How to calculate turnover rate?

Turnover rate is an important metric that measures how many employees leave an organization over a set period of time. Tracking turnover allows companies to gauge employee satisfaction, optimize retention strategies, and bolster recruitment efforts when strong talent is lost. By regularly analyzing turnover, organizations can identify problems early and implement solutions to strengthen the workplace.

This blog post will explore the fundamentals of calculating turnover rate, outlining key formulas, benchmarks, and strategies leaders can leverage to shed light on this critical area of business performance.

You’ll learn the basics of identifying and classifying turnover alongside actionable methods for digging into root causes and symptoms.

Definition of Turnover Rate

Employee turnover rate is defined as the percentage of employees who leave an organization during a certain time period, typically a year. The metric provides insight into overall workforce stability and satisfaction. A high turnover rate typically indicates unhappiness among staff, while a low figure suggests strong employee retention.

Why Calculating Turnover Rate?

Regularly measuring turnover rate allows organizations to gauge employee satisfaction, recruitment efficacy, and changing workplace dynamics over time. Leaders can use turnover insights to identify pain points, inform retention initiatives, and benchmark against industry standards. It provides an invaluable talent management tool for strengthening company culture.

Learn more: Turnover vs profit?

Why Calculate Turnover Rate?

Before diving into the calculus, let’s discuss why turnover rate matters and how it impacts key areas of business performance when tracked consistently over time.

Impact on Business Performance

A high turnover rate is widely understood to hurt overall business performance. Recruiting and onboarding new employees expends resources and productivity. Lost talent also erodes organizational knowledge and continuity. By keeping turnover low, companies retain skilled staff and cultivate stronger institutional memory and cohesion.

Employee Satisfaction and Retention

Turnover provides a clear snapshot of employee morale and workplace contentment. Employees who feel unhappy, underpaid or slighted by management will not stick around long. Regular turnover analysis allows executives to pinpoint patterns and implement corrective strategies like improved benefits, flexibility policies and engagement initiatives.

Identifying Areas for Improvement

Sometimes high turnover stems from issues with a specific manager or department. Segmenting analysis appropriately allows organizations to spotlight problem groups and develop targeted retention plans. Whether turnover spikes indicate a toxic boss or insufficient pay, calculating the metric provides actionable organization-wide and group-specific insights.

Types of Turnover

Understanding turnover type provides critical context for leaders seeking to bolster retention. Let’s explore classifications and defining characteristics:

Voluntary Turnover

Voluntary turnover refers to instances where staff proactively elect to leave the company, whether due to unhappiness, disengagement, burnout or better opportunities elsewhere. While some degree of voluntary turnover is normal, high rates indicate poor working conditions.

Involuntary Turnover

Involuntary turnover occurs when employees are fired or laid off by the company itself. These separations result from poor performance, economic factors, restructuring or downsizing. Involuntary turnover is beyond staff control but still crucial for leaders to track.

Functional Turnover

Functional turnover refers to turnover of low-performing employees. Some leadership theorists argue reasonable functional turnover provides space for new talent to excel. Distinguishing voluntary vs. functional turnover helps parse data.

Key Metrics and Formulas

Now let’s explore key rates and formulas leaders use to calculate and interpret employee turnover.

Basic Turnover Rate Formula

The most common method for determining turnover rate is:

Number of Separations (Within Time Period) / Average Number of Employees (During Time Period) x 100

Simple and highly useful, this basic computation yields the critical turnover rate percentage indicating workforce stability.

Voluntary Turnover Rate Formula

To home in on voluntary exits specifically, leaders can apply dimension and specificity by isolating voluntary separations:

Number of Voluntary Separations / Average Number of Employees x 100

Involuntary Turnover Rate Formula

Similarly, examining involuntary turnover alone also provides useful insights:

Number of Involuntary Separations / Average Number of Employees x 100

Segmenting analysis between voluntary turnover vs. involuntary turnover illuminates macro trends, like whether poor culture or economic conditions drive exits.

Steps to Calculate Turnover Rate

Now, let’s outline the step-by-step process for accurately determining turnover rate:

Define the Time Period

First, leaders must determine the span of time for analysis, typically either quarterly or annually. Calendar or fiscal year frameworks both work as long as data remains consistent.

Gather Employee Data

Compiling key workforce stats – including new hires, terminations, resignations and layoffs – provides the foundation for credible calculations. Data should segment voluntary vs. involuntary leave.

Calculate the Number of Separations

Add total voluntary and involuntary separations within the set time period. For granular analysis, consider separating voluntary resignations and terminations.

Calculate the Average Number of Employees

Add total headcount at beginning and end of the time period and divide by two to determine the average number of employees across the full span.

Apply the Turnover Rate Formula

With inputs determined, simply:

  • Insert number of separations
  • Divide by the average number of employees
  • Multiple by 100 to convert figure into a percentage

Interpreting Turnover Rate

Understanding healthy vs. concerning turnover levels provides essential context for analysis. Let’s explore:

Benchmarking Against Industry Standards

Since turnover fluxuates between sectors, leaders should compare their rate against industry averages. Tech and hospitality see higher turnover than public sector jobs, for example.

Identifying Normal vs. High Turnover

According to leading experts, healthy employee turnover hovers between 10-15% annually. Rates climbing above 15% indicate substantial issues. Turnover exceeding 20% annually enters dangerous territory.

Implications for Organizational Strategy

If analysis determines an 82% annual turnover rate, for example, extreme workforce instability is clearly undermining operations. Leaders must prioritize reform.

Strategies for Reducing Turnover

When turnover grows problematic, these evidence-backed initiatives can strengthen retention:

Employee Engagement Initiatives

Gallup research shows highly engaged teams exhibit 59% lower turnover. Creative engagement initiatives like peer recognition programs and team building activities help.

Professional Development Opportunities

Investing in career growth through skills training and mentoring builds loyalty. Employees who see opportunity stay longer. Tuition assistance and workshops help here.

Competitive Compensation and Benefits

While pay isn’t everything, feeling appropriately compensated boosts employee satisfaction immensely. Conducting periodic competitive analysis and benchmarking against local market rates helps. Offering in-demand benefits like remote work options and flexible hours also helps retention.

Tools and Software for Turnover Calculation

Automating turnover tracking through digital tools saves leaders time while enabling dynamic analysis. Let’s discuss options:

  • Robust HR Information Systems like PeopleSoft crunch employee data, calculate key metrics like turnover rate automatically alongside tools to segment analysis.
  • Free online Excel templates also simplify turnover rate calculation. The customizable documents automatically generate visualizations to spotlight trends.

Case Studies or Examples

Let’s see turnover calculation in action through a real-world scenario:

ACME Software Company employs 280 people on January 1, 2023.

By December 31, 2023, voluntary resignations total 32 employees.

Involuntary terminations during span equal 10 employees.

To calculate turnover rate and gain insights we:

  • Add total separations: 32 + 10 = 42
  • Calculate average headcount: (280 + 280) / 2 = 280
  • Divide separations by avg. headcount: 42 / 280 = 15% turnover

Benchmarking shows ACME’s 15% rate aligns with tech industry turnover norms, indicating solid retention policies. While positive, parsing data could optimize strategy. If 30 resignations stemmed from the sales division, for example, ACME knows where to improve.

Common Mistakes to Avoid

Even experienced leaders make turnover calculation mistakes. Let’s review errors:

Garbage in, garbage out. Incomplete records on separations, headcount and other variables undermine credibility. Establish rigorous tracking processes first.

Context is key. Consider relative rates between departments and roles alongside current events. Don’t develop strategies based on faulty conclusions.

It’s easy to apply quick fixes without investigating underlying issues. Leaders who dig into resigning employee exit interviews and conduct engagement surveys resist this temptation. There are always buried reasons when turnover spikes.

Final Thoughts

Calculating turnover rate provides invaluable workforce insights, enabling data-backed retention strategies and stronger talent management. But deriving meaning from the math requires awareness of key formulas alongside organizational context. Leaders must avoid superficial problem solving and dig into root causes when attrition rises.

Recap of Key Points

We’ve covered various facets of calculating turnover rate, including:

  • Definitions and classification systems
  • Essential formulas for overall rates and segments
  • Step-by-step calculation processes
  • Benchmarking against averages
  • Strategies for improvement
  • Real-world examples
  • Common analytic pitfalls

I hope these fundamentals provide a helpful foundation for sharpening your organization’s turnover analysis.

Turnover insights quickly grow stale if not tracked consistently. Leaders should institutionalize quarterly or annual turnover reviews, ensuring data accuracy in the process. Technological automation and HRIS systems help here tremendously via dynamic reporting.

Like any business process, even the most finely tuned turnover program can improve. As new research emerges and workplace dynamics shift, so too should calculation techniques. Remember to periodically revisit assumptions and practices to ensure maximum analytic impact over time.

If meaningful turnover analysis helps retain top talent for the long haul, the effort required pays for itself tenfold. I hope this exploration of turnover rate calculation, interpretation and application provides a springboard to advance your organization’s approach. Feel free to reach out with any other questions!