Industry and employment news is filled with stories of employees moving on to greener pastures now that the job market has opened up a bit. This coming and going is generally referred to as “turnover.” As a small business owner, why should you care? What impact does turnover have on your business? We are going to attempt to answer those questions in this article.
1. What is turnover?
Turnover is the rate at which you gain and lose employees. In other words, it’s a measurement of how long employees tend to stay, contrasted against the rate at which they leave — voluntarily or involuntarily. Turnover is often measured for individual companies, but industry turnover ratios are also tracked by the Bureau of Labor Statistics. For example, turnover rates in hospitality jobs tend to be higher compared to government positions.
This is useful information to small-business owners, since having high turnover relative to your industry competitors may indicate an internal issue you need to address. High turnover can harm your company’s productivity especially when you consider the investment you make in recruiting, hiring and training employees. Shorter than average tenure could mean you’re not getting the best return on your hiring investment, and that is costly to a growing small business.
2. Why should I care about turnover?
Employee turnover is costly. The Bureau of Labor Statistics estimates that in January 2014, the median length of time an employee worked for an employer was 4.6 years. Recently, Recruiterbox.com reported the cost to hire an employee can be as high as $5,000 or more depending on the position and industry. If you lose three employees a year that’s $15,000 taken from your bottom line. Can you afford to throw away that kind of money? But the cost hemorrhage doesn’t stop there. Additional tangible and intangible losses you must account for include:
- Cost to process termination
- Pre-employment costs to hire replacement
- Vacancy costs for temp to cover open position
- Declining productivity due to change in team dynamics
- Increased stress and tension to meet increased workloads due to vacancy
- Loss of vital “tribal knowledge”
These are all very real costs for small businesses, and in many cases you will see the negative impact of turnover on your business very quickly.
3. How do I calculate turnover in my business?
Calculating turnover in your business is a fairly straightforward process. The most common calculation involves figuring monthly turnover. In this case, all you need is this formula:
Monthly turnover rate = (# of separations in month / # of employees in month) X 100
When determining the number of employees, be sure to include all employees on your payroll — don’t forget any employees on temporary layoff, leave of absence, or furlough. Do not include temporary workers paid through an agency or independent contractors.
Depending on the nature of your business, it might be more useful to calculate quarterly or annual turnover, and also compare turnover metrics between involuntary and voluntary separation. Let’s look at the difference between involuntary and voluntary separation:
- Involuntary Separation: This is what happens when the employer, not the employee, makes the decision to terminate the employment relationship. Being laid off is considered involuntary, so is termination for performance, absenteeism, insubordination, etc.
- Voluntary Separation: This is what happens when the employee leaves the position; quits, retires, resigns, abandons job, fails to return from approved leave of absence, etc.
So, look at turnover in these two categories. For example, if you had an average of 125 employees in 2016, a total of 10 involuntary terminations, and 5 voluntary separations in the year, your calculations would look like this:
Involuntary turnover: (10/125) X 100 = 8% for 2016
Voluntary turnover: (5/125) X 100 = 4% for 2016
Total turnover: (15/125) X 100 = 12% for 2016
4. I know the turnover rate for my business and also understand the cost. What more do I need to know?
Generally speaking, turnover is bad for business. You’ve calculated the cost to replace a valuable employee who voluntarily leaves and know it’s high. Conversely, the price to keep, coach and manage a difficult employee is equally as high and may eventually lead to a costly involuntarily termination. To reduce turnover, it’s important to analyze your data and take necessary steps to improve employee motivation and engagement. Here are a few steps to get started:
- Maintain a turnover file. This may be an electronic file folder on your computer, or hard copies of documentation you keep. The goal is to monitor the comings and goings of your employees by tracking:
- Length of employment
- Position held
- Reason for leaving
- Watch for trends. As you gather information about attrition, you will likely notice a trend. For instance, are there certain positions in your business often left vacant? What is the potential reason for this? Do you notice employees stay for a certain period of time, and then leave? Are they moving to a competitor, seeking more opportunities or leaving for some other reason?
- Resolve problems immediately. Once you’ve identified attrition trends, take immediate action to fix the problem. If exit interviews reveal people leave due to inadequate pay, research compensation data to determine if your pay is in alignment with the demands of the position and the industry. If people leave to pursue better career opportunities, either make sure you’re communicating the limitations of growth in certain positions during the hiring process, or look for ways to build in growth opportunities for valuable employees you want to keep.
5. I run a good business, but people still leave. I don’t understand why. Help!
Turnover isn’t always a direct reflection of the quality and value of you personally, your character, or your business. Sometimes external factors beyond your control affect turnover. Even still, understanding the external issues facing all employers, not just small-business owners, will help you prepare for the challenges and make internal changes that can minimize the impact on your business.