Easy Calculation for Employee Turnover
What is a healthy level of employee turnover? And how does your business measure up? Monitoring employee turnover is one of the easiest, and most informative, metrics to track.
If I asked you, ‘what is your employee turnover for the last year as a percentage?’, would you know the answer? For many businesses, the answer is no. But it’s really not that hard to calculate your staff turnover, and the results can tell you a great deal about your business.
‘it’s really not that hard to calculate your staff turnover, and the results can tell you a great deal about your business’
Employee turnover is costly
Depending on which article you read, or which people you speak to, it can cost anywhere from 50% of the person’s salary, through to 200%. The reason for this wide range is that the cost depends:
- the type of role
- how long the person’s been with you
- the level of skills and knowledge the person had
So let’s say that I have an administrative assistant in my business, who earns about $70,000 per year. If they leave after six months, it’s really inconvenient and very disruptive. But in six months, they haven’t made a huge impact on the business. They probably haven’t put a lot of new processes or systems in place.
So really our costs at that point are
- the initial recruitment cost when we brought that person in
- the productivity cost of whoever it was that was trying to train the person up
- the productivity loss in terms of having a new person there in the first place.
So with that kind of example, you might be at the lower end of the turnover cost.
But if that same person had been with my business for six or seven years, then I could be getting further to the top of that percentage range. Their role likely impacts on lots of processes and systems and stakeholders, and losing that long-term employee is likely to cost closer to 200% of their salary, because there’s so many indirect costs as well.
‘losing that long-term employee is likely to cost closer to 200% of their salary’
Direct and indirect costs
What do I mean by indirect costs? First let’s look at the direct costs of hiring a new person. These are things like:
- job ads
- recruitment agency fees
- psychometric tests
- time of the hiring manager
- training the new employee into their role, including training courses.
But there are also indirect costs, things like:
- productivity loss during the time of the vacancy
- productivity loss while the new person gets up to speed.
- morale among other team members, because a missing team member reduces their productivity, and could also encourage them to look for a new job.
- poor customer service or poor stakeholder relationships prior to the person leaving because they’re headed somewhere else, and also while their replacement learns.
Why measure staff turnover?
The reason to measure employee turnover is because it can be an enormous cost to our business. This is particularly true in smaller businesses, where there’s often a single person in a role, creating a lot of core, single-person dependency. If you don’t measure something, it’s impossible to quantify it or to know whether an issue is improving over time.
‘If you don’t measure something, it’s impossible to quantify it‘
Data can also tell you how you sit in the marketplace. Are you an employer that can retain people? Or are people continually walking out the door? Because that sends a big signal to the rest of our employees and our clients.
Tracking employee turnover also helps us to understand what our culture looks like. Sometimes it can be difficult as a business owner to get an objective view. We think, ‘Oh, we have a great workplace culture’, but our employees may not agree.
Perceptions of employee turnover
Many years ago I did an engagement survey for an organisation and one of the questions was, ‘do you think you will still be working here in two years time?’ Over 50% of people said, ‘No, I don’t think I will be here in two years’.
I remember some of the members of the senior management team were really surprised by those results, saying, ‘Hang on, the tenure in this company is really good. So why would we have 50% of people say they don’t think they’ll be working here in two years?’
When I looked at the employee turnover numbers, I saw that over the last three to four years, that company turnover had been over 25%. So although the senior management team didn’t see the turnover, because their direct reports hadn’t left, if you looked across the whole organisation, people were feeling the impacts of one in four staff members leaving every year.
When that’s happening, people start wondering ‘why is everyone leaving?’, and they begin to think about those small things that might annoy them, which suddenly become big things. For example, ‘the company always does this’, ‘we’re so bad at that’. People start to think, well, there are other options out there, maybe I should go and explore them.
How to calculate staff turnover
It’s important to have a calculation for your employee turnover and to measure this regularly. Here’s a simple way to calculate it. You’ll need to pick a period (say, a calendar year) and take three numbers:
- the number of employees you had at the start of the period
- the number of employees you had at the end of the period.
- the number of employees who left during the period
First you calculate the average number of employees, then you divide the number that left during the period by the average number of employees.
For example, say in my business:
- 27 were employed at the start of the year
- 32 were employed at the end of the year
- 8 employees left during the year
In that case, my average employee number is 29.5:
(27 + 32) ÷ 2 = 29.5
Now I divide the number that left (8) by the average number of employees (29.5):
8 ÷ 29.5 = 0.27
Then I multiply that by 100, to give me a percentage, and that gives me 27%.
Calculating the cost of employee turnover
And what does a 27% turnover mean? To find out we need to quantify (put a price on) this example. The average full-time adult, ordinary time earnings in Australia is just over $90,000, according to the Australian Bureau of Statistics.
If we take a conservative approach, the cost of replacing an employee is 50%. That would mean that each person who leaves costs the business just over $45,000, which means losing our eight people costs us a total of about $360,000.
Now let’s take it a step further. A business of around 30 employees could be generating around $5 million per year. So what is the percentage loss of $360,000 to that $5 million? It’s about 7%. That means that employee turnover this year is costing us, conservatively, the equivalent of 7% of our revenue. That is a very large cost to the business.
So you might be thinking, okay, 27% is pretty high, right? So let’s say that we have a 12% turnover rate, and we have 30 employees. That means that about 3.6 people are leaving per year. So let’s do a higher turnover cost. It’s still conservative, but I’m going to say that my turnover cost is 75% of the salary. That means the cost is $243,000 and for our $5 million business, that is still 5% of the revenue.
So as you can see, so much of this is not just your overall turnover percentage. But it’s also what you consider to be the turnover cost in your business as a percentage of salary. If you want to quantify it more precisely, you can get an Excel spreadsheet and you can start to put in the costs of people coming into the business.
The direct costs are easy to calculate, the indirect costs are more difficult. But even with those indirect costs, you can still make some calculations based on assumptions. For example, you can assume that if one person is leaving per month, an additional one person is probably going to leave every six months, and you can still quantify that.
Or if you decide not to make assumptions, you can quantify the manager time of recruitment. Take the average manager salary, that average hours to recruit, that average hours in onboarding, and you can start to calculate all of that up to give you a cost for your turnover.
What’s the right level of staff turnover?
If your rate is 27%, is that low? Is it average? Is it high? What is a healthy turnover rate?
This is a difficult question to work through because it’s going to depend on your industry, and also your individual business.
The Australian Human Resources Institute reports every four years on average turnover. Their last report in 2018 indicated that businesses with under 100 employees had the highest average turnover at 22%. And across all business sizes, it was an average of 18%. When asked, most respondents considered the ideal amount of turnover would be 1% to 10%. So turnover in businesses, on average, is double what we think is ideal.
Personally, I have found that if your business has less than 10% turnover, it can lead to other challenges. There isn’t enough movement to enable staff development and career paths, and you lose the opportunity to onboard new people. So you may not get an injection of ideas or a fresh set of eyes, which leads to groupthink.
My belief is that 10% to 20% turnover is a better goal. But again, what is best for your business may be different. If you only have five employees, it may be better to have 1% to 10% turnover because you really only want one person leaving every couple of years. But if you have 30 to 40 employees, 15% to 20% may be right for you.
Resignations, redundancies or terminations
Some businesses take the calculations a step further, and look beyond the overall percentage (ie using the calculation earlier), to track if they were resignations, redundancies or terminations.
This is helpful if you’ve gone through a redundancy programme, or you’re looking at employer-led termination. It’s important to track performance-based terminations, because a high number can suggest there’s an issue in your recruitment. For example, you’re recruiting the wrong people, you’re not giving a realistic picture of the job or the company, or there’s an issue with the manager of those roles.
I usually suggest that you break out the turnover into resignations, redundancies and terminations only if you have a redundancy programme. It’s also a great idea to break out the turnover to track the number of people leaving within the first 12 months. Because that’s another indicator that something’s going on in your organisation that you should look into.
When you have high turnover, it is not just costly, but it’s also really difficult to gain traction on projects. And that can damage your reputation with your clients. It can cause disruption and distractions to the rest of your team. And that all impacts on the performance of your business. So ideally, you want to create a workplace that encourages people to grow and stay with you. If you reduce turnover you’ll see an impact on your bottom line.
If you aren’t already, ask your accountant to give you the number of employees you had at the start and at the end of a 12-month period, and the number of people that left. Then get a piece of paper and do the calculation to get your percentage.
Ask yourself, does that percentage sound okay, in the industry that I’m in, in how this is translating in my business? Are we getting projects done? Are people telling me that they love working here? Does it feel like the turnover percentage is about right for you? Or does it feel like it’s too low or too high?
And then set yourself a goal for the next 12 months, can you reduce your percentage? I know it’s more difficult to reduce when you have a smaller business because just one extra person leaving could really throw your figures out.
But remember the old saying — what gets measured gets managed. I encourage you to have a look at your percentage today and again in 12 months’ time. And make sure you’re checking it at least every three months as well.