The Right Way To Measure Turnover

When the economy turns around next year, retention will almost instantly go from being a non-issue to a major issue. But because most HR departments currently miss the boat when it comes to measuring and reporting turnover, they are likely to compound the increased turnover problem by underreporting turnover and the impact of turnover on the organization. That’s why I recommend that senior HR managers immediately revisit and rethink the way they report turnover before the next flood of resignations begins. The goal of any HR metric is to provide managers with information that allows them to improve the measured item, and employee turnover is no different. While HR metrics are supposed to clarify things, the way that most turnover is reported to managers is misleading and, as a result, can lead to some very bad decision-making. How “Simple Turnover” Is Misleading Managers often start a conversation related to turnover with phrases like, “Turnover is high, but everybody else’s is too, isn’t it?” And HR typically provides little additional useful information to managers when it report, for example, that “turnover is 20%.” Simply reporting turnover as a percentage of the workforce hides the real truth. The real truth is usually more detailed ó and harmful ó than a simple metric like “our turnover is 20%.” If you delve deeper into the situation, you will find that “20% turnover” is highly misleading, because it omits important pieces of information. The following examples show how the “20% turnover” figure could be made more useful by adding additional information:

“Our turnover is 20%, but our competitors is 4%.” By adding a comparison number, we now know that our turnover rate is five times that of our competitor.

“Of that 20%, 19% were top performers.” By adding information relating to whether those that left are top or bottom performers, we provide managers with some deep insight into the impact of the turnover. Clearly, losing top performers would have two or three times the economic impact of losing a bottom performer.
“Of that 19%, all were in key, high-impact jobs.” By adding additional descriptive information, we now learn that each of these top performers also held key positions in the organization. Clearly, the cost of losing individuals in key positions is higher than losing individuals in low-impact positions.
“Of that 19%, 90% were in hard-to-fill jobs.” Adding this information now tells managers that the job market is tight for these vacated positions. This means that replacing these employees could be expensive.
“Even when replacements are found for this 19%, it takes six months to find them and two full years before they are up to the minimum productivity level.” This additional information tells managers that these positions are guaranteed to be filled by “under-trained talent” for at least two and a half years.
“Of the 20%, half went to our direct competitor.” If these are key individuals and they have gone directly to a competitor, any calculation of the cost of losing this talent must be doubled or tripled, because the terminated employees will now be bringing their skills and talents to your direct competitor.
“One of the 19% that left was an award-winning technologist.” Losing individuals with strong reputations within the industry can impact stock analysts’ assessments of your firm. It can also send signals throughout your firm and the industry that you are weakening, which can in turn lead to more turnover and increased “raiding” by other firms. If the person is significant enough, it may also make your customers nervous and eventually harm product sales.
“The remaining 1% of the 20% that left were top salespeople.” This additional information tells managers that the individuals left sales positions, which are arguably the positions with the highest impact in most corporations.
“We lost 33% of the customer accounts when a top salesperson left (average revenue = $1 million).” By adding dollar impact of lost sales to the basic turnover metric, we now know the severity of the economic impact.
“Half of the 19% that left took a colleague with them.” Assume we know from past terminations that, when top performers leave, 85% of the time they take one or more colleagues with them to their new organization within six months. However, because turnover rates are typically reported internally on a monthly basis, few managers would be warned of the high likelihood of future turnover in the same area.
“Of that 20% that left, almost half of the turnover came from a single business unit.” Reporting company-wide turnover may hide the fact that most of the turnover is concentrated in a single division or manager.
“Follow up exit interviews (done three months after termination) indicate that 90% of the turnover was preventable.” By providing managers with information relating to the causes of employee turnover, HR can help them understand whether the turnover was preventable and what can be done to prevent additional turnover in the future.
“The involuntary turnover is zero.” This is an indication that we are firing absolutely no one, even though we have already calculated that low-performing employees cost us $40,000 per year and bad managers cost us nearly $100,000 per year each.
“Profits in low turnover divisions (those divisions with turnover rates under 5%) are two times higher than the profit in high turnover divisions.” By connecting the dots and looking at past turnover, we are able to directly link turnover rates and profits in a business unit.
“The dollar cost of these losses were over $20 million.” By quantifying the dollar impact of the turnover, you can give management a better view of the importance of reducing turnover than any report that cites turnover rate as 20% ever could.
“Our firm’s total profit last year was $10 million.” By providing managers with a comparison number, HR can further provide information about the importance of reducing future turnover. In this case, the yearly costs of turnover actually exceeded the firm’s total profit!

Improving Turnover Reporting Rather than just reporting turnover as a simple percentage, HR managers must instead realize that a simple percentage provides little value to managers struggling with high turnover. In fact, as we have seen in the previous example, it can be highly misleading. Few would argue that it provides managers with sufficient information in which to understand the magnitude of the turnover problem. After over 10 years of measuring and providing turnover solutions, I have found that no single turnover measure is sufficient to tell the entire story. Instead, a more comprehensive “turnover dashboard” is the best approach to take if you really want results. Some of the measures that I recommend that you include in your turnover dashboard include:

Performance turnover: This involves weighting voluntary turnover based on the performance rating or the ranking of the individual.
Involuntary turnover: Accurate information in this area helps to ensure that you measure performance and terminate a sufficient number of bad performers.
Key position turnover: Key position turnover means identifying when turnover occurs in key positions.
Hard-to-replace turnover: This involves identifying when turnover is in positions that are either hard to replace or where you do not have a trained replacement immediately available.
Key individual turnover: Tracking the number of well-known individuals who leave the firm is also important. It may also be important to track the turnover of individuals with key “future” skills or individuals that you just can’t afford to let go to a competitor.
Turnover rates by manager: Because turnover may be concentrated in a few managers, it is important to identify exactly who in the organization has most of the turnover.
Turnover rates in key business units: Because turnover may be have a greater impact on high-profit, high-growth divisions, it’s important to identify exactly where in the organization most of the turnover is occurring.
Competitor turnover rates: Both the average and the best-in-class competitors should be reported to put your firm’s numbers in perspective.
“Too low” turnover: In most cases, a low turnover rate is good. But there are some situations where an extremely low turnover rate can be an indication that an organization has a large number of under-performing individuals who are judged as “undesirable” by external recruiters. In addition, a “too low” turnover rate in a department might limit future promotional and growth opportunities.
Internal “churn rate”: Even though individuals might not leave the firm, high or low internal transfer rates can indicate serious problems with individual managers or the internal transfer system.

In addition to providing turnover statistics, the following dollar impacts on the business should also be calculated and provided to managers:

The correlation between turnover rates and business unit profitability
The cost of losing an average performer
The cost of losing a top performer in a key position
The cost of losing an anyone in a key position

Key information that should also be reported to managers includes:

What firms your organization is losing key individuals to
The leading causes of preventable turnover (from post-exit interviews)
The satisfaction or frustration level of those who left (because it might impact your external image)
The lowest turnover rates within the firm (so that managers can have a “target” to aim for and know which individual managers they can learn from)
The likelihood that the person that left will eventually take others with them

Don’t wait until it’s to late. Instead, revisit your turnover/retention metrics today to see how you can more accurately present the “real picture” of what is happening. If you have time, I also suggest you dust off those old retention solutions that you labeled as unnecessary during the downturn ó because they will soon be needed!