Employee turnover is the process of replacing one worker with another for any reason. A turnover rate is the percentage of employees that a company must replace within a given time period. This rate is a concern to most companies because employee turnover can be a costly expense, especially for lower-paying jobs, which typically have the highest turnover rates. Having an employee leave a company, either because of his or her choice or after being fired or otherwise let go, might require various administrative tasks to be performed and severance pay or other payments made to the employee. Replacing the employee might require such things as advertising the open position, using a so-called headhunter or other service to find potential job candidates, bringing in candidates for interviews and eventually training the new employee.
Importance to Businesses
Companies often take a deep interest in their employee turnover rates because replacing workers can be a costly part of doing business. When a company must replace a worker, it incurs direct and indirect expenses. All of the tasks that must be performed during the process cost money, take time or do both. In addition, there can be a loss of productivity during the time after the former employee leaves and the new employee has been fully trained. For some companies, replacing employees also could make it difficult to retain clients or customers with whom those employees worked.
Many factors play roles in the employee turnover rate of a company. These can stem from either the employer or the employees. Wages, benefits, attendance and job performance are all factors that play significant roles in employee turnover. The workplace environment and employee morale also are important aspects.
Calculating Turnover Rates
Turnover rates can be calculated for any time period, but they usually are referred to in terms of monthly or annual rates. If a company has 100 employees and must replace an average of 10 of them per year, its annual turnover rate is 10 percent. A company that has 150 employees and must replace 36 of them per year could be said to have an annual turnover rate of 24 percent or a monthly turnover rate of 2 percent. These rates also can be calculated based on specific departments within the company, specific types of jobs or other categories. They also can be calculated for entire industries.
Although lower-paying roles experience a higher average of employee turnover overall, they tend to cost companies less per replacement employee than higher paying jobs do. Companies typically incur these costs more often, however. For this reason, most companies focus on employee retention strategies regardless of pay levels.
Most companies find that employee turnover is reduced when they address issues that affect the morale of employees. By offering employees benefits such as reasonable schedule flexibility that allows them to balance their work and family life, performance-based incentives and traditional benefits such as paid holidays or sick days, companies are able to reduce their employee turnover rates. The extent to which a company will go in order to retain employees depends not only on the costs of replacing its employees, but also on the company's overall performance. If a company is not getting the performance it is paying for from its employees, the replacement costs might be considered a small price to pay over the long term.