onboarding process might leave a lot to be desired.
Timing is incredibly vital information to have in order to fully understand why turnover is such a prevalent problem at your organization and how you can react accordingly. To calculate your new-hire turnover rate, divide the number of employees who leave within one year of their start date by the total number of employee separations during that same period. Multiply the number by 100 to represent the value as a percentage.
Who is leaving?
As previously mentioned, a low turnover rate isn’t necessarily something to celebrate — it depends on who is leaving your company. If the majority of your top performers are headed for the door, that’s a huge problem and likely a sign of a bad company culture, poor management or a lack of employee development opportunities.
However, if disengaged employees are the main source of turnover, you don't need to sound the alarm just yet. Employee engagement is important to the health of your business, and disengaged individuals do more harm than good; they can subvert your company culture, as well as demotivate and spoil the experience for people you want to keep around. Turning over toxic employees can actually improve your engagement outcomes.
Before jumping to conclusions, think about the types of employees you’re losing and what that says about your organization. Additionally, analyze the roles of departing employees — are you constantly backfilling the same position? Is turnover contained to one department or team? If so, a high turnover rate could be the result of poor onboarding in a particular role or a bad manager, not necessarily a company-wide issue.
Why are employees leaving?
Separations can be frustrating and uncomfortable, but that doesn’t mean you should try to get through them as quickly as possible. A departing employee has wealth of knowledge about your employer brand and competitors, so don’t dismiss them before doing your due diligence. Conduct exit interviews with engaged employees who willfully terminated their employment to collect feedback and get to the the bottom of voluntary turnover.
You may find that several employees had serious problems with their direct managers or felt that they plateaued in their career at your company. The only way to find out what actually made employees want to leave is to ask them. Once you do, it’s absolutely essential that you act on that information to avoid additional turnover; what frustrated one employee is likely to bother their replacement and could be the beginning of a vicious turnover cycle. Pair exit interviews with stay interviews to round out your employee feedback process.
Turnover rate is arguably one of the most important HR and recruitment metrics to track. Develop your own internal standards by regularly collecting turnover data over various periods of time and across all departments. Additionally, track turnover as it relates to individuals managers at different levels. Armed with this information, you’ll be well-prepared to make improvements and create an exciting employment opportunity that job seekers want and employees don’t want to leave.