Turnover Rate

  • Employee turnover, a crucial organizational phenomenon, is the rotation of workers around the labor market; between firms, jobs and occupations; and between the states of employment and unemployment (Abassi et al. 2000).
  • Turnover refers to the percentage of employees leaving the organization for whatever reason(s).
  • According to Price (1977) the term turnover describes the ratio of the number of members who have left an organization during the period being considered divided by the average number of people in that organization during the period.

Avoidable turnover is often distinguished from unavoidable turnover so that the proper emphasis can be placed on the avoidable portion.

Understanding the Turnover Rate

When discussing turnover and what is considered to be an appropriate rate of turnover, several key issues must be addressed.

First is the misconception that a very low turnover rate (near zero) is the most acceptable.

It is virtually impossible and undesirable to achieve a continuous zero turnover rate in an organization.

Extremely low turnover rates can be dysfunctional and unhealthy, particularly when new thinking and fresh ideas are needed.

Also, extremely low turnover rates for extended periods can add tremendous costs as incumbent employees reach higher salaries. For example, the electric utility industry has been addressing this problem for decades.

In recent years, the industry has gradually forced employees out, often with huge severance packages, simply because turnover rates were not high enough.

Another issue concerns the definition of the word employee in the literature.

For the purpose of this literature, employee refers to all paid workers and excludes volunteers.

In most contemporary organizations, this is not an issue because there are no unpaid volunteers; in others, there are. The American Red Cross, for example, depends heavily on volunteers to serve in traditional employment roles. The turnover of the volunteers may be an issue, but this literature focuses directly on paid employees.

Defining the acceptable rate of turnover is another concern.

After the specific type of turnover is defined, the economic climate considered, the expectations detailed, and capabilities considered, a turnover rate above a certain level becomes excessive and will trigger action.

More importantly, monitoring leading indicators to the actual turnover rate is better. Turnover may be defined in many ways and five different types of turnover calculations are described underneath.

1.   Total Turnover Rate

Total turnover rate is defined simply as the total number of employees leaving the organization during the month divided by the average number of employees during the month.

Some calculations use the number of employees at mid-month in the denominator. However, this can be slightly misleading because of the surge of employees who leave at the end of the month (many professional employees prefer to leave at the end of the month).

This category includes all the reasons for an employee’s departure, regardless of the performance of the employee or unavoidable situations that created the departure. In reality, this standard value has little practical meaning because there are so many unavoidable reasons for turnover.

The value also includes functional turnover (discussed below), where a certain number of employees are purposely removed from the organization. Still, it does provide the absolute value, showing the total rate of exit of employees in the organization.

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2.   Voluntary versus Involuntary Turnover

Voluntary turnover usually designates a phenomenon of those employees who initiate the departure from the organization. It is defined as the number of employees who voluntarily leave during the month divided by the average number of employees during the month (or number at mid-month).

At first glance, this appears to be the appropriate definition. However, a question often arises as to whether a departure is actually voluntary—the employee could be pressured into resigning. The practical issue of voluntary versus involuntary coding may pose a problem. An employee may actually leave voluntarily, but then the departure is coded as a performance termination, escaping the scrutiny of the volunteer issue.

3.   Avoidable versus Unavoidable Turnover

The rate of avoidable turnover is defined as the number of employee departures that are avoidable, divided by the average number of employees during the month (or number at mid-month). This calculation requires the analysis of turnovers that could have been avoided in some way.

The concept of avoidable turnover should not be considered as a controllable retention issue. For example, it is difficult to prevent an individual from leaving because of the relocation of a spouse, a home care issue, or a desire to care for children after a maternity leave.

The avoidable categories include both voluntary and involuntary issues. In most situations, the focus of attention would be the voluntary, avoidable category. However, the other avoidable category, involuntary, deserves some attention. Terminations for substandard performance, layoffs, early retirement encouragement, and resignations in lieu of terminations, could, for the most part, be prevented. Consequently, they should be included in the statistics.

4.   Dysfunctional vs. Functional Turnover

In previous definitions, the quality of the employee’s performance is not taken into consideration. For talent management, the issue becomes critical when high-performing talents leave the organization versus those considered to be low performers.

Some organizations intentionally weed out the low performers, creating turnover. On the other extreme, the departure of a high-performing individual can be a devastating blow to the organization.

Employees with a negative rating are either terminated for substandard performance or quit because they see the inevitable consequences of their performance. This is called functional turnover. When an employee leaves after receiving a positive rating, it is considered dysfunctional turnover and should be the primary focus of attention for the organization.

Cisco Systems, which has a reputation for attracting and keeping the best talent, uses the above approach to turnover. According to the vice president of human resources at Cisco, two questions are addressed when analyzing turnover data:

  • Are the low performers being moved out of the organization to create a better team?
  • Of the volunteer turnover, how many of those are high performers?

Both issues are critical to retain the best employees in the organization.

Consequently, the definition of dysfunctional turnover is the ratio of the number of high-performing employees who leave during the month divided by the average number of employees during the month (or the number at mid-month).

This turnover rate can be developed for actual performance levels. For example, consider an organization with five levels (or categories) of performance evaluation for employees, typical of most performance review systems. This could range from 1 for unacceptable performance to 5 for outstanding performance. If voluntary turnover is tracked along performance ratings, the percentage of high performers leaving can be quickly pinpointed. This essentially modifies the definition.

Turnover at performance level 5 is the number of employees leaving the organization with a rating of 5 divided by the average number of employees during the month with a performance rating of 5 (or at mid-month). This is an excellent way to examine turnover and focus attention on the critical issue that many organizations today face—retaining high-performing employees.

5.   Early Turnover

A critical time in an employee’s tenure with an organization is usually with the first few days, weeks, and months of employment. It is during this period that mismatches are identified and frustrations intensify.

An employee may decide to leave if other opportunities are available. This early turnover is often a function of improper selection systems, ineffective orientation systems, and inadequate socialization processes to adapt the employee to the organization.

To understand this issue completely, it is recommended that an early turnover measure be developed.

This measure is defined as the number of employees leaving in the first sixty days of employment divided by the number of new employees hired in the same period.

The time period for the length of employee could vary from a shorter time frame, thirty days for entry-level unskilled employees, to a longer period for technical and professional employees (ninety days). Monitoring and understanding this specific turnover rate provides an opportunity for early attention to an important issue.

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Setting Retention Targets

Collectively, the five measures listed above should be appropriate for monitoring turnover data. Total, avoidable, and early turnover are the measure typically collected by employers of choice. A more appropriate measure may be dysfunctional turnover rate.

In addition to selecting the appropriate definition, it is important to set the targets or triggers for action. Triggers can be set at different levels, depending on when and where action is needed.

The maximum acceptable rate for the turnover is often the first trigger. A value above this rate is unacceptable and triggers significant analysis and/or action. A value below that rate is accepted as minimum; however, organizations often set lower targets as desired or stretch goals.

Some organizations striving to be employers of choice set their turnover rates at a value below the maximum acceptable rate. These organizations focus much attention on attracting and retaining employees.

In still other situations, a few organizations desire to be the best at this issue. When considering their position in the industry and other best-practice firms, a lower rate is often set that is considered to be a best practice, world class, or a top 10 percent standard for the industry. This represents truly exceptional performance, achieved by only a few organizations. This becomes a stretch goal for the entire organization.