The Hidden Savings of Employee Retention
A certain level of employee turnover is normal in any business, it’s not a perfect world and human involvement in anything can be problematic. But there’s a point at which ‘normal turnover’ transitions to frustration and a feeling of one step forward, two steps back.
Employee churn is one of many significant frustrations and costs for managers and businesses alike. But how do you quantify and determine your employee churn rate? More importantly, what are the key things you can do to avoid churn and minimise your overall labour costs.
Ask a bunch of accountants what the cost of employee churn is and you’ll get several different answers, including the mandatory “depends”.
But the bottom line is that churn has a cost. This is true whether you run a simple operation (is there such a thing?) or have complex and lengthy hiring, induction and onboarding processes. It all requires a financial outlay, and apart from the cost of getting someone started, a new hire may not be immediately effective and rarely are they totally productive on day one.
The rate at which things get produced and delivered in your business will also be affected in some way, and that has a measurable cost including the quality and speed you can get your product to your customer. That has the potential to be very costly. If that’s not enough, there’s one last obvious cost - the cost of your sanity!
Figuring Out Your Churn Rate
An organisations employee churn rate is a simple mathematical equation. We calculate it as the percentage of employees leaving over a certain period divided by the total number of employees currently employed during that period.
A common timeframe for reviewing the rate of employee churn is on a quarterly basis. But depending on the number of employees you have, calculating every month can be useful in spotting a concerning, or even a good trend which can validate an employee retention change you’ve implemented.
Let’s say in a particular month, a business with 250 employees had 5 employees leave. The monthly churn rate would be calculated as: 5/250 x 100 = 2%.
This formula provides the churn rate calculation for a month, but it could also be useful to know what that rate is across a period of one year?
How Does Your Churn Rate Stack Up?
There are various ways of working out whether your turnover is good, average, or not so good. According to the Australian Bureau of Statistics latest Job Mobility data, 11.5% of the Western Australian workforce have jobs in a year. So as an initial benchmark, if you’re below 11.5% you’re churn rate is better than average, if you’re above 11.5% you should keep reading!
Why is Calculating Your Employee Churn Rate Important?
Now that we know how to calculate our employee churn rate, let’s understand why it is a crucial number to know in your business.
If you need to replace someone who’s left the business, here’s some typical costs to include:
- Time spent on hiring
- Onboarding
- Training
- Agency fees!!
The costs can really add up and when you factor in your time and the time of your people who do the training, loss of productivity and so on, the overall cost can be quite significant and may surprise you. You can put your own numbers into our Productivity & Retention Calculator.
Cost is certainly an important measure, but employee churn also tells a lot about an organisation. It can highlight things like culture, policies, practice, compensation, and procedures. It provides clues about the employee experience, how they feel, along with the effectiveness of your recruiting strategy.
Understanding your churn rate will help you identify what things needs to change within your business or operation. Employees are crucial to your success so your strategy to improve employee retention should be right up there on your list of things to do. It’s one of the top few drivers of business performance and profitability.
Factors Contributing to Employee Churn
The most recent Australian Bureau of Statistics job mobility data reveals that 33% of Australian employees left their job to get a better one, or just wanted a change. And there’s nearly 14% of Other Reasons. That number provides a good guide, but uncovering the specifics that relate to your business and operation is the next step in solving or improving your rate of employee churn.
Creating a brilliant new retention strategy or even implementing a bunch of great ideas must achieve the outcome you want - your employees (especially the good ones) stay employed with you. To achieve that, I recommend you do two very important things:
- Understand why employees leave, I mean really dig down and uncover the truth and their perspective. Leave your ego at the door for this one, because it’ll get bruised! If it's not, you’re doing it all wrong.
- Find out why employees stay. Yes, good things leave clues and provide valuable information. Unless you want to impress the board or CEO with some good numbers, although it might be obvious, running an employee satisfaction survey is not the first place to start. The most successful and immediate method of learning why your people are staying is to talk with them, individually or in a small group. And you don’t need to talk with every single employee to get the idea, but you do need to create an atmosphere that’s conducive to your employees talking freely and openly.
How to Contain Employee Churn?
The most immediate and effective starting point is to take the feedback and learning you’ve gained from talking with employees and action the things that will have the biggest payoff or benefit and are relatively easy to implement. I’ve been in the recruitment and management industry for 25 years and it's taught me quite a lot about retention – I'm still learning too!
Here are the fundamentals, the prerequisites to getting it better:
- Listen to your employees,
- Embrace their ideas and solutions,
- Act on the important things
- Regularly communicate openly and honestly
- Invest in the relationship with your employees
The feedback and insights your employees share are paramount and invaluable in improving the rate of churn in your business, I couldn’t emphasise that enough. But there are some common retention success factors that have repeated themselves many times and have proven to be effective in improving employee churn.
A growth plan, opportunities for advancement: Most (not all) employees want a defined growth pathway, a next step which could include learning more skills, taking on more responsibility, or accepting another challenge. Its fundamental to know and regularly review your employee’s growth and career plans.
Then it’s about communicating and agreeing on the course of action. And this flows straight on to the next success factor…
Productive employee reviews: Not to mention frequency, most are annual (if conducted at all) and usually the horse has bolted by then, your employee has left or might be on the way out. Obviously, employee reviews are a two-way process, there’s things they can do to improve which left unchecked can mean you’ll get frustrated and move them on, or they get frustrated and leave.
The productive element of a review is often revealed by setting aside the day to day and looking at the big picture so you can understand what growth plans or work interests your employee is seeking and working on a plan to help them facilitate and achieve that. I suggest reviewing this quarterly or more frequently depending on the individual employee situation.
Hire the right person: Of course it is! But before you assume the bleeding obvious, look at the ABS job mobility stats again. Given that dismissals represent a meagre 1.2% and leaving for something better a whopping 33%, it appears that you hiring the wrong person is not the problem at all. The reason for your churn is that you’ve employed someone who has taken the wrong job.
And that could mean they didn’t know what they were getting into, what they thought was on offer didn’t materialise or go to reason #1 which doesn’t need repeating. The absolute key to hiring the right person is to make sure the role is right for the employee/applicant. It’s a very weird concept for those of us who started their working career pre-1990’s. In 2023, successfully hiring the right person, really means the job you’re offering is right for them. Determining that is a whole new article.
Pay: No doubt about it, money talks. A strong pay rate, relative to the market is great for generating lots of good applicants and securing that top employee, but it’s not great for retention. There is a rate of pay that should be somewhere in the market and meeting your employee expectations about what they should be earning. You can test this on SEEK to get an idea of where your pay rates are relative to the SEEK market.
But if your pay is somewhere in market range, that is unlikely to be the reason for churn. Instead, it’s the factors that trigger an employee’s intrinsic ambitions and motivators such as learning new skills, feeling valued or understanding how their role helps the business achieve its purpose. One method of bringing pay and the non-financial employee motivators together is to link pay to performance or competency.
Leadership & Culture: Poor leadership or culture is cited as one of the top few reasons why people leave. In fact, employees usually leave or stay because of their boss, generally their direct report. Leadership and culture are intrinsically linked and its really not possible to have one without the other.
In the end culture is just about the behaviours and actions you want from your employees. A significant part of being a good and effective leader is setting those expectations and reinforcing those with consistency and fairness. The clearer a leader is in expressing those, the better.
Summary
Retaining your employees and minimising churn involves many interconnected parts and it can be complex, especially because people and all our imperfections are both the problem and the solution. What I hope you take away from this article is one or two ideas that will help reduce your employee turnover, improve quality, and increase output.
Most of all, as a manager, supervisor or any other type of leader, there’s less effort and drama and for better results, a sense of fulfilment and meaning to it all, and your sanity remains intact. To learn more,
contact the
IRP team and let us talk you through your churn factor.
Contact
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