Data is central to most decisions companies make, particularly when hiring. Gone are the days when companies would hire and fire or let employees leave without taking a step back and analyzing the cause and impact.
Calculating employee turnover rates can help you understand your hiring and employee retention rate strategies, as well as your overall company culture. While you might have the best strategies for attracting qualified candidates, your company's culture may fall short of their heightened expectations. Employees in your company may not stay long, and these high employee turnover rates can affect your employee engagement and productivity, not to mention your company's success, bottom line, and long-term growth.
This article discusses how to calculate turnover rates accurately to examine its impact on your business and help determine what a good turnover rate looks like for your company.
What Is Turnover Rate?
Employee turnover rate refers to the percentage of employees who leave your company over a defined time frame—monthly, quarterly, or annually. The turnover rate can help you assess the stability and sustainability of your workforce.
For instance, a high turnover rate could indicate that your employees are unhappy. You can see if employees are leaving faster than those in comparable roles in other companies, which could indicate problems like low job satisfaction or poor management. It could also be a red flag for underlying issues, such as poor working conditions or a lack of opportunities for career growth.
Impacts of a High Turnover Rate
A high turnover rate can be costly and affect a company's ability to function smoothly and grow. It means employees in your company don't stay long, and your Human Resources department is constantly recruiting new hires. High turnover rates can cause many problems for your business, such as:
- Increased recruitment costs: The average cost of hiring just one person is almost $5,000. Now, imagine hiring for the same position three times a year. That's a lot of money spent on recruitment!
- Decreased productivity: New employees typically take time to reach the same level of productivity as their predecessors. This may cause temporary dips in your business's overall productivity and profitability.
- Low morale: A revolving door of employees can harm your company's culture and cohesion. It makes your remaining staff feel overburdened by additional work and perceive the workplace as unstable. You may have an uptick in employees experiencing burnout.
- Difficulty in long-term planning: High turnover makes it challenging to plan for the future, as there's constant uncertainty about staffing levels.
- Reputation damage: Potential hires sometimes look at a company's turnover rate to determine if they want to work there. Candidates may feel uneasy about their job security if your company has historically high turnover rates.
- Disruptions in workflow: Frequent departures can disrupt team dynamics and project continuity, leading to delays and decreased efficiency.
- Decreased customer satisfaction: If customer-facing roles are affected, high staff turnover can lead to inconsistent customer service and decreased customer satisfaction.
What Is a Good Turnover Rate?
A "good" turnover rate varies depending on the industry and your company's circumstances. Some industries naturally have higher turnover rates due to the nature of the work. For example, seasonal jobs may have higher turnover during off-peak seasons.
A good turnover rate aligns with your industry's standards and doesn't result in excessive costs or disruptions. A rate that allows for a stable and satisfied workforce while meeting business objectives is ideal.
Benchmarking against industry averages can provide valuable insights into what is acceptable for your organization. Here are some examples of good turnover rates in various scenarios:
- Below industry average: Comparing your turnover rate to industry benchmarks can provide context. If your turnover rate is consistently below the industry average, it's a positive sign. For instance, turnover rates are typically 13% in the product management sector, according to data gathered by LinkedIn. A good turnover rate can be anything below this.
- Negative turnover (0% or negative percentage): A turnover rate of 0% or even a negative percentage can be good in some scenarios. This occurs when an organization experiences a net gain in active employees due to promotions, internal transfers, or employees returning after temporary leaves. A company that promotes from within and retains all employees over a year might have a negative turnover rate.
- Voluntary turnover lower than involuntary: A good turnover rate may have more involuntary turnover (e.g., terminations for poor performance) than voluntary turnover (employees leaving by choice). This indicates that a number of employees are generally content and are not seeking opportunities elsewhere.
- Strategic turnover: In certain situations, turnover can be strategic and beneficial. For example, a company might deliberately encourage turnover to bring in fresh perspectives or align with a shift in business strategy. In this case, a good turnover rate would be one that secures a healthy influx of new talent.
How to Calculate Turnover Rate
Understanding your organization's turnover rate is crucial for assessing workforce stability and employee retention strategies. Calculating the turnover rate for your company requires you to have two key pieces of information:
- The number of employees who left during a specific period: This may include those who voluntarily resigned, retirements, and terminations.
- The average number of employees during the same period: You can calculate this by adding the total number of employees at the beginning and end of the period divided by two.
Here's how to calculate your employee turnover rate:
Turnover Rate (%) = (Number of Employees Who Left / Average Number of Employees) x 100
Suppose a company started the year with 200 employees and ended with 220 employees. However, 20 employees left during the year for various reasons. To calculate the annual turnover rate:
Turnover Rate = (20 / [(200 + 220) / 2]) x 100
Turnover Rate = 9.52%
In this example, we'll calculate the monthly turnover rate. A company had five employees at the beginning of the month and seven employees at the end of the month. Two employees left the company during this time. To calculate the monthly turnover rate:
Turnover Rate = (2 / [(5 + 7) / 2]) x 100
Turnover Rate = 33.33%
What's the Best Turnover Rate Formula?
There are various formulas you can use to calculate your turnover rate. The right formula depends on your organization's needs and goals, so find the one that works for you. Here are a few common formulas:
- Overall turnover rate: This formula considers all employees who leave your company within a specific period, regardless of the reason.
- Voluntary turnover rate: This formula focuses on employees who leave your company voluntarily.
- Involuntary turnover rate: This formula calculates the percentage of employees your company terminates or lays off.
Turnover Rate in the Tech Industry
The tech industry is no exception to turnovers. According to a recent report by LinkedIn, the turnover rate in the tech industry is among the highest, at 12.9%. This makes sense as the demand and competition for recruiting tech talent are generally high. Technology plays a crucial role in nearly every industry, and there is a persistent need for skilled professionals. Engineers often move between jobs as projects come and go, which could also add to the higher rate.
Software Engineer Turnover Rate
Even though software engineers are often involved in projects with longer life cycles, they don't necessarily stay in the same job for long. This is because the tech industry offers lucrative salaries and benefits, which can incentivize frequent job hopping in pursuit of higher compensation and career growth opportunities. According to Zippia, the average tenure for software engineers is one to two years.
Additionally, the tech industry is known for its rapid pace of innovation. This creates opportunities for career growth. Software engineers may change jobs to take on more challenging roles, learn new technologies, or seek positions with greater responsibility.
Software Developer Turnover Rate
Software developers primarily concentrate on designing computer systems and application software. This typically involves working on components or features of software projects. Their work may be project-oriented, leading to shorter-term engagements and high turnover rates. Developers may transition to another project or company when one project concludes if they find more appealing opportunities.
Moreover, software development offers a wide range of career paths and opportunities for specialization. Developers may change jobs more frequently to gain experience in different areas, technologies, or industries, leading to increased turnover rates.
Retain Development Teams by Hiring With Revelo
Calculating the employee turnover rate in your organization can provide numerous insights into employee management and retention. It's a crucial step toward creating a stable, satisfied workforce and ensuring the long-term success of your organization. But understanding your turnover rate isn't always straightforward, especially in the tech industry where talented software engineers and developers are in high demand.
But Revelo can help. We offer a comprehensive solution to help you take proactive steps to retain your development teams. We match businesses with Latin American developers who are not only highly skilled but also time-zone-aligned and rigorously vetted for technical skills, soft skills, and English proficiency. We also provide ongoing support to our clients and developers throughout their time with your company, which is instrumental in keeping your development teams satisfied and productive.
Contact us today to learn more about how Revelo can help you grow and retain your development teams.