Of the many HR metrics we study, perhaps some of the most requested are turnover metrics. It’s important to know how much turnover we have so we can make estimates on how much this turnover is costing the organization and to take steps to reduce both the turnover and the associated costs. These costs have a direct impact on the profitability of the organization.
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Basics First: Measuring Turnover Rate
First things first. The total turnover rate is measured by dividing the number of employees who have left the organization (often called “separations”) by the total (or average) number of employees on payroll during the same time frame. Multiply the answer by 100 to get the percentage.
This could be measured on any frequency you require, such as monthly, quarterly, or annually. If applicable to your organization, take seasonal fluctuations into account.
Most organizations include both voluntary and involuntary separations in this calculation of total turnover. However, some find it useful to separate the two figures and have two separate rates, as this can help to uncover some of the reasons behind the turnover. Depending on the needs of your organization, you may opt to make this number even more granular by making further distinctions, such as excluding retiring employees from the figure, as these may be viewed differently than losing an employee to a competitor or terminating the employee. Some organizations also look at things like new hire turnover, counting only those who left within their first 12 months of employment.
As with most statistical measures, most organizations find it beneficial to watch the trends and to compare against internal and external benchmarks. For example, if your organization’s turnover rate this year is 10%, that number has more meaning if you know that your historic turnover has been 14%, and the industry average is 15%.
Turnover Costs: What to Include
Calculating the turnover rate is just the beginning, of course. The next question is: How much is the turnover costing the organization? Every organization may differ in terms of what it would like to include in the cost of turnover, but here are some of the most commonly included costs to consider.
Costs when an employee leaves, such as:
- Severance pay or continuation of benefits when applicable.
- Possible fluctuations in unemployment insurance costs.
- Time and money spent by HR and other managers conducting disciplinary measures, when applicable.
- Time and money spent by HR and other managers conducting exit interviews, when applicable.
- Time and money for other expenses associated with the leaving employee, such as paperwork to be filed, administrative changes in the organization, security updates, and recordkeeping.
- Lost productivity while no one is in the position, and/or costs of temporary workers, contract labor, or overtime of other employees to make up the shortfall.
Costs to bring a new hire into the organization:
- Hiring: recruiting, advertising, running background checks, drug screening, etc.
- Administrative time and costs, such as time spent conducting interviews, reviewing applications, calling references, and working with recruiters.
- Training costs for the new hire.
- Other time spent onboarding and bringing an employee up to speed on company culture, expectations, employer policies, etc.
- Benefits paid upon hire, such as relocation expenses or hiring bonuses.
- Lost productivity while the new hire comes up to speed.
- Administrative costs such as setting up a new employee in all systems and getting all tools necessary and all security updates.
As you can see, there are many costs to take into account when figuring how much turnover costs the organization. Once these have been calculated for a few roles within the organization, it’s often easiest to apply an average cost per employee to get a ballpark figure of turnover costs. Alternatively, sometimes it makes sense to express this as a percentage of the annual salary for the role, assuming the general costs involved will vary in accordance with the role in question.
What costs does your organization include when calculating the cost of turnover?
*This article does not constitute legal advice. Always consult legal counsel with specific questions.
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.