Employee Churn and how to calculate it

Employee churn is a costly affair & high churn rates are not good for any business. Learn here how to reduce employee churn in your organization.


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What is employee churn?

Employee churn is defined as the percentage of employees leaving an organization over a specific period. An employee’s exit can be voluntary or involuntary. Resignation or retirement falls in the voluntary category, whereas, an employee being let go will be in the involuntary category. Some voluntary churn is avoidable with hiring best practices, building a positive workplace culture, etc.

According to the Society of Human Resources Management’s (SHRM) 2018 Employee Recognition Report, employee churn is the number one challenge for most organizations globally. A staggering 29% of these organizations admitted to being stressed about finding replacements.

Although a certain level of employee turnover is normal in any organization, however, high rates of employee churn can be a costly affair. Employee onboarding, hiring, training, and development require a financial outlay, and a new hire may not be immediately effective in terms of bringing in profits. You have to give them a certain amount of time to learn, adjust, and start contributing.

Factors contributing to employee churn

While many factors add to employee churn, some easily stand out and need management attention. Let’s look at the top 5 factors that contribute to employee churn:

  1. Lack of growth plan and opportunities: Every employee needs to have a defined growth path that needs to be conveyed to them clearly. Lack of this can lead to dissent and doubts that their efforts are unrecognized. This could lead to resentment and employees leaving the organization.
  2. Skewed work-life balance: Striking the right work-life balance is crucial for employees, be it for family, hobbies, or pursuing higher studies. Not having the right balance or organizations not helping find it can cause employees to exit the organization.
  3. Bad workplace culture: Having a positive culture is essential for organizations. A culture where employees are appreciated, valued, rewarded is highly appreciated. If employees feel the work culture is toxic and non-conducive to their growth, they will leave the organization.
  4. Dissatisfactory appraisals: Many organizations follow the yearly appraisal process. Employees eagerly wait for that for the entire year. If they feel the assessment is not in-line with their efforts and contributions, they may get disheartened. Some employees may stick it out for another cycle, but most will leave as early as possible.
  5. Low staff morale: The above factors can affect employee morale and bring it down significantly. It could either be one of the elements or a combination, but employees with low morale are a significant attrition risk.

Employee churn formula and calculation with steps

Employee churn rate is calculated as the percentage of employees leaving an organization at a certain period divided by the total number of employees in the organization during that period.

A common way of looking at employee churn rate is on a monthly basis. Calculating every month can be useful in spotting when employees tend to leave in the first year of employment.

How to calculate monthly employee churn rate:

Monthly employee churn rate = Number of employees quitting that month / Average number of employees in that month X 100

Let’s say in a particular month, four employees quit the organization, and there are a total of 200 employees in that organization then their monthly churn rate can be calculated as:

Monthly churn rate= 4/200 X100 = 2%

This formula gives us the calculation for a month, but what about over the course of a year?

How to calculate annual employee churn rate:

First-year employee churn rate = Number of employees who quit in less than 1 year of employment / Number of separations during the same period X 100

For example, let’s consider 30 employees quit the organization even before they completed one year and you have 115 employees who departed your organization during the same period.

Putting the numbers into the formula:

First-year employee churn rate = 30/115 X100= 26.08 %

Now that we know how to calculate it let’s understand why is it crucial to know the employee churn rate.

Why is it important to calculate employee churn?

Employee churn tells the story of an organization - culture, policies, practice, compensation, and procedures. It lets you know about the employee experience, how they are treated, and how long do employees usually stay with the organization.

When an employee leaves, the organization incurs the following costs:

  • Time spent on hiring
  • Onboarding
  • Training
  • Getting an employee to accommodate to the organization’s culture

Apart from expenses, measuring employee churn also helps you in understanding if the hiring strategy is moving in the right direction. The data and benchmark will give you a starting point for investigation. After all, as an organization, you would want to know who is leaving and why!

This understanding will help you determine what needs to change in the organization. Employees are critical to any business and hence, as an organization, your strategy should be employee retention. Understand their reasons behind their decision, inquire if it is company processes, the culture, or something else. This will help bridge any gaps in your people processes.

How to contain employee churn?

Employees join and exit, but when a significant number of employees leave the organization, it is undoubtedly a matter of concern. The amount of money, efforts, and resources required to hire new people or replacements are enormous. Arresting employee churn is essential for smooth operations.

Here are 4 ways to help reduce employee churn:

  1. Hire the right talent: It all starts with hiring an employee. As a rule of thumb, organizations hire an employee based on their skill set, but how well do you know if the employee is the best fit for your organization’s culture? You must hire employees who not only have a strong skill set but are also the right fit for your culture. At the time of hiring, ask them organizational behavioral questions to understand their mindset and their intent to stay in the organization.
  2. Recognize achievements: Your employees need to be recognized and encouraged. Show them you notice their hard work, reward them when they go above and beyond. This creates a positive impact on the minds of the employees, and they appreciate it.
  3. Provide the best compensation: Employees want to be compensated well. There will always be a gap as to what they expect and what organizations can and will pay. What organizations can do, however, is offer compensation that is current, meets industry standards, and rewards excellent performance via incentives or other benefits.
  4. Provide benefits: The workforce has changed over the years, and so have its benefits and expectations. Some employees travel long distances while some juggle multiple responsibilities. Taking note of that and allowing a few options like work from home or flexible hours will certainly make employees happy. Benefits such as college debt management, health insurance, and dental care coverage will go a long way in containing employee exits from organizations.

You may retain some employees, if not all, and that’s fine. Employees have various ambitions, desires, and ideas about work that they need to pursue. All you can do in this case is to ensure they had a great experience. This way, they can always feel like and come back to the organization.