Employee turnover occurs whenever someone stops working for a business or organization. It’s a natural part of a dynamic economy and it’s not necessarily a bad thing. The key question is not “What is employee turnover?” but rather “Why is it occurring?” The answer to that question says something about the health of a business and the way it’s run.
Human resources departments classify employee turnover in several ways. One of the primary ways is voluntary vs. involuntary. Voluntary turnover happens when an employee chooses to leave. Involuntary turnover happens when a business fires an employee or lays him off because the job no longer exists.
Some companies build high voluntary turnover into their business model. A fast food chain offers a classic example. Most jobs pay the minimum wage. Employees who really love the industry move up the management ladder. Others are not expected to stick around for decades flipping burgers for minimum wage. In fact, managers do not want them staying in the same job for years, pressuring for higher wages and benefits. The employees are expected to leave voluntarily at a fairly high rate. However, that business model counts on the employees staying for a certain amount of time, based in part on how long it takes to train them. If a burger joint finds that its employees bail out consistently before they can even be trained and contribute to the effort, that eatery badly needs to assess its employee turnover rate.
In November 2021, turnover reached an all-time high in the U.S with more than 4.5 million workers leaving their jobs behind — roughly 3 percent of the national workforce — according to a Labor Department’s job openings and labor turnover report. Experts expect those high turnover rates to continue throughout 2022.
Turnover rates differ greatly from industry to industry. What might be high for one industry may be average for another. Business leaders should compare the rates of their company to others in their industry.
According to the labor report, the highest turnover rates came from lower-wage industries including food services, health care, social assistance, transportation, warehousing, and utilities. Meanwhile, employee turnover rates decreased in real estate and federal government. That same month, President Joe Biden issued an executive order aimed at limiting turnover of federal service contract workers by offering them right of first refusal when a government contract changes hands.
Types of employee turnover
As we noted, voluntary turnover occurs when an employee chooses to leave. It could be for any reason, such as a good opportunity elsewhere, a position that offers a better work-life balance, or dissatisfaction with the job. Involuntary turnover happens when the employer makes the decision because of factors like poor performance, behavior, or a business downturn or shift.
There are other ways of slicing and dicing turnover, including:
- Desirable turnover. Desirable turnover refers to when an organization loses or releases underperforming employees and replaces them with a new hire. It allows for improvement in the business.
- Undesirable turnover. Undesirable turnover means an organization is losing quality employees. The impact of a high-performer’s departure is felt deeply. Those employees can be hard to replace. To give a fanciful example of what it can mean to a company, look at what happens to the betting odds when a star player, like LeBron James, gets injured and can’t play. The odds of success for his team get worse.
- Functional turnover. Functional turnover is the term for the voluntary departure of underperforming employees. Perhaps they received a poor performance review and saw the writing on the wall. This type of turnover is often seen in large consulting industries, like accounting or law firms, where employees are expected to develop and improve to advance. If they do not advance, they are expected to leave.
- Dysfunctional turnover. Dysfunctional turnover is the opposite kind of voluntary turnover. It happens when an organization’s best employees choose to leave. Dysfunctional turnover can indicate that high-performing employees feel like there is a low potential for advancement. A company that typically fills management positions with external candidates instead of promoting from within encourages dysfunctional turnover.
- Avoidable turnover. When dysfunctional turnover occurs because of things that a company controls, it’s further categorized as avoidable turnover. Reasons might include employee dissatisfaction with pay, working environment, and personnel policies.
- Regrettable turnover. Regrettable turnover is another term used for the loss of an employee considered important to a business, which can include high-performers, those in upper-level positions who possess a great deal of intellectual capital, and other types of employees the company would rather have retained.
Calculating employee turnover
Keeping track of turnover rate is a necessity. A business leader must quantify her company’s turnover rate to understand whether it’s higher than average for her industry and is signaling a problem that should be addressed.
Let’s say a company has an annual average of 112 employees. In the last 12 months, 8 employees left the company. Here’s a simple formula to calculate annual employee turnover:
- Divide the number of departures by the annual average number of employees. To express that as a percentage, multiply the result by 100.
- Example: 8 / 112 = 0.0714
- 0.0714 X 100 = 7.14 percent
Companies will track their turnover rates by specific time periods or by groups to get a better understanding of who is leaving and when. Tracking turnover rates for each quarter might reveal seasonal trends. Tracking turnover rates of new hires versus overall hires will show whether a business is losing employees too quickly.
For obvious reasons, HR departments and business leaders track avoidable and regrettable turnover because they pose the greatest threat to success.
The impact of employee turnover
Turnover is costly. In 2019 alone, voluntary turnover costs exceeded $630 billion, according to a study by the Work Institute.
As with turnover rates, costs will vary from industry to industry, but HR experts at Builtin.com estimate the average costs can look like the following:
- $1,500 for hourly employees
- Between 50 percent and 200 percent of an employee’s annual salary
- Up to 150 percent of an employee’s salary for technical positions
- Up to 213 percent of an employee’s salary for C-suite positions
For example, let’s say an employee making a $90,000 yearly salary leaves. That departure can cost anywhere from $45,000 to $180,000.
To extrapolate: A 200-person company that pays an average salary of $60,000 and experiences 20 percent turnover could spend as much as $4.8 million a year replacing 40 workers at the cost of $120,000 each.
Understanding turnover costs
Employee turnover comes with many hidden costs. Up to two thirds of all sunk costs due to turnover are intangible. It’s not hard for companies to track some of the costs, such as recruiting, interviewing, onboarding, training, learning and development. However, the costs related to the impact of turnover on remaining employees are harder to pin down.
Those also costs reflect financial impacts from:
- Lost productivity
- Interrupted schedules
- Increased mistakes
- Potential overtime
- Missed deadlines
- Damages to the brand due to poor performance
In addition to those effects, remaining employees can suffer from low morale due to increases to their workload, the loss of colleagues and friends, concerns about new hires, fears about their job security, and thoughts about whether they should leave the company, too.
How to reduce employee turnover
No business can achieve zero turnover, but they can do a lot to increase employee retention. In this section, we’ll explore some of the top reasons for turnover and how companies can prevent unnecessary departures.
Lack of advancement opportunities
Workers, particularly high performers, are motivated by the possibility of advancement. A company that never hires from within for high-level jobs cuts off that motivation. If employees don’t see a future for themselves at a company, they’ll head for greener pastures when it suits them.
Give employees opportunities for growth to keep them engaged and motivated, which means they’re more likely to stick around. If there are limited opportunities, business leaders have to get creative in advancing and rewarding desirable employees. It’s equally as important to provide a staff with learning and development opportunities to help them sharpen their skills and learn new ones. Mentorship programs are also a good way to retain staff and increase employee engagement.
Poor work/life balance
With work-from-home options becoming more prevalent, employees are coming to expect flexibility in their schedules and where they work. Companies that don’t have much wiggle room here can at least publish employee schedules far in advance and allow employees to swap shifts as needed.
For some employees, personal time, vacation policies and work/life flexibility are at least as important as money. Good leaders find out what motivates their best people.
When employees are overworked for too long, burnout sets in. That combination of physical and mental exhaustion can bring on a range of performance problems and increased turnover.
When employees are frequently asked to work extra hours or are making up for gaps in staffing, they’re more likely to reach burnout and head for the door. Business managers should communicate often with staff about their workloads and make changes as necessary.
It’s easier than ever for employees to figure out if they’re making an equitable salary. When employees believe they’re being underpaid, they start to look elsewhere.
In addition to offering attractive base salaries and competitive benefits to match, providing annual pay increases to match — or exceed — industry rates are a great way to retain talent. Identify high performers and award bonuses that make them feel appreciated. Correct any pay imbalances by conducting a racial or gender pay equity analysis.
Stability and success
Some turnover is normal, but business can minimize the damage by retaining top talent and reducing overall turnover rates by staying alert, communicating and perhaps making a few changes. If you’re looking for ways to readjust and strengthen your employee relationships, GovCon Wealth, a division of Cope Corrales, can help.