Employee Retention: What Does Your Turnover Rate Tell You?

What is employee turnover?

Employee turnover is the loss of talent in the workforce over time due to layoffs, terminations, location transfers, resignations, retirements or other separations.

Employee turnover should not be mistaken for employee attrition. Attrition refers to the natural reduction of staff due to resignation, retirement or personal health issues, with no intention of replacing the position.

Employee turnover involves the voluntary or involuntary departure of an employee who leaves a position your business must fill. While some reasons overlap with attrition, turnover is often viewed negatively as it adds costs and operational challenges.

There are two standard types of employee turnover:

• Voluntary: Voluntary turnover occurs when employees choose to leave their jobs, such as for a new role or personal reasons.
• Involuntary: Involuntary turnover occurs when an employer lets go of employees through layoffs, terminations or employment contract

Additionally, Marc Prosser, CEO and co-founder of Choosing Therapy, believes there is both good and bad employee turnover:

• Good employee turnover: Good employee turnover can include employees who leave the company for a significant promotion and employees on performance improvement plans. You want to be a company where people can learn and advance their careers. Your reputation as a place where employees develop new skills and become attractive to future employers will enhance your recruiting efforts.
• Bad employee turnover: Bad turnover occurs when moderate- or high-performing employees leave for lateral positions. This may indicate a less-than-optimal work environment or below-market compensation. If your bad turnover rate rises, you should examine your employee compensation packages and evaluate changing your workplace culture.

How do you calculate your employee turnover rate?

To determine if you have an employee turnover problem, you must first calculate your turnover rate by looking at a set period (such as a month or a year). Sue Andrews, a senior human resources (HR) professional and fellow of the Chartered Institute of Personnel and Development, explained that calculating turnover requires three key figures:

1. The number of employees who left in the period (voluntarily and involuntarily). 
2. The number of employees at the beginning of the period.
3. The number of employees at the end of the period.

First, you’ll calculate the average number of employees: Take the number of employees at the beginning of the period and add it to the number of employees at the end. Dividing this figure by 2 will give you the average employee count.

Next, calculate your turnover with this simple formula:

Turnover rate = (Employees who left ÷ Average number of employees) x 100 

Turnover calculation example

Say you want to calculate your business’s turnover rate for July. During this month, two employees retired and two quit. Here are the calculations: 

1. Employees who left in July: 4 (two retired and two quit).
2. Number of employees at the beginning of July: 180.
3. Number of employees at the end of July: 176.

The average number of employees is as follows: 

(180 + 176) ÷ 2 = 178

The turnover rate is calculated this way:

Turnover rate = (4 ÷ 178) x 100

Using the formula, your employee turnover rate for July is about 2.25 percent. 

Tracking your turnover rate 

Your internal HR department can track your turnover rate manually by monitoring employee departures carefully. However, Bob Teasdale, relationship manager at Agilio Software, emphasized that the best HR outsourcing services and HR software can make tracking your employee turnover rate effortless. 

“For example, our system generates an exportable staff turnover report that automatically calculates staff headcount at the end of each month and provides a turnover percentage,” Teasdale explained.

What is the average employee turnover rate?

According to the Bureau of Labor Statistics (BLS), the average annual “quit rate” (the percentage of the workforce that voluntarily leaves their jobs during a given year) for 2023 was 2.4 percent — representing 44.4 million people in the United States workforce. This figure marked a decline from 2.8 percent in 2022. Additionally, 19.8 million people were laid off or terminated during the same period, representing a “discharge rate” of 1.1 percent.

Still, there is no universal standard for an organization’s “acceptable” average turnover rate and turnover rates vary widely by industry and region. Benchmarking your industry’s turnover rates can give you a better idea of whether your organization’s turnover rate is excessive.  

BLS data offers helpful insights into industry-specific turnover rates. For example, as of the most recent data, the average turnover rate across all industries was 3.3 percent. Financial and insurance businesses enjoyed a low 1.7 percent turnover rate while arts and entertainment businesses saw a 7.4 percent turnover rate. 

Conventional advice generally states that keeping your turnover rate under 10 percent is considered healthy and indicative of solid employee retention strategies. 

Why should a company track its employee turnover?

Your business should monitor and track employee turnover for several reasons. 

Gauge your company’s internal health. 

Your turnover rate can help you gauge how attractive your company is to prospective employees and pinpoint areas that may contribute to team members leaving. High turnover figures are a red flag that will prevent you from securing the best talent in the field.

Generally, high employee turnover indicates low employee satisfaction and a high risk of employees quitting, while a low employee turnover rate indicates a relatively happy and productive work culture and a positive outlook for new hire retention. 

Ensure compensation rates are in line with industry standards. 

Josh Dane, the owner of Dane Salon Group, stressed that your turnover rate reveals valuable information about whether your compensation rates are on par with industry standards, how employees view their work environment and how your business’s professional development opportunities compare to those of your rivals. 

“We analyze employee turnover based on our estimates of our competitor turnover levels, as well as tracking period to period,” Dane explained. “If turnover is increasing, we need to figure out what is causing this.”

Stay on top of the costs of employee turnover. 

However, the cost of turnover is the primary reason a company should track its turnover rate. A high turnover rate can negatively impact a company’s bottom line if it isn’t prepared for it, according to Ellen Mullarkey, vice president of talent advisory solutions for Messina Group. “If you know that you have to hire several times a year, you should set aside enough time and money to do so,” Mullarkey advised. “It’s not cheap, so you have to plan.” 

Belinda Wee, associate professor at the Husson University School of Business and Management, explained that the financial impact of employee turnover can be significant. “Losing an entry-level employee costs a business about 50 percent of that employee’s annual salary,” Wee said. “Losing a technical or senior-level employee costs a business about 125 percent of the employee’s annual salary to the business.”

Turnover incurs both direct and indirect costs:

• Direct costs: Direct costs include the money spent replacing departed employees, such as the costs of the hiring process, background checks, training, onboarding and other recruitment expenses.
• Indirect costs: Indirect costs aren’t as easy to quantify. For example, finalizing paperwork when an employee leaves — including paperwork related to terminating employee benefits and unemployment documentation — represents a hidden cost to the company.

How do you analyze your turnover rate? 

Your turnover rate is only part of the story. Digging deeper to identify and address problems is essential to maintaining a strong company culture and attracting and retaining top talent. 

Look beyond the numbers to analyze your turnover rate and paint an accurate picture of what’s happening in your company. Determine answers to the following: 

• Who left? Did you part ways with more seasoned, tenured employees or new hires? Did top-performing talent leave?
• When did they leave? Look for exit patterns. For example, did you see a turnover spike after employee bonuses were awarded? Do new hires often leave shortly after completing the onboarding process? 
• Why did they leave? Look at the patterns you’ve uncovered. Are there obvious reasons employees left? For example, if there’s a mass exodus after bonuses were given out, the distribution process may have been seen as unfair. If new hires leave quickly, your employee training and onboarding may be lacking. 

What are the top reasons for employee turnover?

Employees leave for numerous reasons, but you may be losing excellent talent because of the following issues: 

• Lack of career opportunities and advancement: High turnover could indicate that employees are not finding professional development opportunities and advancement potential in your company. When employees feel stuck in a dead-end job, they’ll often seek better positions elsewhere. Employees appreciate companies with career training programs that allow them to add new skills and build their resumes. Training opportunities can also increase their confidence in handling their current job duties.
• Poor management: If managers are difficult or tend to micromanage the employees, workers may look elsewhere for a position. Also, a manager’s critical or discouraging leadership style can create a hostile work environment that makes employees want to move on.
• Heavy workload: The work environment and how your company values employee time also contribute to turnover rates. For instance, team members who feel overworked or are frequently asked to commit to long shifts may be at risk of employee burnout and start looking for other positions.

How can you improve your employee turnover rate?

Once you’ve calculated, analyzed and determined the reasons behind your employee turnover rate, you can implement strategies and initiate procedures to improve employee retention. Here are a few examples:

• Open communication: Excellent communication between employees and employers can significantly improve job satisfaction and reduce miscommunications. Encourage regular one-on-one meetings and feedback sessions to ensure employees feel heard and valued. 
• Recognition: Employees appreciate recognition, constructive feedback and incentives to reward them for their hard work. Examples include Employee of the Month programs, performance-based awards and bonuses.
• Professional development opportunities: Consider offering programs to expand your team’s knowledge and skill sets. Support certifications, outside training or tuition reimbursement programs, which benefit both employees and the organization. 
• Flexibility: Flexible benefits and schedules can help employers reduce their turnover rates. Many employers find that paying for work produced instead of hours worked increases overall employee satisfaction. Additionally, consider remote work opportunities or flexible hours if the role permits.
• Improved onboarding: Welcome your new hires with a smooth onboarding process that includes comprehensive training and clear expectations, setting them up for success.
• Monitor the employee experience: Monitor the employee experience and company culture at your organization. Problems may creep up, but you can proactively address issues by conducting regular employee surveys and maintaining an open dialogue about workplace concerns. 

Sean Peek contributed to this article. Source interviews were conducted for a previous version of this article.