In our modern world, employees do not tend to stick around with the same employer for their entire careers. Employees come and go for different causes in any business: maybe a better job, starting a family, or retiring. Regardless of their motivation, leaving a company is a normal process of the business balance.
According to a Gallup Workforce study, half of U.S. employees were watching the job market or actively looking for a job. So, at one point, if your business is more than just one person, you will most likely deal with employee turnover.
But, when too many employees are regularly leaving, it can become a problem for your business - affecting productivity, morale, and, ultimately, company growth.
That is the reason why employee turnover is a significant concern for businesses of all sizes, as workers leaving an organization for another one can create considerable costs for employers. That is why it is crucial to know:
Turnover in human resources means the act of substituting one employee with a new employee. Termination, retirement, death, transfers, and resignations are all examples of separations between organizations and employees.
In the HR specialized language, when we talk about the turnover of staff turnover or labor turnover, we talk about the same thing: the rate at which an employer loses employees. It shows the period employees tend to stay within a company.
Therefore, employee turnover is the measurement of the number of employees who leave an organization during a specified time, typically one year. While an organization usually measures the total number of employees who leave, turnover can also apply to subcategories within an organization like individual departments or demographic groups. The turnover includes any employee departure, including resignations, layoffs, terminations, retirements, location transfers, or even deaths.
When the number of employees who have terminated their association with the company is expressed as a percentage of the total average employees in a company, we have an employee turnover rate. This percentage is usually calculated for yearly periods, but quarterly and bi-annual turnover rates can also be calculated.
Employee turnover is unavoidable as employees will always leave for better opportunities, studies, resignations, dismissals, or retire. However, these factors cause a small amount of employee turnover rate and may even be advantageous for a company. The benefit appears because it will lead to new personnel's injection of new ideas and different perspectives. High employee turnover is, however, undesirable as it can destroy a company's structure.
Related: Termination letter templates.
At first glance, the phrase "employee turnover" has a negative connotation – a stigma associated with an employer's obligation to reduce turnover at all costs. However, there are different types of turnover, some with a negative impact on business, while others positively influence the working environment.
Positive Types of Employee Turnover
Positive turnover occurs when the workforce changes due to new employees bringing fresh ideas and perspectives to the company and replacing workers who are terminated for poor performance. Bringing new talent in an organization can re-energize the workplace, increase productivity, and boost profitability.
Replacing a stagnant workforce can be costly; however, employers ultimately realize the return on investment in recruitment and selection processes for new and fully engaged employees.
Negative Types of Employee Turnover
It is easy to understand why turnover is considered negative: mass layoffs, business closure, and plant shutdowns might be classified as negative or undesirable turnover – layoffs have a devastating impact on workers and the surrounding community. The adverse effects of losing jobs in certain areas can create a downward spiraling impact on economic conditions for employees of other nearby companies. For example, when employees suffer job loss from a plant shutdown, surrounding companies that provide services such as meals, transportation, and other services also suffer from lost revenue.
While the effect can be positive or negative, many possibilities may lead to your employee’s exit. Employee turnover does not only happen when an employee says: “I quit!” or an employer says: “You are fired!”
Whether the employees leave voluntarily or involuntary, they retire, or they are subject to an internal transfer, the managers need to find the underlying cause of why they are leaving in the first place.
The general rule is that employees’ retirements are inevitable and out of a company’s control. But there are situations when employees get disengaged for various reasons, and they choose to enter retirement early. Organizations need to learn what led to this unexpected retirement so they act appropriately to engage and retain older and more experienced employees.
Internal transfers usually involve employees taking new positions within the same organization. While this type of employee turnover can be a sign of a healthy balance, there may be other intentions behind the employee’s move. Are they genuinely interested in another department's role, or are they running from a bad manager, distrust in coworkers, or a lack of growth opportunities?
But the main types of employee turnover are:
Voluntary employee turnover occurs when an employee chooses to leave the company. Employees who resign, retire, or simply leave the organization for other reasons are all voluntary turnover examples.
While some voluntary turnover instances may occur because employees are dissatisfied, several employees resign for reasons unrelated to working conditions. Examples of voluntary turnover for non-work-related reasons are:
Involuntary employee turnover happens when the employee's decision to leave is not in his/her hands. It usually occurs when a company implements budget cuts, structural reorganization, or similar actions where the company decides for an employee to leave. Employees who witness regular involuntary turnover or terminations might be stressed out and concerned about their job security.
In many cases, it is the employee who decides to leave an organization. However, there are lots of situations when the company initiates it. If the company is at fault, it is necessary to ask yourself what you can do to lower the turnover rate within the company? Finding the answer to the right question is the first place to start if you want to make improvements.
Here are some of the most common causes of turnover and tips on how to reduce it:
Reason 1: The salary is unsatisfactory
If your organization offers miserly wages and hesitates to give raises, chances are your team members will continuously be on the lookout for a better-paid job. It is not always possible for a company to offer a competitive salary to keep up with other companies. Still, the managers should investigate other forms of rewarding the employees for keeping their workforce motivated.
Tip: We have a free people management skills guidebook with leading strategies to help you become a better manager.
There are many ways to make a job offer more attractive, from traditional benefits like medical insurance to non-traditional ones like onsite childcare. The benefits you offer reflect how much you value your employees; it is not always the monetary salary that wins out.
Reason 2: Lack of growth opportunities
Being stuck is not a pleasant feeling; nobody likes to feel stuck in their personal or professional lives. A discouraged employee lacks motivation, and that is the least you want happening to your business. If you never offer your staff career development opportunities, do not be surprised when they are leaving.
Seeing employees leave for other firms can be avoided by creating an environment with growth opportunities for all employees. Investing in your employees is essential if you want to improve your employee retention. According to a recent LinkedIn’s workplace learning report, 94% of employees would stay with a company longer if they invested in their career development. Invest in training and development and support your employees’ professional goals by having career conversations often during your one-on-one meetings. Show your workers employees that those who work well are seen and rewarded.
Reason 3: Toxic work environment
A company where everyone fights is a direct path to employees leaving. No one likes to work in an unhealthy, stressful environment. You do not need to be friends with everyone, but to gain your employee’s loyalty, you must make them feel integrated and create an atmosphere of acceptance and understanding.
Take a look around. Do your employees seem happy? Or do they seem to be going through the motions? If your culture leaves something to be desired, take steps to improve it. An easy first step is to use surveys to get feedback from your employees. Remember: they spend at least a third of their day working and spending that time in a lousy environment ends up taking its toll.
Reason 4: Team members are treated differently
When somebody gets treated differently than everyone else, it is only a matter of time before other workers get angry. These inequities can also go beyond just playing favorites. They can take various forms and often unintentionally influence how we perceive and treat someone with a different background or gender.
Make it a top priority to treat all your employees the same. Do not play favorites. Make it a top priority to treat all of your employees the same. do not play favorites. Please look at your current policies to ensure they are fair and consider how your employees may negatively perceive your actions.
Reason 5: Employees are worked to the bone
When employees are overworked, it often leads to higher stress levels and employee burnout. These overworked and burned out employees will often jump ship to join companies that understand the importance of work-life balance.
To help reduce employee stress and decrease turnover, take a proactive approach. Make sure work is distributed evenly across your organization. If you are unsure whether your employees are overworked, the easiest way to find out is by asking them directly. You can also use anonymous surveys to figure out whether your employees feel they handle too much work each week. If the result shows they are overworked, it may be time to hire more employees - or bring freelancers into the mix.
Reason 6: Employees do not get along with their bosses
If many subordinates of the same manager are leaving in a short time, you can be sure there is something wrong with their professional relationship. Contrary to what managers might think, most of their employees who voluntarily leave the company are not doing so for a bigger salary. According to the Gallup Business Journal, at least 75% of the reasons for voluntary turnover can be influenced by managers.
Money is important, but it does not buy employee loyalty. And, in most cases, employees are quitting their bosses, not their jobs.
The turnover rate is defined as the percentage of employees who have terminated their association with the company within a certain period of time. This percentage is usually calculated for yearly periods, but quarterly and bi-annual turnover rates can also be calculated.
Businesses should aim to have a low turnover rate since high turnover is usually costly, since hiring new staff is time-consuming for the HR department. Having key positions open too long for the organization can be costly.
Based on voluntary and involuntary employee turnover, managers can calculate three types of employee turnover rates:
The mathematical formulas are best described not by words, but, obviously, numbers. So, here is an example of how to calculate the above-described rates:
If a company has 200 employees at the start of the year and then 4 are dismissed, 5 more resign and 5 are employed over the same year.
The number of employees at the end of the year is:
200 - 4 (dismissed) - 5 (resigns) + 5 (new employed) = 196
The average number of employees will be:
(200+196)/ 2 = 198
The voluntary employee turnover rate will be:
(5/198) X 100 = 2.5%
The involuntary employee turnover rate will be:
(4/198) X 100 = 2%
The total employee turnover rate will be:
(4+5)/198 X 100 = 4.5%
Transfers and promotions are not usually included while calculating employee turnover rate.
The quality of an organization's workforce determines the overall performance of such organization; performance in productivity, sales, quality of service delivery, and the organization's general management can all be traced to the quality of an organization's workforce.
High employee turnover is a warning sign of low morale among an organization's workforce, which is one factor that affects the organization's productivity.
The negative effects of high employee turnover are the following:
1. It is expensive
Employee turnover can be very costly for an organization, mainly if it is a voluntary resignation of human capital investment from the organization and the subsequent replacement process. These replacement costs may include the search of the external labor market for a possible substitute, selection between competing candidates, interviews, induction, formal and informal training of the replacement until they attain a reasonable level of performance that is equivalent to that of the individual who quit.
A research conducted by The Center for American Progress shows that for all positions, except for those requiring very specific skills, the typical cost of turnover was 21% of an employee’s annual salary.
2. It results in the loss of experienced employees
Building a culture that encourages knowledge transfer and succession is a crucial strategy for an organization's growth and sustainability. A high labor turnover rate results in an organization's inability to ensure continuity knowledge.
Losing an experienced employee is hard to deal with. Besides this, the organizations must search for a new candidate, and it takes years to get the level of knowledge and experience of the one who left the company.
3. It affects productivity
Employee productivity and overall performance can be negatively affected when there is high personnel turnover. Employee turnover leads to the loss of experienced and trained staff who know the organization's policies and goals and their roles in achieving these goals.
However, a new employee may require some time to learn these roles.
It takes a lot of time and resources for a new employee to reach the full productivity level of a departing employee. Therefore, high employee turnover means having many inexperienced employees, leading to lower employee productivity.
4. It affects profit
Aside from the cost of replacing an employee, other adverse effects could combine to affect a firm's profit. The cost settlement of employees' benefits (gratuity and others) and the cost of litigations, as some separations may lead to legal disputes, all combine to affect company performance, which ultimately affects the firm's overall profit.
Anything that tends to increase costs or reduce productivity or revenue will certainly reduce profit. A new business often takes months or years to achieve profitability, and unexpected expenses like high turnover can increase the time it takes a new venture to generate profit or break even.
5. Severe loss of valuable knowledge and experience
We know that financial resources are important; however, human capital can weigh even higher. Senior employees tend to carry a lot of know-how and experience gained over the years that the newcomers usually lack. A well-thought transition plan, a good playbook for each role, and actively coaching more junior staff is definitely the key to avoid such challenges.
Conclusion
There is extensive evidence that organizations, regardless of size, technological advances, market focus, are facing human resource challenges in today's highly competitive labor market. Employee turnovers are results of employees' dissatisfaction with one or more factors. Measures can be taken to prevent turnover and to improve other operating results as well.
There needs to be a greater appreciation of the costs and consequences of high staff turnover, and a willingness to change established personnel management practices. Employees are one of the most important determinants and leading factors that determine an organization's success in a competitive environment.
The way people are managed has a significant impact on their commitment and organizational performance. The advantages of gaining employee commitment have been perceived to be lower labor turnover, extra-role behavior, and better product quality and employee flexibility leading to the firms’ competitive advantage. Thus, given the contribution that a highly productive trained employee can make to organizational productivity, retaining such an employee should be a high priority to the organization. Businesses can secure this commitment by engaging in fair HR practices such as effective communication, increased participation, supportive management, and reasonable rewards.
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