Understanding the company's employee turnover rate is very important. High turnover rates can damage employee morale and significantly increase company costs. You need to understand each type of employee discharge. If you're willing to analyze how employees are recruited and managed, you can take steps to reduce employee turnover costs.
Step
Part 1 of 2: Using the Employee Turnover Formula
Step 1. Study the employee turnover rate formula
The employee turnover rate formula is (Employee layoffs in a period)/(Average number of employees in a period). Some companies use the term layoff (termination) in place of discharge. The difference is that the term discharge can mean the employee leaves voluntarily.
- Voluntary dismissal of employees refers to employees who retire or resign. In essence, the employee decides to leave the company. For example, Bambang is 65 years old and has decided to retire. Thus, Bambang's departure was voluntary.
- When an employee is laid off (fired), it means that the employee leaves involuntarily. Layoff is also categorized as involuntary employee departure. For example, if Jonathan is laid off by the company due to his deteriorating performance, Jonathan's departure is involuntary.
Step 2. Calculate your company's turnover rate
Most calculate the employee turnover rate every year. You can calculate the turnover rate over a shorter period, for example the fiscal quarter (3 months).
- Assume that your company employs 1,000 people on January 1. The number of workers on December 31 was 1,200 people. The number of dismissals of employees during the year is 50 people.
- The average number of employees in the period was (1,000 + 1,200)/2 = 1,100 employees.
- Your employee turnover rate is (50 people)/(average number of employees 1,100 people) = 4.6% (after rounding up).
Step 3. Compare the turnover rate with the industry average
This comparison will help you assess how employees are monitored and managed in the company. Turnover rates will also have a major impact on costs incurred.
- Say, you run a fast food restaurant. The average turnover rate in this industry is 30%.
- In the current year, it is known that the restaurant has a turnover rate of 15%. This figure is much lower than the industry average. This means that the restaurant manages its employees effectively.
- If the restaurant has a turnover rate of 50%, you need to investigate. An employee turnover rate that is higher than the industry average may indicate that employee selection or management is not being carried out effectively. You need to find out why the company's employee turnover rate is so high.
Step 4. Analyze the reasons why employees leave the company
Employees leave the company for various reasons. If you know why they left, you can initiate steps to reduce the company's employee turnover rate. This way, you can save time and money in the future.
- If 50 employees are fired, this may happen during the year. There may not be a specific event that triggered the employee's dismissal. However, this may occur as a result of hiring incompetent employees. You should analyze the problem before concluding.
- This also applies to employees who resign.
- While you can't control resignations, you can take steps to reduce the rate of layoffs and resignations. Analyze the process of hiring, managing and maintaining your employees. Try making changes to reduce the turnover rate.
- Meanwhile, 50 employees may experience layoffs simultaneously due to losses in business. Losses are problems in sales and marketing, not labor. Thus, the changes that need to be made are not related to employee management.
Part 2 of 2: Making Decisions About Employee Turnover
Step 1. Consider the costs of releasing an employee
When employees leave the company, a number of costs will arise. Some of the costs incurred are due to regulations and laws enacted to help employees who are fired or laid off.
- Your employees may be eligible for compensation. In the US, companies pay to the state agency that covers the costs of compensation for unemployment. The more employees that are fired, the more fees must be paid to the agency.
- In the US, employees who are fired or laid off are also entitled to continue with company-provided health insurance. This is because of the law in the US called COBRA. Ex-employees covered by COBRA health insurance will add to the company's costs.
Step 2. Add replacement costs
If you fire an employee, or lose an employee due to retirement or resignation, there will be additional costs for replacing that employee. In addition, your staff also wastes time interviewing and assessing new hire candidates.
- There may be additional costs if you use the services of a recruiting company to find applicants.
- Employers may need to pay travel expenses for prospective employees interviewed by the company.
- Almost all companies now conduct background checks on prospective employees. The company may have to pay someone to do this check.
Step 3. Consider training costs
The cost of finding new employees is usually much less than the cost of training until employees are productive in the company. Training costs also include the study materials used as well as the time spent by managers or other employees training new employees. On average, companies spend 32 hours and $12,000 a year training each new employee. These costs can be avoided by retaining employees who are already actively producing.
Also consider the mistakes new employees will make. All new employees need to adapt to the workplace system and sometimes accidents can happen. These accidents can add to the company's time and money costs
Step 4. Reduce employee turnover
The trick is to re-evaluate the entire process of recruiting and managing employees. Conduct interviews with employees who are about to resign or retire. Ask why they left the company.
- Create a formal annual review for each employee. Ensure employees receive timely and relevant feedback on their performance.
- Each manager is required to make an annual review, including an analysis of how well the company's employees have been managed. This is an important role for managers, and their performance should be assessed.
- If you act and improve employee management, you can increase staff morale. The productivity of the company's workforce will increase if they are satisfied working at the company.
