What it means
Turnover includes anyone who leaves the company, whether they resign, are dismissed, retire or reach the end of a contract. Some firms track voluntary turnover separately, since resignations are the ones management can most influence.
Others also track regretted turnover, which counts only the departures of people the company wanted to keep. The cost of turnover is easy to underestimate.
There are direct costs, such as recruitment fees, advertising and onboarding, and indirect costs, such as lost productivity while the role is empty and the new hire learns the job. A common rule of thumb is that replacing an employee costs a substantial share of their annual salary, and for senior roles it can cost more than the salary itself.
What counts as a normal rate depends on the industry. Hospitality and retail often see high turnover, while sectors such as public administration or utilities see lower rates.
Comparing your own rate with close peers and with your own history is the useful test. Finance teams use turnover in workforce planning and budgeting.
If the rate is 18%, a company with 200 staff should expect to recruit about 36 people in the year just to stand still. That affects the recruitment budget, training plans and the timing of project delivery.
Reading the number takes care. A rate that is low overall can hide a serious problem in one team or among new joiners, so the figure should be broken down by department, length of service and reason for leaving.
Exit interviews and employee surveys provide the explanation behind the number. Some turnover is healthy because it brings in fresh skills and ideas, and no business wants to hold on to underperformers.
The goal is not zero turnover but the right kind of turnover, with high performers staying and the costs of leaving kept under control.
In practice
Real-world examples
Example 1
A call centre with 500 agents loses 275 people over the year. Its turnover rate is 55%, which is high but not unusual in that sector. The finance team builds a recruitment and training budget that assumes this level of replacement, and the operations team looks for ways to improve retention.
Example 2
A law firm finds that its overall turnover is 10%, but among associates in their second and third years it is 30%. The partners review pay and workload for that group. The finance director estimates that cutting the figure to 20% would save $900,000 a year.
Example 3
A software start-up compares its turnover of 25% with the 15% typical for its sector. It uses exit interviews to learn that staff are leaving over a lack of promotion routes. The company then introduces a clear career ladder.
Think of it
Employee turnover shows what percentage of your workforce leaves each year-your talent retention challenge.
Formula
Calculation
Employee turnover rate = (Number of employees who left during the period / Average number of employees) x 100
Average number of employees = (Employees at start + Employees at end) / 2
Suppose a company had 190 employees at the start of the year and 210 at the end, and 36 employees left during the year.
Average employees = (190 + 210) / 2 = 200.
Turnover rate = 36 / 200 x 100 = 18%.
If each replacement costs about $12,000 in recruitment, training and lost productivity, the annual cost of turnover is 36 x 12,000 = $432,000.Case study
Seen in the real world
Brightwater Care Homes is an illustrative, fictional operator with 400 staff and an annual turnover rate of 40%. The managing director regarded this as simply part of the care sector.
The finance manager costed it. With 160 leavers a year and an average replacement cost of $5,000, turnover was costing $800,000 annually, in addition to the premium paid to agencies for temporary cover.
The company raised wages by 4% for frontline staff, improved rotas and started a mentoring programme. Turnover fell to 30% within 18 months, saving about 40 replacements and $200,000 a year. The illustrative lesson is that retention spending can pay for itself when the cost of leavers is measured properly.
Watch out
Common mistakes
- Using the year-end headcount instead of the average when the workforce size changes during the year.
- Treating all leavers as equal, when losing a top performer costs far more than losing a weak one.
- Looking only at the company-wide rate and missing problem teams or groups of new joiners.
Questions
People also ask
What is a good employee turnover rate?
It depends on the industry and the type of role, so the most useful comparison is with similar companies and with your own past figures.
What is the difference between voluntary and involuntary turnover?
Voluntary turnover covers resignations and retirements chosen by the employee, while involuntary turnover covers dismissals and redundancies decided by the employer.
How do you calculate the cost of turnover?
Multiply the number of leavers by the average cost of replacing each one, including recruitment, onboarding, training and lost productivity.