The Ideal Turnover Rate
No issue comes up more often in relation to workforce planning than ideal turnover rate. Every time this comes up, my response is always the same: There isn’t just one.
Use Better Metrics
The term “turnover rate” is a bad metric, and using it on its own is superfluous. Its major flaw is that it does nothing to tell me whether the turnover is a positive or negative event. If I am losing 20 percent of the people I consider top performers, then the turnover is definitely negative, but if the majority of the people leaving are bottom performers, then a high turnover rate is positive. Instead of focusing on this outdated metric, organizations should focus on:
This is the metric that really matters. Your high-performance turnover rate measures the percentage of turnover among the most valuable employee population you have. Studies have routinely demonstrated that top performers contribute an average of 10 times more than average performers. Some firms, like Microsoft, claim that contribution number to be much closer to 100. From my experience, top firms keep turnover among the top 25 percent of the employee population to below 5 percent.
Poor/Marginal Performance Turnover
This metric, sometimes referred to as the replacement rate, is the percentage of turnover among employees who have demonstrated marginal or poor performance in the past. Poor performers can actually cost you money. Leading firms routinely cut a percentage off the bottom of the organization, some cutting only 5 percent and others, like GE, cutting as much as 10 percent. I tend to side with firms like GE and agree that poor-performance turnover should be at least 10 percent.
Ideal Rates Are Unique to Your Firm
The ultimate answer is that every firm should establish its own ideal rate. Workforce planning is about:
- Strategically planning the flow of talent through the organization.
- Decreasing the flow of top performers out.
- Increasing the flow of top performers in.
Ultimately, turnover rate for top performers should be as close to zero as you can get it, and turnover among the bottom 25 percent of your organization should be maximized to the extent that replacement is feasible. If you have a well-honed recruiting function that can handle your organizational growth as well as replacing 25 percent of your organization each year, then shoot for 25 percent. However, if like most organizations, that number scares you, shoot for a smaller number no less than 10 percent.
The only population that is left to look at is average performers, which is most likely the largest population in your organization. Some of your retention efforts should be focused on this population as well, because it is more advantageous for you to have an average performer on board than a poor performer. Average performers do no harm to your organization, so the biggest impact of high turnover among this population is the cost of replacement, and the cost of having a position vacant. Regardless of your findings, 99 percent of the time, the cost of retaining an average performer is less than the cost of replacement and vacancy combined, which means that average-performer turnover should be minimized. To determine your ideal minimum turnover rate for average performers, consider these steps:
- Look at what percentage of past turnover among this population is related to a life event (a family move for example) that made continued employment by your firm difficult.
- Subtract from that percentage the number of turnovers that could have been avoided by making simple accommodations (a flexible schedule for example).
- The result should be your ideal turnover rate among average performers.
Don’t Start Too Late
The last issue to be addressed is that most firms look at turnover when it’s too late. Smart firms identify those that they can’t afford to lose long before these people begin looking. The best way to do this is through preexit interviews, which involve talking to them periodically and asking what excites and frustrates them. Great managers then act before a problem occurs. Remember: Talk to them now, or talk to them as they go out the door in the real exit interview.