Turnover occurs when an employee leaves a job, and the position needs to be filled. Turnover can be measured using a turnover rate formula. The time and cost you incur to interview and hire new workers can impact your company's profit and loss. Employers and human resources professionals should know how to calculate the turnover rate in order to make the smart business decisions.
Reviewing The Concept of Turnover
1Go over the turnover rate formula. Your company’s most valuable asset may be the your talented employees. Turnover rate measures the rate at which workers leave your firm.
- The turnover rate formula is (Number of employees who leave the business) / (average number of total workers during the period).
- Turnover is measured during a specific period, such as a month or year.
- Your business should take steps to decrease employee turnover. If your company has an increasing level of turnover, your firm’s costs will increase.
2Identify why employees are leaving your firm. Workers may leave your firm due to resignations or other separations, such as retirements. Most businesses want to track employees who leave voluntarily.
- Employees who are terminated are not normally included in the turnover rate formula.
- The formula is designed to analyze the percentage of the workers who leave voluntarily.
- You company has less control over employees who leave voluntarily. It’s important, however, to track those who leave. If you notice that the turnover rate is increasing, you can take steps to reduce your turnover rate.
3Take a look at your average number of employees and your turnover rate. Your average number of employee is computed for a specific period. For example, to compute the average for October, you take [(Total employees on October 1st) + (total employees on October 31st)/2].
- Count the number of employees on the first day and the last day of the period (October, in this case).
- Assume that 20 employees leave during the month of October. You started the month with 1,200 employees. You end the month with 1,190 workers. Even though 20 workers left during the month, some of their positions were filled before month end. That’s why the decrease during the month is only (1,200 – 1,190 = 10 employees).
- Your average number of employees during October is (1,200 + 1,190)/2 = 1,195.
- The turnover rate for October is (20 / 1,195 = 1.7%).
Considering The Impact Of Turnover
1Analyze the cost you incur for employee separations. When a worker voluntarily leaves your firm, it will cost you time and money to replace that individual. During that transition, your company will not be as productive.
- Assume that the accountant who generates invoices for customers decides to retire. This job is critical, since you must be able to send an accurate invoice to clients in a timely manner. If you can’t do that, you won’t collect customer payments quickly.
- You’ll need to find candidates who are qualified for the position. You may place the job posting on industry websites, or job sites such as Monster.com. Some companies hire recruiting firms to find good candidates. You’ll incur time and expense to find worthy candidates.
- Your business may have multiple people interview candidates for the job. This will take your staff away from their normal jobs so they can participate in the interviews. The interview process reduces your staff’s productivity.
- Once you hire a new employee, you’ll need to train them. Training will require more staff time. During the training process, the new worker will not be as productive as the employee who left. Your staff may need to assist the new invoice processor, so that invoices are sent to clients in a timely manner.
2Add in the cost of terminating workers. The turnover rate formula does not typically include terminations in the number of employees leaving total. However, terminations reduce your average number of workers, which affects the turnover rate formula. Your analysis of employee turnover should include termination costs.
- Employees who leave voluntarily and those who are terminated both have access to COBRA. COBRA is a federal law that allows workers who leave a firm to continue to receive health insurance coverage through your firm. The length of time and conditions vary. This is an added cost to your business.
- Workers who are terminated may also access unemployment insurance through their state. The state program is funded by taxes charged to companies. If former workers from your business request unemployment benefits, the rate of tax you are charged may increase.
- You may incur legal costs to defend your firm against litigation from a terminated employee.
3Minimize the cost of turnover. Take a look at the turnover rate of other firms in your industry. If your rate is higher than the industry average, investigate your hiring and training process.
- Invest the time to perform exit interviews with workers who voluntarily leave your business. Find out why they are leaving. Document the results and look for trends.
- Say, for example, that a growing number of people leave because they don’t get timely performance reviews. Use that information to make changes to your review process.
- Insist that your managers communicate well with employees. Maintain a written procedures manual for each job. A manual is a valuable tool for your staff, particularly a new employee. Explain how often performance reviews will be given, and stick to that schedule.
Sources and Citations
- ↑ http://www.payscale.com/compensation-today/2010/02/how-to-calculate-employee-turnover
- ↑ http://www.forbes.com/sites/mikemyatt/2012/12/13/10-reasons-your-top-talent-will-leave-you/
- ↑ http://business.tutsplus.com/tutorials/make-your-business-more-efficient-by-tracking-these-numbers--cms-20883
- ↑ http://www.gnapartners.com/blog/employee-turnover-its-costing-you-more-than-you-think/
- ↑ http://www.paychex.com/articles/human-resources/the-true-cost-of-terminating-an-employee
- ↑ http://www.cbsnews.com/news/how-much-does-it-cost-companies-to-lose-employees/
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