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. 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 employees? 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 employee engagement survey for an organisation. 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. These members were saying, ‘Hang on, the company culture here is really good. So why would we have 50% of people say they don’t think they’ll be working here in two years?’
Looking at employee turnover numbers, I saw that over the last three to four years, company turnover had been over 25%.
Senior management didn’t see the turnover because their direct reports hadn’t left. Yet looking 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?’. 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 is important to have a calculation for employee turnover and to measure this regularly. Here’s a simple way to calculate employee turnover rate. 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, calculate the average number of employees. Next, divide the number who 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% annual turnover rate.
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%. This means that each person leaving costs the business just over $45,000. This in turn 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.
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.
As you can see, so much of this is not just your overall turnover percentage. It is also what you consider to be the turnover cost in your business as a percentage of salary. To quantify things more precisely, use an Excel spreadsheet and enter the costs of people coming into the business.
Calculating the direct costs is easy, indirect costs are a bit harder. But even with those indirect costs, you can still make some calculations based on assumptions. As an example, if one person is leaving each month, an additional person is probably going to leave every six months. 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, the average hours recruiting, and the average hours onboarding. You can start to calculate all of that up to give you a cost for your turnover.