HR Impacts The Bottom Line By Managing Employee Turnover
In order to become strategic
assets to their companies, HR departments need to focus on managing
issues which directly affect the financial performance of the
organization. Typically, many of the benefits provided by HR are not
evident through strict quantitative analysis. One area where HR can show
immediate strategic impact is in managing turnover rates.
What is Turnover?
Turnover is the voluntary resignation from employment. It
excludes layoffs, position eliminations, nonwork related disabilities,
retirement, and other employment events, which do not require a
replacement worker to be hired.
Why is Turnover Important?
Turnover is important because when a company has to replace a
worker, it costs money. Turnover costs include recruiting, training, and
administrative costs. In addition, since it normally takes a new
employee three to six months to come up to speed, there are productivity
losses during the ramp up period. Turnover costs can be calculated based
on specific company data; alternatively, a good rule of thumb is that
turnover cost is approximately equal to 25% of an employee’s salary.
Turnover costs and rate have
a high strategic impact. If a company’s turnover costs and rate are
higher that of competitors, the company’s costs of doing business are
higher. As a result, the company earns less profit on its goods or
services. In short, the less turnover a company encounters, the better
off it will be.
How Do You Calculate Resources?
There are a number of formulas people use to calculate turnover.
Some simply take the number of voluntary terminations and divide that by
year-end headcount. This approach is probably too simple since it does
not accurately capture the replacement costs caused by employee
Another way to look at
turnover is to calculate net job flows. The formula for Net Job Flows
is: Hires – Exits / Total Number of Jobs
A better formula may be:
Turnover Ratio = Terminations / Incumbents + New Hires
Terminations – Termination of employment in the time period being analyzed
not resulting from layoff, downsizing, non-work related disability, or
retirement, and which normally requires hiring of a replacement employee.
Incumbents – Active employees as of the first day of the time period analyzed.
New Hires – Employees hired during the time period being analyzed.
How Do You Know if Turnover is Too High?
There are two data points one needs to assess in order to find an
appropriate turnover ratio. One is internal and other external.
First, one must look
internally at the company’s historical data and observe the trend. If
turnover is going up, possible explanations could be found in
compensation differentials, management practices, or working
However, to put company
specific trends into context, you need to look at industry Turnover
Ratios. Private surveys are generally better than free material from the
government because they are more specific. There are many different
vendors, which serve specific industries. Below is a table showing
turnover percentages, published by the Department of Labor.
The government turnover
rates have two shortcomings. First, they are fairly general. As a
result, one may not be comparing apples to apples. Second, the
government numbers include some numbers in turnover which may not
require replacement workers. As a result, they may overstate turnover.
If one can make an educated approximation of a discount factor to apply
to the government rates, that should be a good benchmark.
The government numbers do
provide a good means to assess turnover trends. For example, the chart
below shows the U.S. trend in turnover through August 2003. If a company
was trending up when the rest of the country was trending down, that
might indicate a problem HR needs to analyze.
• The previous charts are
from several years ago, but they show a general pattern that can be a
basis for assessing particular turnover trends.
Build A Turnover Report In People-Trak
Using People-Trak’s HRIS Report Writer, one can build their own Turnover Report.
1. Define a Report
2. Build a Query
3. Run Report and Export to Excel
4. Insert Count Functions and derive ratio.
5. The Final Report.
The final Report should look something like the following.
Turnover analysis is one of the things HR
should be doing. It helps the company’s bottom line and it elevates HR
to a more strategic function. Turnover analysis should be done on at
least an annual basis. When using People-Trak to run an analysis, one
should run a series of reports to get the annual data for the past few
years. Keep an eye out for interesting trends.