What Is Employee Turnover And Why You Should Care

Written by: Amor Traceski  

When people leave their place of employment, the reasons are either voluntary or involuntary.  Whether employees resign or are terminated for cause, many employers, unwisely, view the departing employees as those who can just be replaced.  They figure they’ll just hire another.  This seemingly nonchalant attitude is detrimental for your business, because of how it negatively affects your bottom line.  Here are some important basics to help you understand employee turnover and why it should be an important focus of every business.

WHAT EMPLOYEE TURNOVER IS AND ISN’T

  • Employee turnover is the percentage of workers who leave your organization, the employment relationship ends and they are replaced by someone new.
  • It is not attrition, which refers to the end of an employment relationship due to retirement or job elimination or employee death.  When attrition occurs, the position is not filled with a new employee.

Note:  Attrition is not included in Employee Turnover calculations.

HIDDEN COSTS of EMPLOYEE TURNOVER

Terminating an employee or adding a new worker to the payroll isn’t cheap.  Costs (direct and indirect costs) can easily accumulate, quickly eating up your profits before you know it.  Consider how the following affects your bottom line every time you hire and terminate an employee.

DIRECT COSTSINDIRECT COSTS
Recruitment Costs. In-house recruiters’ salaries (including travel expenses, if needed), third-party/agency recruiter fees, employee referral bonuses, background checks, administrative processingLost Knowledge. It usually “takes 8-12 weeks to replace a knowledge worker, and then another month or two before the replacement gets to full productivity mode.” (S. King, CEO of Workforce)
Advertising Costs for new position.  Job board fees (print and online), materials and fees for campus recruiting days or career fairs.Loss of Productivity 1.  You and other trainers (usually your best employees) are pulled away from more important work to train the new employee until he gets up to speed.
Higher Pay/Salaries. “External hires demand 18-20% more in pay than internal hires.” (S. King, CEO of Workforce)Loss of Productivity 2.  The extra time and effort it takes for the remaining employees to pick up the slack while you’re in transition.
Orientation and Training of New Hire.  New hire processing and training materials, training software and trainers’ salaries and time.Costs Associated with Departing Employee’s Lack of Motivation prior to leaving, including lower productivity and overall product quality, activities that distract co-workers e.g., gossip.
Severance Pay / Separation Pay (if applicable).  Pay arising from the contractual agreement you made with the employee upon termination or resignation.   Under terms of that contract, you agree to provide the separating employee with benefits or payment in exchange for their agreement to waive all legal claims that they might have against you.  Costs Associated with Loss of Trade Secrets, especially if leaving for a competitor.  NOTE: Many non-compete agreements are not enforceable, depending on the provisions and the state.  
Final Pay.  This includes anything you owe to the departing employee when their employment ends i.e., wages for hours worked, expense reimbursements not yet refunded, allowances previously agreed upon, outstanding bonuses or commissions.Your Loss of Time to focus on growing the business.  Instead, you need to reconnect and stabilize your team, by spending more one-on-one time with them.
Testing Costs.  Candidate assessments, technical evaluations, investment of software and materials to test candidates.Low Team Morale, which leads to decreased productivity, especially when they were friends or looked up to the terminated employee.  Resentment may grow.
Other Direct Costs: Signing bonuses, relocation expenses, travel reimbursements for candidates. When applicable, accommodation costs, including purchasing special equipment or supplies.Loss of Sales based on lower quality of customer service due to lack of manpower or lower morale.

CALCULATING YOUR EMPLOYEE TURNOVER RATE

According to business.com, “Organizations should aim for 10% for an annual employee turnover rate, but most fall into the range of 12% to 20%. Certain industries report higher employee turnover rates due to the nature of the job.”  Does your company have a healthy turnover rate?
Answer this by calculating your employee turnover rate.  (Note:  Calculations can be done monthly, annually or even, over the lifetime of your company.)  Here’s the formula for annual turnover rate:  

FormulaExample
Total Turnovers in a Year ÷   Average Number of Employees ×   100   =   Turnover Rate6 Employee Terminations in a Year ÷ Average of 30 Employees in a Year x 100 = 20% Turnover Rate

COMMON REASONS GOOD EMPLOYEES VOLUNTARILY LEAVE 

According to a survey conducted by the human asset management consulting firm Mercer, there are many reasons why employees leave.  The most common reason was for Better Job Opportunity (81%), followed by Personal/Family (62%), then Relocation (41%), Better Pay (39%), and, finally, Career Change (29%).   

When employees state that they’re leaving for better job opportunities, they’re basically saying that they are no longer satisfied working with your company.  The phrase “better job opportunity” covers many reasons. Review the below to determine if your employees may have any of the following reasons to leave for better job opportunities.

  • A promotion or higher-paying lateral move
  • Growth opportunities
  • Better or flexible work hours
  • More challenge; more meaningful work
  • A more positive work environment
  • More supportive management

HOW TO PREVENT EMPLOYEE TURNOVER

In order to retain your best employees, you first need to understand their “pain points” at work, which represent the friction they experience at any given work day.  Meet with them to discuss what they may be.  Below are some major employee pain points and possible ways to remove them:

  1. Technical issues caused by old or poorly maintained equipment.
  2. Lack of Flexible Options (hours or work arrangements) to be able to enjoy a work-life balance.  
  3. Office Politics i.e., having to work with co-workers who are instigators and like to gossip and create conflict.
  4. Lack of Recognition i.e., feeling taken for granted, unacknowledged, under-valued or unappreciated for their work.
  5. Workload Problems or being expected to work overtime (after hours, weekends) due to inadequate staffing for work volume or trying to work around burdensome processes that cause stress and fatigue.

Next, work on removing those pain points.  In most cases, you can do so and keep your best employees by:

  • awarding a goodwill boost to their salary
  • implementing real work/life balance
  • offering professional development
  • acknowledging their hard work on a regular basis
  • ensuring equipment is properly maintained and technology is effective 
  • creating an environment that engages your employees and boosts productivity

Good employees don’t leave because they have to.  They resign, because they’re not getting what they need from the company and are able to find it elsewhere.  And, many times, there are recruiters from other companies who work to lure them away from you.  The best way to keep your good employees from accepting their invitation is to give them a strong reason to stay with you.  Remember that employees want to love their job and their company.  

Doug Conant, the former Fortune 500 CEO and New York Times bestseller stated: “To win the marketplace, you must first win the workplace.”  Make stabilizing your employee base and preventing turnover an important part of your business strategy.  Understand your turnover rate and its accompanying costs, and you’re sure to win, not only the workplace, but the marketplace as well!

About the author:

Amor Traceski

Amor Traceski is a Human Resources Consultant with over 20 years of experience in human resources management in various fields of industry.  She is also a motivational speaker, life coach and author of Been There, Done That: Practical Tips & Wisdom from Cancer Survivors for Cancer Patients.  

Learn more about Amor online at https://www.amortraceski.com/

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