What is the Ideal Employee Turnover Rate?

Engaged and productive employees are the key to any successful business, so when an employee leaves your company it can have damaging effects on productivity and profits. The same can be said for low-performing employees staying in your organisation for a long time. Finding the optimal turnover rate for your business can help mitigate bottom line costs and increase productivity.
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In light of what is being termed the ‘Great Resignation’ in the aftermath of the coronavirus pandemic, employers and HR managers must pay closer attention to staff turnover, attrition and retention rates. Staff turnover is a familiar term to most of us, but the ramifications of turnover in a business are often overlooked. Understanding the factors which influence staff turnover can help you to keep top talent and cut recruitment and onboarding costs.

While a high employee turnover can be damaging, that doesn’t mean you want to stop every employee from leaving your business ever again. Onboarding new employees and letting go those who may have reached the end of their employee lifecycle in your company is a natural process for any employer. Maintaining a healthy turnover rate keeps fresh ideas coming and keeps your business focused on the future.

However, employee turnover becomes problematic if your annual turnover percentage is particularly high for your industry, if you lose many employees in their first year or if your company is losing high performing employees. Employees may be inclined to leave your organisation by either a ‘push’ or ‘pull’ factors, or most often a combination of both.

Push factors in employee turnover are linked to job dissatisfaction, a change in circumstances or a lack of growth opportunities in the workplace.

Pull factors in staff turnover are usually external and involve an employee being attracted or ‘pulled’ toward an alternative position. This can be caused by a number of reasons: better work life balance, flexible working or financial gain.

Both push and pull factors can be indicators of your workforce morale, as your employees will see what attracts their coworkers to another company and this may cause them to reevaluate whether their role is meeting their expectations.

How can I measure turnover?

There are two metrics that can be used to measure employees leaving your company- turnover rate and attrition rate. Though these terms often get conflated, the differences between turnover and attrition can have significant impacts on profits, HR policies and practise and help you to understand whether your HR strategies are working for you or against you.

What is employee turnover rate?
The employee turnover rate is the rate at which employees leave during a specific period of time and have to be replaced by the organisation. This could be in their first year, over several months, all the way to a five-year period. Employee turnover rate covers both voluntary turnover, such as resignations and retirement, and involuntary turnover cases such as layoffs and disciplinary action.

The employee turnover rate doesn’t typically include internal turnover (employees who “leave” their position because they were transferred to another department or who were promoted). Turnover is a metric specifically used to calculate those who leave your organisation.

What is attrition rate?

The attrition rate of a business is the rate at which employees voluntarily leave their position at a company and their position is not re-filled. Attrition is a strategic decision in an organisation, often to reduce costs and streamline a workforce.

Involuntary turnover due to layoffs cannot be included in a company’s attrition rate as attrition is dependant on the voluntary departure of an employee.

Attrition rates are not as commonly discussed as turnover rates, but can have significant impacts on reducing an organisation’s bottom line figures.

What is the average employee turnover rate?

In the UK the average annual employee turnover rate is 15% but according to various reports the number of employees actively searching for new positions could be as high as 24%. Taking attrition into account, the average annual turnover would be slightly less and average employee turnover rates do vary depending on the sector that you work in. Private sectors like retail and sales have higher rates of staff turnover than the public sectors, education sectors, and legal and accountancy sectors.

How do I calculate employee turnover rate?

Calculating annual staff turnover is very simple to deduce and takes just two steps.

For example, say you have 10 employees at the start of the year and 20 at the end of the year. During that year, 5 employees left. To calculate the annual turnover rate, you will need to:

Step One:
(total employees at the start of the year) + (total employees at the end of the year) ÷ 2 = Average number of employees during the year

Eg: (10 + 20) ÷ 2 = 15

Step Two:
(Number of employees who left during the year) ÷ (Average number of employees during the year) × 100 = Annual Turnover Percentage

Eg: (5 ÷ 15) × 100 = 33%

This employee turnover calculation can be adapted to suit any period of time that you find useful for your metrics. Instead of calculating annual turnover, you could gain valuable insights from quarterly turnover, particularly if you’re in an industry which has a typically higher turnover rate, like hospitality. Simply use the time frame you want.

What is the ideal employee turnover rate?

Defining a healthy turnover rate depends entirely on your business as some companies may benefit from higher turnover rate and others will suffer for them, this will depend on your industry, growth opportunities and business size.

What matters most is who is leaving. If lower performers leave, then this benefits your business, particularly in cases of attrition. If higher performers leave, then this can hurt your company. The tricky part is that you cannot always deduce a high-performing employee from a poor-performing employee right away. It can takes months or even up to a year for new hires to settle and start reaching their potential.

Having an employee turnover around the national average is a good ballpark to start with, but be wary if you have a high first-year turnover rate, as this will incur the highest costs.

How can I make more of my employees high performers?

No employee is inherently a low-performer or a high-performer. Of course, there are those who will more naturally fall into the rhythm of your organisation, but it doesn’t mean an employee who is struggling cannot be an asset to your business.

Offering comprehensive learning and development opportunities in the workplace is a great way to increase employee engagement, increase profits and reduce staff turnover. With regular performance reviews, you can ensure your employees are aware of their performance in the workforce, the expectations of your business and where to improve.

Incorporating a performance management system into your HR practise can increase the value of your employees for your business and boots retention rates.

Why is employee turnover important for your business?

There are several insights that you can glean when you calculate your staff turnover rate.

While low turnover rates may seem like a good thing, many people will stay with a company not out of loyalty but out of familiarity. These employees can be a detriment to your company if they are demotivated or performing poorly. Hiring new employees can keep workforce motivation high and benefit your teams by bringing fresh new ideas and new perspectives that keep your business growing.

Too high, however, and you will incur unnecessary costs. Recruitment costs, onboarding costs, and training costs all add up. Most employees won’t reach their maximum productivity levels until six months to a year into their new position, so a high turnover in the first year of employment is a big issue.

How Can I Improve Retention of Valuable Employees?

We’ve talked about the importance keeping your high-performers in your organisation, but what are the best ways to increase retention in your workforce?

Provide Growth and Advancement for High-Performing Employees
You must give employees a future with your company. Anyone working in the same position without any chance to grow or progress is going to start to falter. By building in means for employees to take on new responsibilities and grow their career with you, you give high-performers ample reason to push themselves harder.

Conduct Exit Interviews
Understanding why your talent is leaving your organisation is invaluable information to reduce turnover and increase retention. Conducting exit interviews enables you to hear directly what combination of ‘push’ and ‘pull’ factors motivated your staff to leave. Exit interviews can be particularly useful for attrition rates as employers can understand where to streamline business processes.

Exit interviews can inform where your organisation can improve employee engagement or where your competitors have the edge. Find 10 Common Exit Interview Questions To Improve Your Organisation here.

The Right Hiring Process
It’s inevitable that you’re going to lose employees and have a natural annual turnover in your business. However, ensuring you’re hiring the right candidates is the first step in maintaining a low turnover for your business. Use onboarding and recruitment software to inform your hiring process and ensure you acquire the best talent for your workforce.

Improve Your HR Strategy
HR are not just there to handle the recruiting process and payroll. Their work, when done effectively, can help you understand the human capital of your organisation. HR strategy can help inform turnover rate insights and can help you understand a high-performing employee from a low-performing employee. These are more complex issues, however, and can only be conducted once you improve the productivity and efficiency of your HR team.

Determining employee turnover and attrition rates are invaluable insights for your company and can shed light on deep-rooted issues in your organisation. Using quantifiable data and holistic insights, turnover and attrition can help you to determine what motivates employee departures.

Improving HR strategy is one of the first steps to understanding your turnover and making your turnover work for you. Forward-thinking HR professionals are proactively developing strategic plans that align with business objectives, translating into organisational success. Access resources where we get into the ins and outs of this below: