Turnover Rate: What It Means and Why It Matters for Your Business

As a business owner or manager, you‘ve likely experienced the disappointment of seeing a valued employee move on to a new opportunity. While it‘s normal to feel excitement for their new chapter, it‘s concerning if employee departures become a regular occurrence. A high employee turnover rate can be extremely costly to your organization and indicative of deeper issues with your company‘s culture, management, or employee experience.

In this article, we‘ll take an in-depth look at what exactly turnover rate is, why it matters, and how to calculate it for your business. We‘ll discuss what‘s considered a high turnover rate and strategies you can implement to reduce turnover and retain your top talent. By the end, you‘ll have the information needed to assess the health of your organization‘s turnover and an action plan to optimize it.

What is Employee Turnover Rate?

Your employee turnover rate is the percentage of your employees who leave your company during a specified time period, typically a year. It includes both voluntary departures, like resignations and retirements, as well as involuntary ones, like layoffs and terminations. Some turnover is unavoidable, such as an employee relocating to a new city, but much of it is avoidable, such as an employee leaving for a higher paying job.

For example, if a company has 500 employees at the start of 2023 and 550 employees at the end of 2023, it has an average of 525 employees that year. If 50 employees leave during that period, voluntary or not, the company‘s annual turnover rate would be:

(50 / 525) x 100 = 9.5%

So in 2023, this company saw about 10% of its average headcount depart. But is 10% considered "high" turnover? We‘ll explore that more later.

Why Turnover Rate Matters

Turnover is a normal part of any business—nobody expects employees to stay forever. However, excessively high turnover rates are very costly and disruptive. Some of the costs associated with losing an employee include:

• Recruiting costs to find a replacement
• Onboarding and training the new hire
• Lost productivity during the hiring process and while the new employee gets up to speed
• Lost institutional knowledge
• Damaged morale and culture
• Strained customer or client relationships from the transition

According to Gallup, the cost of replacing an individual employee can range from one-half to two times the employee‘s annual salary. So for a worker earning a $60,000 salary, that‘s a $30,000 to $120,000 hit to the bottom line. Clearly, those costs add up quickly when multiple employees depart.

Beyond the financial impact, high turnover is often a symptom of underlying issues within the organization, such as:

• Non-competitive pay or benefits
• Poor management or toxic leaders
• Lack of flexibility or work-life balance
• Limited career development opportunities
• Unclear direction and expectations
• Favoritism or unfair treatment

Left unchecked, these problems fester and cause even more employees to leave and productivity, innovation, and customer service to suffer. Low retention makes it very difficult to build a strong, stable team and organization.

Some industries do have naturally higher turnover rates than others, which we‘ll touch on shortly. But in general, excessive, recurring turnover is a red flag that warrants further investigation into your company‘s employee engagement, leadership, compensation, culture and overall employee experience. It‘s imperative that businesses track and understand their turnover rates.

Calculating Your Turnover Rate

To calculate your company‘s turnover rate, you‘ll need three data points:

1. Number of employees at the beginning of the time period
2. Number of employees at the end of the time period
3. Number of employees who left during the time period

Then follow this formula:

1. Add your beginning and ending employee counts and divide by 2 to get your average number of employees.
2. Divide the number of employees who left by your average number of employees.
3. Multiply the result by 100 to get your turnover rate percentage.

(# of separated employees / average # of employees) x 100 = Turnover Rate

For example:

• Employees on Jan 1st: 475
• Employees on Dec 31st: 500
• Average employees: (475 + 500) / 2 = 488
• Employees who left: 45
• Turnover rate: (45 / 488) x 100 = 9.2%

Many HRIS systems will automatically calculate your turnover rate. But it‘s important to understand the underlying formula so you can calculate it yourself if needed.

For the most accurate picture, calculate both your overall turnover rate and specific rates by department, location, and job level to spot problem areas. It‘s also helpful to separate voluntary vs involuntary and avoidable vs unavoidable turnover to surface insights.

Track your turnover rate on a monthly, quarterly and annual basis to identify trends. Has it increased or decreased compared to last month or last year? Monitoring turnover regularly allows you to catch troubling spikes early.

Putting Your Turnover Rate in Context

Once you‘ve calculated your turnover rate, you need to analyze if it‘s high or low for your company. So what percentage is considered high turnover? The answer unfortunately is: it depends. Turnover rates vary significantly across industries, from a high of 13.4% annual turnover in technology to a low of 9.4% in healthcare and pharmaceuticals according to LinkedIn.

Below are the average turnover rates by industry according to LinkedIn:

• Technology (Software) – 13.4%
• Retail & Consumer Products – 13.0%
• Media & Entertainment – 11.4%
• Professional Services – 11.4%
• Government/Education/Non-Profit – 11.2%
• Financial Services & Insurance – 10.8%
• Telecommunications – 10.8%
• Oil & Energy – 9.7%
• Aerospace/Automotive/Transportation – 9.6%
• Healthcare & Pharmaceutical – 9.4%

Use these industry benchmarks as a rough gauge of where your company stands. If your turnover is significantly higher than your industry average, that‘s cause for concern. Even if your rate falls below the average, a sudden spike from your typical level can still be worrying.

Other factors that influence target turnover rates include your company‘s growth stage, size, location(s), and specific occupations. For example, entry-level roles almost always have higher turnover than senior positions. Comparing your rate against companies of similar profiles will provide the most relevant insights.

Some specific red flags that likely signal your turnover rate is too high include:

• Your rate is more than 10 percentage points higher than your industry average
• Your turnover has sharply increased year-over-year
• You‘re regularly losing high performers and top talent
• A particular department or manager has much higher turnover than others
• Most of your turnover is voluntary and potentially avoidable

If any of those scenarios sound familiar, dig deeper to get to the underlying root causes. Conduct exit interviews with departing employees, engagement surveys with current staff, analyze compensation against market data, and assess your managers‘ leadership abilities. Identifying the true drivers of your turnover empowers you to address them.

Strategies to Reduce Turnover

Turnover will always occur to some extent, but there are proven strategies to minimize avoidable turnover:

1. Hire right-fit talent – Avoid bad hires who are more likely to leave by assessing for job fit, culture fit and mission alignment during your interview process.

2. Provide competitive pay and benefits – Regularly benchmark your compensation against industry data and offer benefits that support employee well-being.

3. Optimize onboarding – Provide comprehensive orientation and ramp up training so new hires feel informed, welcomed and positioned for success.

4. Offer ongoing development – Provide learning opportunities, mentoring and internal mobility options to engage and retain ambitious talent.

5. Give regular feedback and recognition – Meet consistently with employees, provide constructive feedback and recognition, and support their goals.

6. Train managers – Equip managers with training on effective leadership, communication, development and cultivating psychological safety.

7. Promote work-life balance – Offer flexible schedules, reasonable workloads, and encourage employees to take time off to avoid burnout.

8. Create a positive culture – Foster an inclusive environment of teamwork, transparency, respect and fun so employees feel a sense of community.

Proactively prioritizing these research-backed retention drivers will boost employee engagement and reduce your voluntary, avoidable turnover.

Key Takeaways

In conclusion, your turnover rate is a vital HR metric for any organization. It reflects your ability (or lack thereof) to engage and retain talent. Some turnover is inevitable as employees move, go back to school, change careers or retire. But an uncommonly high rate compared to your industry or own historic levels often points to systemic issues with your employee experience – and it‘s extremely costly in terms of both hard costs and human costs.

To protect your profitability and build a thriving workplace, regularly calculate and benchmark your turnover rate. If it‘s excessive, dig into the root causes and develop a proactive people strategy focused on hiring top talent, compensating competitively, supporting development, and cultivating positive leadership and culture. While you can never fully eliminate turnover, you can build an organization where employees are highly engaged and want to stay and grow for the long-term.

Reflect on your own company‘s current turnover rate and how it stacks up to industry norms. Have you seen an increase in key employees leaving recently? Are certain departments struggling with retention? Use the strategies we covered to get ahead of avoidable turnover and boost your employee engagement and retention. Your bottom line and company culture will benefit as a result.