Employee turnover is the proportion of employees that leave a business for any reason during the measurement period. A low turnover ratio is indicative of excellent benefits and compensation, as well as enlightened management practices. A high turnover ratio is indicative of the reverse - poor benefits and compensation, and/or oppressive business practices or conditions. However, a low ratio can also be driven by outside factors, such as economic conditions that are so poor that employees do not believe they can leave their current jobs to find work elsewhere. To calculate employee turnover, divide the number of employees who left the company for any reason by the average number of employees working for the company during the measurement period. The calculation is:
Number of employee departing the company ÷ Average number of employees = Employee turnover
For example, ABC International lost 40 employees in the past year, when they were poached by competitors. During that time, ABC employed an average of 500 employees. This means that the company's turnover was 8%.
The measurement is usually annualized when reporting on employee turnover for an entire business. However, it is also possible to narrow the focus of the measurement for more specific time periods, as well as by department. Doing so can bring management attention to bear on why people are leaving certain parts of the business.
A low employee turnover rate is considered good, since the implication is that employees are being retained who have a high level of knowledge about company operations, which improves efficiency. However, this is not entirely the case. Some organizations follow a practice of ranking their employees and terminating the employment of those staff who rank at the bottom. Also, there is a natural amount of turnover that will occur, as employees move away for family reasons or change their careers. Further, some industries (such as fast food) are well known for having high turnover rates, which cannot be easily changed. Consequently, the circumstances in which a company finds itself must be evaluated in order to determine whether its employee turnover rate is unusually high or low.
A company wishing to improve its turnover percentage needs to evaluate the incremental cost of doing so against the cost of replacing those employees who are leaving. When the turnover rate is already low, it may require an inordinate increase in benefits or other factors to achieve an even lower turnover rate. Consequently, management needs to understand what is driving turnover, and the incremental cost of altering the situation.