Employee turnover rate: A key metric in human resources management. Conventional wisdom may tell you that a higher turnover rate is bad and a lower one is good, but the truth is more complicated. It explores the intricacies behind defining low turnover rates, the idea that “lower is better” may not be applicable in all instances, and from the context of achieving organizational objectives where a healthy balance is essential.

What Is Employee Turnover Rate?

Before getting too deep, let’s quickly recap what exactly employee turnover rate means. It’s the proportion of employees that leave an organization in a defined time, usually reported on an annual basis. This measure includes both voluntary exits (separations, retirements) and involuntary termination (layoffs, outplacement).

Cost of Employee Turnover

Many organizations today are struggling with employee turnover. The bottom line is developers avoid these types of red flags b/c they cost employers a lot more in talent retention costs over time than it costs to hire a new developer. In this article, we will go over the ways to find the true price of employee turnover, as well as ways to reduce people turnover costs.

The Cost of Employee Turnover Types

There are two main types of employee turnover costs: direct costs and indirect costs.

Direct costs include:

• Separation costs (i.e., severance pay, accrued unused vacation time)
• Recrutiment expenses (e.g., Advertising, interviewing, background checks)
• Onboarding and training costs
• Vacancy period productivity losses

Indirect costs may be less quantifiable, but they’re equally important:

• Lower employee morale and engagement
• Destruction of institutional knowledge
• By-products are reduced business performance and customer satisfaction

What Is the Cost of Employee Turnover?

So, how do you calculate the cost of employee turnover?

1. Define the scope / time frame – decide the time period (i.e.: quarterly, annually, etc.) and the groups of employees you include in your analysis.
2. Separation costs — Assess the total costs associated with an employee’s departure, including severance pay and unused vacation time.
3. Determine hiring and onboarding expenses – Assess costs associated with recruitment, interviewing, background checks, and onboarding new staff.
4. Calculate loss in productivity – Compute the cost of lost productivity due to the vacant position plus the time spent by other employees in training the new hires
5. Total up the costs – Consolidate all of the costs line items you found in the previous steps, to attain the total cost of employee turnover per employee.
6. Calculate the annual cost of turnover – Use this formula:

$$\text{Total turnover cost} = \text{Total Employees} \cdot \text{Turnover Rate} \cdot \text{Average Departure Cost}$$

For instance, if a company employs 100 people, has a 10% turnover rate, and an average departure cost of $20,000, the annual turnover cost will be:

That is: $$100 \cdot 0.10 \cdot \$20,000 = \$200,00$$

A Case for Low Turnover Rates

A low turnover rate seems like an ideal at first glance. Here are a few reasons why many organizations aim to keep employee churn low:

1. Cost-Effectiveness: Reducing turnover lessens the costs related to recruitment, onboarding, and training.
2. Retention of knowledge and expertise: Long serving employees accumulate valuable and enterprise orientated knowledge.
3. Synergy of Team: Stable teams form durable relations and work efficiently.
4. Customer Relationships: In roles where employees deal with customers, longer-serving staff can develop deeper relationships with clients.
5. Productivity: Tenured employees are generally more productive than newly hired workers.

The Danger of Having Too Low of a Turnover

But a super low turnover rate isn’t always a good thing. Think about some of the drawbacks of this:

1. Stagnation: Without incoming talent, you tend toward the same views, ideas, or solutions, creating stagnation in your organization.
2. Complacency: This happens in overly stable environments where employees may find themselves too comfortable which decreases motivation and productivity.
3. Higher Labor Costs: Long-serving employees will usually require a bigger salary, which could be a drain on company resources.
4. Skills Gap: A static workforce may find it difficult to keep pace with changing skills needs in industries that are undergoing rapid transformation.
5. Limited Growth Opportunities: Slow turnover can mean fewer opportunities for advancement, which can lead to frustration among ambitious employees.

The Sweet Spot For Turnover Rate: A Balancing Act

Instead of looking to minimize turnover as much as possible, organizations should use it strategically to find a median turnover rate that meets their goals for stability and renewal. This “healthy turnover” depends, of course, on industry, size of company, and roles, but generally sits in certain ranges:

It’s worth mentioning that these are general guidelines, and ranges may not be consistent for all organizations within an industry.

How to Get the Most Melt for Your Turnover

Here are some techniques for maintaining a healthy turnover rate:

1. Not all turnover is the same: Differentiate Between Types of Turnover Keep your best staff and let a few lesser performers depart naturally.
2. Establish Sound Performance Management: Having a sound performance management and feedback system can help prevent and resolve tensions and issues before they escalate to attrition.
3. Offer Competitive Compensation and Benefits: Ensure remuneration packages you offer are competitive within your industry.
4. Offer Advancement Opportunities: Define career paths and provide training to keep ambitious employees content.
5. Create a Healthy Work Environment: A positive and inclusive atmosphere can greatly enhance employee retention.
6. Conduct Exit Interviews: Fine tune retention methods through feedback from departing employees.

A Global & Remote Work Point of View

With remote work and global hiring, turnover dynamics can be even more convoluted. Remote employees might be motivated differently than the people that work in an office. Consider these factors:

• Liberation: Statistics differ from state to state, and likewise from country to country.
• Time Difference: Working across several time zones can strain employee satisfaction and retention.
• Legal Factors: Labor laws differ across countries, influencing turnover rates and possible management practices.

Payroll and Tax Compliance Considerations

Turnover rates can carry important implications from a tax compliance and payroll perspective:

• Payroll: Constantly changing employees can make payroll difficult, especially when it comes to handling taxes that differ from country to country.
• The Hidden Cost of Employee Turnover: Ensuring Compliance Frequent employee changes lead to compliance risks including mistakes in tax filings and benefits administration.
• Cost impacts: The high turnover can add to overall payroll, and HR management administrative costs.

Final Thoughts: The Employee Turnover Goldilocks Zone

So maybe the best employee turnover rate isn’t necessarily the lowest it can be, but instead a “Goldilocks zone” — the right rate for your organization. This balance enables the absorption of new thinking and staff with established team members only meeting quarterly to formulate and ensure collaborative input.

Assess your industry standards, growth goals, and the requirements of each position in the organization to establish your organization’s optimal turnover rate. If you leverage the insights gained from turnover data and develop a focused retention strategy, it will enable you to build a dynamic, engaged staff that propels your organization forward.

Keep in mind that, in the fast-changing world of global and remote work, the key to successful turnover management is to be flexible on your approach. When you strike the right balance, you are building a strong agile organisation that can thrive in the modern world.