Turnover: Why Is It Important?

Your firm’s employees are its most valuable asset. Any statistic that relates to them and their activities has to be one that is crucial to the business’s success, and turnover is no exception.

Out of all the metrics out there giving us information about a company’s activities, turnover is the one that pops its head out most often. It is easy to calculate and is a good measure to have on hand, but what does it really tell us?

By understanding what this number really means, how it can be used to calculate other important numbers, and what types of turnover exist, we can start to see why it is so important to pay attention to.

In this blog, we’ll discuss:

• What turnover is about
• How to calculate its rate
• Turnover types
• Consequences of having a high turnover rate
• Different approaches to tackling high turnover
• If a high turnover rate is always bad

With that being said, let’s take a deeper dive into all things turnover-related!

What Is Turnover?

At its most basic level, turnover is the percentage of employees that leave a company within a certain period of time.

To calculate it, you simply take the number of employees who left and divide it by the total number of employees at the beginning of that period.

This number gives you the turnover rate, which is a key number companies use to judge their success in retaining employees.

This number can be reported monthly, quarterly, or annually. The time frame will usually depend on how quickly your business grows or how often people tend to change jobs in your industry.

How Do You Calculate The Turnover Rate?

Let’s illustrate turnover in an example so we can gain a deeper understanding of the number and the different ways in which it can be calculated.

Imagine you have a company with 100 employees throughout the entire year. In a given year, 10 of those employees leave the company. This would give you a turnover rate of 10%.

The calculation we perform is: the number of employees that left/the total number of employees.

However, this situation changes slightly when you make hires throughout the year as well.

Imagine you have a company with 100 employees at the beginning of the year, 10 employees leave the company and 20 more are hired throughout the year, giving you a net 110 employees by the end of the year.

To calculate turnover in this case, we take the number of leavers (10) and divide it by the average number of employees at the beginning and the end of the year.

We started off with 100 employees at the start of the year, and ended with 110 after all the hires and separations. Therefore the average number is (100+110)/2 = 105 employees. This gives us a turnover rate of 9.52%.

As you can see, the calculation is different when terminations and hires are made throughout the year. The first method is used when there are no separations or additions during the year, while the second one accounts for changes in employee numbers.

It’s far more likely that you’ll make hires throughout the year, so the second method of calculating turnover is the most relevant one to look at.

Types Of Turnover

There are a few other types of turnover that we need to be aware of so that we can fully understand this number. Let’s go through each one in further detail:

Gross Turnover

First, we have what is called gross turnover. Gross turnover includes all separations from the company, whether they were voluntary or involuntary.

Voluntary separations are those in which the employee decides to leave, while involuntary separations are those in which the company terminates the employee.

Gross turnover is important to track because it will give you a good idea of how many employees are leaving the company overall. However, it’s not as useful when trying to pinpoint problem areas within the company since it lumps together all separations.

We tend to use this type of turnover most when we’re referring to the turnover rate, as it’s the easiest to calculate and compare against other companies.

Net Turnover

Next, we have net turnover. Net turnover only includes voluntary separations and does not take into account involuntary separations.

This number is useful when trying to identify retention problems since it eliminates any employees that were terminated by the company on purpose.

If you see a high net turnover rate, it could be an indication that your company has a problem with morale or that employees are not happy with their current situation.

This type of turnover is most useful when you’re trying to pinpoint specific areas of improvement within the company.

Revolving Door Turnover

The third type of turnover is revolving door turnover. This is when an employee leaves the company and is immediately replaced by another employee.

The number of employees leaving and joining the company stays relatively constant, hence the term “revolving door.”

This type of turnover can be a problem if it’s happening too often, as it can indicate that your company is not a desirable place to work.

Employees may not feel like they have enough opportunity to grow or advance in their career, so they leave in search of greener pastures.

If you see a high revolving door turnover rate, it’s important to take a closer look at why employees are leaving and what can be done to improve the situation.

Other Types Of Turnover

There are a number of other types of turnover which we can calculate separately depending on our needs. Here’s a closer look at some of them:

Functional Turnover

This is when employees leave a specific department or function within the company.

This type of turnover can be a problem if it’s happening in a critical area of the business, such as engineering or sales.

Voluntary Versus Involuntary

As we mentioned before, voluntary separations are those in which the employee decides to leave, while involuntary separations are those in which the company terminates the employee.

It’s important to track both types of turnover so that you can identify any potential retention problems.

Age

You can also track turnover by age group to see if there are any trends among employees of different generations.

For example, you may find that Gen Z are more likely to leave the company after a few years than older employees.

Tenure

Turnover can also be tracked by length of tenure, which is the amount of time an employee has been with the company.

This type of turnover is important to track because it can help you identify any potential retention problems.

Position

Turnover tracking by position can also be very useful to see if there are any trends among different types of employees.

For example, you may find that managers are more likely to leave the company than entry-level employees.

5 Consequences Of A High Turnover Rate

A high turnover rate isn’t usually a good thing, and there are quite a few reasons for us to reach that conclusion.

Here are five of the most common consequences that arise when a company has a high turnover rate:

1. Lowered Morale Among The Employees Who Stay

When people see that their co-workers are leaving left and right, they can start to feel like they are next. This lowers morale and motivation among the employees who stay, which in turn can lead to even more turnover.

This consequence usually arises with high levels of involuntary turnover where employees get fired. It is less likely to be an issue when employees are leaving of their own accordion (voluntary turnover).

2. Increased Costs

It costs money to hire and train new employees, so when you have a high turnover rate, those costs add up quickly.

Not only that, but if you have to keep hiring replacements for the same position, it starts to look bad to potential candidates.

It’s a definite red flag if a particular position keeps resulting in the employee leaving and sends a signal that there’s something wrong with the company.

3. Lower Quality Of Work

When you have a high turnover rate, it can be hard to maintain the same level of quality in your work.

This is because new employees might not be as qualified or experienced as the ones who left, and they might need more time to get up to speed.

4. Difficulty Building Relationships

If your company has a high turnover rate, it can be difficult to build strong relationships with clients or customers. This is because the people they deal with are always changing, and it can be hard to keep track of who is who.

Clients want a face they can speak to on a consistent basis, and if this face keeps changing, the client may not be able to forge a close relationship with the firm.

5. Missed Opportunities

High turnover also means you might miss out on opportunities to promote from within or develop your employees. If the people in those positions are always changing, there is no stability on the management side which spells bad news for the firm’s future.

What Do You Do If Your Company Has High Turnover?

If you are looking at your company’s turnover rate and thinking that it is too high, there are a few things you can do to improve the situation. Here are 5 actionable ways to address the situation accordingly:

1. Take A Look At Why People Are Leaving

This can be done through exit interviews or surveys. Once you know what the reasons are, you can start to address them.

Maybe employees are leaving because they don’t feel like they have room to grow in their position. In that case, you could start offering more training or development opportunities.

2. Focus on Retention

Offer more competitive salaries and benefits, or create a better work-life balance. If your employees feel like they are valued and appreciated, they will be less likely to leave.

3. Try To Improve The Onboarding Process For New Employees

This can help them feel more comfortable and welcomed, and it can help them hit the ground running so they are less likely to quit in the first few months.

4. Increase Communication

Let employees know about company changes or updates that might affect them, and give them a chance to provide feedback or ask questions. If employees feel like they are in the loop, they will be less likely to feel like they need to leave.

5. Make Your Workplace More Fun And Enjoyable

This can be done by organizing social events or outings, or by offering perks like free food or gym memberships. If employees enjoy coming to work, they will be less likely to want to leave.

Is a High Turnover Rate Always Bad?

In a few cases, it might be normal to have a high turnover rate which means there is nothing to worry about with your company. Think of situations where:

• People are only staying for a short period of time because it is an internship or training program;
• The company is in a high growth phase and people are being hired and promoted quickly;
• The company is trying to cut costs and are firing people to get this done.
• Outsourcing has become the preferred option resulting in in-house teams being fired.

In these cases, the high turnover rate is actually a good thing and is nothing to be concerned about.

It is only when the turnover rate is high and it isn’t due to any of the above reasons that you need to start looking into what might be causing it.

Final Thoughts

Now that we can define turnover, know about the the different types of turnover, and have discussed the consequences and reasons for a high turnover  – it’s time to ask the question: why should companies care so much about this number?

The answer is simple: because employee retention is key to a company’s success.

As discussed above, the costs associated with recruiting and training new employees are high, so it’s in a company’s best interest to keep the employees it has.

In addition, happy and engaged employees are more productive, which leads to higher profits.

Turnover can also be a sign of bigger problems within a company.

If turnover is high, it could be a sign that employees are not happy with their jobs or that the company is not providing adequate training or development opportunities.

To wrap up, it’s clear that turnover plays a very important part in a company’s success. Every firm should pay close attention to its turnover rate and the underlying issues it represents.