What is Employee Turnover?

Employee turnover is the number of employees who leave a company in a certain period of time. It includes employees who leave voluntarily due to retirement or to pursue other job opportunities and employees who were terminated or laid off.

Employee turnover is one of the most important metrics since it reflects the health of the workforce.

Employee turnover is never zero, as employees leave the organization as a natural part of their lifecycle, but happy employees tend to stay longer with a company, leading to lower turnover and higher productivity.

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How to Calculate Employee Turnover

Step 1: Number of departures

Find out how many employees left in the time period you wish to calculate employee turnover for. This number should include voluntary resignations, terminations, retirements and any other reason.

Don’t include employees on maternity or paternity leave, furloughed employees or temporarily laid off employees.

Step 2: Average number of employees

Calculate the average number of employees by adding the number of employees at the beginning of the period to the number of employees at the end of the period, and dividing by 2.

Step 3: Divide 

Finally, divide the number of departures from the average number of employees and multiply by 100 to find the turnover rate.

Formula for Employee Turnover

The formula to calculate employee turnover:

(Number of departures / Average number of employees) x 100

You can also calculate employee turnover using the headcount at the beginning of the period instead of average number of employees.

Cost of Employee Turnover

The cost of losing an employee and having to look for a replacement can be very high.

The numbers vary: Gallup estimates the cost of replacing an employee to be 1.5 to 2 times the employee’s yearly salary; a report by Work Institute puts the number at one-third of an employee’s annual salary.

How is the cost of employee turnover calculated? There are direct costs and indirect costs to employee turnover.

Direct costs are those costs which are immediate and tangible. They can be directly tied to the recruitment and onboarding process for a new hire:

  • Cost of advertising the job via job portals or recruitment agencies
  • HR and manager salaries as they interview candidates
  • Joining bonuses for selected candidates
  • Cost of onboarding a new employee including relocation cost, equipment cost, training, etc

Indirect costs are those costs which are a result of negative consequences of losing a skilled, experienced employee. They are difficult to quantify financially but do have a significant impact on the business:

  • Lost productivity due to time taken by the replacement to get onboard
  • Time lost to interviewing and selecting a replacement
  • Mistakes made due to loss of institutional knowledge and experience
  • Drug and background screening for candidates
  • Drop in morale and motivation amongst existing employees

What Does Employee Turnover Tell Us?

Simply calculating your employee turnover rate is never enough – it’s important to compare against an industry benchmark.

Employee turnover rates vary across industries and departments. For example, industries like tech, entertainment and hospitality experience much higher turnover rates than industries like education, government, or medicine.

According to Omam Consultants, a leading HR consultant firm, overall attrition rate in India in 2023 was 13.75%.

Industries with highest attrition rates in India are as follows:

  • E-commerce – 15% turnover
  • Retail – 18% turnover
  • IT & ITeS – 19.7% turnover

Certain industries enjoy lower attrition rates, like government services, education and medicine.

Read more: Industry-wise hiring trends in 2023, a report by RazorpayX Payroll

Top Reasons for High Employee Turnover

Companies with low turnover rates generally spend more on employee compensation, keep an eye out for ineffective managers, and focus on career growth for employees.

Top reasons stated by departing employees which have resulted in high turnover:

  • Lack of growth opportunities
  • Inadequate compensation
  • Lack of job recognition programmes
  • Workplace culture
  • Poor work-life balance

Some examples of Indian companies with low turnover rates include Zerodha and Acko – companies that claim to focus on employee satisfaction and happiness above all else.

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Types of Employee Turnover

Voluntary vs. Involuntary Turnover:

  • Voluntary Turnover: This occurs when an employee chooses to leave the organization for reasons like a new job opportunity, relocation, career change, retirement, or personal reasons.
  • Involuntary Turnover: This happens when the company decides to terminate the employee’s position, due to performance issues, misconduct, redundancy, or company restructuring.

Desirable vs. Undesirable Turnover

  • Desirable Turnover: When employees are terminated due to performance or culture fitment issues, it is considered desirable as a better-performing employee can replace them, which would benefit the organization.
  • Undesirable Turnover: Undesirable turnover includes skilled, well-performing employees who leave the company for new roles, causing detriment to the business.

Employee Turnover vs Attrition

Employee turnover is the rate at which employees leave a company both voluntarily and involuntarily. The positions left empty by these departures are filled up by new hires.

Attrition is the rate at which employees leave the company voluntarily or naturally due to retirement or resignation. Positions left empty due to attrition may or may not be filled with new hires.

How to Improve Employee Turnover

Happy employees stay with their companies for longer. This is why businesses dedicate a sizeable chunk of their budget to keeping their employees happy, with fun office outings, team bonding events, pulse checks, bonuses, and more.

One of the biggest reasons employees leave a company is due to inadequate compensation or recognition. Investing in a robust payroll or HRM software is an important step to improving your employees’ payroll experience.

With good HRM software, your HR team can collect and analyse important employee metrics related to attrition and turnover, enabling them to make well-informed decisions regarding employee welfare.

For example, you can customize a survey on the employee self-serve portal as soon as they apply for resignation, giving valuable insights into various reasons why employees leave your company.

With solutions like RazorpayX Payroll, your employees get the best payroll experience, the best HR integrations and so much more.

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FAQs

How is employee turnover calculated?

Employee turnover measures how frequently employees leave a company. To calculate it, you first need to find the average number of employees during a specific time period. Then, divide the number of employees who left during that time by the average number of employees. Finally, multiply this number by 100 to express it as a percentage. This percentage is your employee turnover rate.

Is employee turnover good or bad?

Employee turnover can be a double-edged sword. High turnover is generally bad, costing companies time and money to recruit and train replacements. It can also hurt morale. However, some turnover is healthy. It allows fresh ideas and perspectives to enter the company, and can open up opportunities for growth for remaining employees.

What is a healthy employee turnover?

There's no one-size-fits-all answer for a healthy turnover rate. It depends on your industry, company size, and goals. Generally, below 10% is considered good, indicating a stable workforce. But some industries, like retail or startups, might see a higher healthy range. The key is to understand why employees are leaving and focus on retaining high performers while allowing for some natural turnover to bring in new perspectives.

How to reduce employee turnover?

Reducing employee turnover involves creating a work environment that fosters satisfaction and engagement. Competitive compensation and benefits are a must, but offering opportunities for growth, recognition, and a healthy work-life balance are crucial too. Regularly solicit employee feedback and address concerns. By investing in your employees' well-being and career development, you can keep them feeling valued and motivated to stay.

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