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The True Cost of High Turnover Rates and How to Spot the Root Causes

High turnover rates have a significant financial cost, but that's just the beginning. Learn some easy ways to find and address turnover causes.

People Ops

Employee turnover is tremendously costly, especially for something that’s so often avoidable. Aside from knocking a box of cash into the paper shredder, it’s probably the most expensive forced error organizations make.

You’re probably thinking, “who would leave a box of cash above a paper shredder?”

Well, we’re thinking, “who would live with a high turnover rate?”

If turnover costs so much, why do so many businesses ignore the many factors that lead to it? 

In this post, we’ll discuss:

 

What is employee turnover and what does it cost?

Employee turnover is simply the loss and replacement of an employee, regardless of whether that employee left voluntarily or involuntarily. Employee turnover isn’t always bad, and a certain amount of employee turnover is natural and expected. However, a consistently high turnover rate can signal a number of systemic operational or company culture issues.

Effects on the bottom line

Employee turnover costs over a trillion dollars for American businesses alone, according to Gallup. What’s more, that figure only accounts for voluntary turnover, not involuntary turnover events like layoffs or other forms of involuntary termination.

Numerous studies have tried to break down the true average turnover cost, with estimates ranging from 1.2 to 2 times an employee's annual salary. 

Even assuming you take the smallest of those estimates and multiply it across your annual turnover rate, the number you end up with will likely be a bit staggering. 

For example, if you lose an employee who made $40,000 per year, the cost of turnover would be anywhere from $48,000 - $80,000. And that’s just one employee! How much of your headcount has left or changed over the past year?

Decreased morale and engagement

When someone leaves the company, you may experience decreased morale and employee engagement across other members of the team. This is especially true when the departing employee is a senior leader or any other type of organizational culture leader. However, losing anyone can have a dramatic, reverberating, team-wide impact.

Increased workload and stress

When someone leaves, there’s an increased workload for others who need to pick up the slack in the interim (or sometimes, indefinitely). It’s exhausting when a team has to absorb the duties of a missing colleague. 

This can lead to increased stress and burnout over time.

Lost organizational knowledge and culture

Even with clear job descriptions, every time an employee leaves, you lose a bit of organizational knowledge. Losing a senior leader can leave an entire division rudderless. Losing an individual contributor can leave a key aspect of an operation floundering, especially if their departure is unexpected.

Ramping up

Depending on the level of seniority and job responsibilities, it can take anywhere from six weeks to six months to a year or more for new hires to ramp up to their maximum level of productivity. That time to productivity can also be measured in lost revenue.

Training costs

What previous training, certifications, and skills are you losing, and how much will it cost to get new hires up to the same high-performing standards?

The time and resources of designated trainers are the most obvious costs, but there’s also a productivity cost for a new employee’s colleagues. From answering work environment basics like “How do I request time off?” to job-specific questions for senior employees, there will be diversions, and lots of them.

Other hidden costs

We’ve only covered a few of the less obvious costs of turnover, but there are many more. Some examples of this include buying updated technology for new hires, replacing keys, the cost and time involved with getting applicants and interviewing top talent.

Voluntary vs. involuntary turnover

Turnover rate: person carrying a boxVoluntary turnover, or elective churn, happens when an employee chooses to leave a job. There can be any number of causes for this, from a bad manager or an offer at a different company, to personal reasons.

Involuntary turnover is when an employee leaves against their wishes. There are many reasons for involuntary turnover, but a few examples are layoffs or other workforce reductions, as well as termination for underperformance or breaking organizational codes of conduct.

Employee turnover rate is the rate at which active employees leave and are replaced by new employees. This overall turnover rate doesn’t consider whether turnover is voluntary or involuntary.

Turnover rate formula

The turnover rate formula is pretty simple. Take the total number of employees that left (whether voluntarily or involuntarily) (s), divide it by the average number of employees (a), then multiply by 100 to get a percentage.

To find the average number of employees, take the number of employees at the beginning of the period (b), add it to the number at the end of the period (e), and then divide by two.

s/{(b+e)/2}*100

For example, if you had four turnover events with an average of 100 employees during a specific period, your company’s turnover rate would be 4% for that period.

Employee attrition formula

While employee turnover represents the number of employees who leave and are eventually replaced, employee attrition is when an organization loses an employee but doesn’t expect to replace them.

Attrition rate formula

The attrition rate formula is identical to the turnover rate formula above but replaces turnover (number of separations that result in a hiring effort) with attrition (number of separations that will not result in a hiring effort).

Choose a period for your calculations. Take the number of attrition separations(s), divide that number by the average number of employees during that period, then multiply by 100 to convert to a percentage.

s/{(b+e)/2}*100

For example, if you had two attrition events with an average of 100 employees during your measured period, your attrition rate for that period would be 2%.

Employee retention rate formula

Turnover rate: team members connectingEmployee retention rate represents the percentage of employees who have stayed at your organization throughout a given period. Retention rates factor in both turnover and attrition because in measuring retention rates, the cause for termination is irrelevant. You’re simply measuring who stayed.

Start by choosing a time range. Take the number of employees at the beginning of that period (b), subtract the number of employees who departed during the same period (d), then divide that sum by the beginning number (b). Multiply by 100 to convert to a percentage.

{(b-d)/b} * 100

For example, if you have 100 employees at the start of the period and four are terminated, the retention rate is 96%.

Calculating employee retention rate is a bit different from measuring turnover or attrition rates. Instead of taking the average number of employees across the period you’re measuring, you only want to measure the number of employees at the start. For that reason, it’s important to measure and track these metrics separately.

This is because retention’s focus is keeping the team you already have, and it can’t be improved by increased hiring. If you start the period with 100 employees, lose four, but end the period with 150 employees, your retention rate is still 96%.

How does your organization compare?

The average employee turnover rate differs across industries, but organizations with turnover rates that exceed the benchmark in their industry may struggle to compete.

It’s also crucial to remember that while an industry benchmark is helpful in understanding your ultimate target, the most important benchmark is your own. 

Addressing the root causes of high turnover rate

People climbing up the stairsThe first cause for leaving a company people think of is salary. While this can certainly result in turnover, if the advantages you offer are solely a “competitive” compensation package, there will always be an organization willing to up the ante just enough to pull talent away because salary is fungible.

You need to fairly compensate your employees. However, that’s not all you need to do. We’ll review some other common causes of high turnover rates so you can look at what changes may be needed.

1. Culture

Changing your workplace culture is a multifaceted issue that requires thought and effort on several levels. You can’t flip a switch and improve culture any more than you can flip a switch and become a piano virtuoso.

However, you can gauge employee sentiment on your company culture and use that information to create initiatives that strengthen it.

Find out how well your benefits meet the needs of your team.

2. Poor pre-boarding and onboarding

Onboarding and pre-boarding are key times to set the tone for employee experience. Getting onboarding right is especially challenging now when so many are working remotely — but that’s exactly why it’s crucial.

Automating new employee check-ins for onboarding basics can relieve some pressure and allow for more bandwidth to be spent on deeper topics.

3. Lack of horizontal or lateral mobility

If an employee continues to grow with no place in the organization to grow into, they’re likely to leave the moment opportunity knocks. While many employers believe that investing in employee development is just footing the training bill for their next career shift, you actually need to create opportunities to advance internally. 

Get a sense of which roles might not currently exist but would help push the team forward.

4. Wasted time and effort

Counter to global bad boss opinion, most employees loathe wasting time and effort. Even the minds of well-compensated employees may start to wander if they feel as though the work they’re doing lacks purpose. As behavioral economist Dan Ariely explains, motivation at work is closely tied to that work's value and purpose..

Find out how team members see and express the purpose in their work. This will motivate you to illuminate why your work is meaningful or create more valuable roles.

Want to do more to reduce your turnover? Read our companion article: How to Reduce Employee Turnover and Stop Losing Top Talent.

The ROI of investing in people

Two people celebratingInvesting in employees’ personal and professional growth doesn’t only influence the cost of turnover — it can also produce an outsized positive impact across other areas.

Find ways you can invest in the employee experience from day zero to the day you part ways. Doing so can help extend that timeline and support greater results throughout it.

Polly can help you create a happy, cohesive team, which can make people more excited to stay with you for the long haul. Sign up for an instant free trial, and we'll show you the many ways you can enhance your company culture to naturally retain your top talent.

Need a simple way to check in with your team, foster rich interactions, and capture crucial data about your employee experience?

 

Try Polly for free to instantly improve your employee engagement.

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We love hearing from you! What are some key factors you look at when addressing turnover? How do you measure their impact? Let us know @polly_ai.

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