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Devi B April 08, 2025

Topics: Employee Experience

The Real Cost of Employee Turnover (And How to Lower It)

Employee turnover remains a steady challenge for many companies, affecting team strength and long-term goals. According to Forbes, over half of today's workers have changed jobs at least once in the past five years. This points to a growing trend — employees are more open to leaving their current roles for better opportunities.

This growing movement puts retention strategies front and center leading to knowledge gaps, impacting productivity, and putting added pressure on HR teams. Alternatively, retention-focused organizations often see stronger teams, smoother workflows, and fewer disruptions. For HR teams, proactive retention strategies aren’t just helpful — they’re necessary. They help reduce employee turnover, protect internal know-how, and support consistency in innovation and customer experience.

This blog explores what employee turnover really means, why it matters, and how you can reduce it with practical, long-term strategies. Let’s get into it.

What Is Employee Turnover?

Employee turnover refers to the rate — typically expressed as a percentage — at which employees leave an organization, either voluntarily or involuntarily, and are subsequently replaced within a specific time frame, often measured annually. This critical HR metric serves as a barometer for organizational health, often reflecting workforce satisfaction, competitive compensation, management effectiveness, and company culture.

Employee Turnover vs. Attrition: What's the Difference?

While often used interchangeably, turnover and attrition represent distinct workforce changes with different outcomes for organizations. Here’s how they differ:

Employee turnover specifically refers to employees leaving and being replaced, creating a revolving door effect that maintains headcount but incurs significant replacement costs and disruption.
Employee attrition occurs when employees leave and their positions remain unfilled. This natural reduction in workforce size might happen through retirements, personal choices to leave the workforce, or strategic decisions to eliminate positions.

The key distinction lies in replacement intentions. Turnover assumes the position remains necessary and will be refilled, while attrition often represents a permanent reduction in headcount. Attrition can be strategic when part of planned organizational restructuring. For instance, a company consolidating departments might use natural attrition through retirements to reduce workforce size without layoffs.

Types of Employee Turnover

Understanding the different types of turnover helps organizations address its root causes and develop targeted retention strategies. Some of the causes include:

Voluntary vs. Involuntary Turnover

Voluntary turnover occurs when employees choose to leave on their own terms — whether for better opportunities, career changes, relocations, or dissatisfaction with their current role.
Involuntary turnover happens when the organization initiates the separation through terminations, layoffs, or restructuring.

Functional vs. Dysfunctional Turnover

Functional turnover benefits the organization by replacing underperforming employees or bringing in fresh perspectives and talents.
Dysfunctional turnover harms the company through the loss of high-performing, valuable employees whose departure negatively impacts operations and team dynamics.

Internal vs. External Turnover

Internal turnover involves employees changing positions within the same organization through promotions, transfers, or lateral moves.
External turnover refers to employees leaving the organization entirely.

8 Common Reasons for Employee Turnover

While there are no fixed reasons behind why employees move on to new opportunities outside of your organization, certain patterns tend to show up more often than others — these factors can vary based on roles, industries, or individual goals. Some of the most common reasons companies face increased employee turnover rates include:

Internal Reasons

Lack of Career Growth and Professional Development: When employees see no clear path forward, they look elsewhere. Organizations without transparent advancement opportunities, regular skill development, or meaningful performance feedback typically experience higher turnover rates. Implementing an AI-powered tool, like a talent marketplace, can help improve employee visibility into what their future could look like within the company while recommending personalized learning journeys to help them get from where they are now to where they want to be in the future.
Poor Compensation and Benefits: While not always the primary reason for leaving, inadequate compensation remains a significant factor. This includes not just base salary but total compensation — like healthcare benefits, retirement plans, paid time off, and increasingly important non-traditional benefits like remote work flexibility or wellness programs. Although you should evaluate the current offerings for your entire workforce, it can be especially impactful to assess remote work flexibility on a case-by-case basis to better meet individual needs when necessary.
Workplace Toxicity and Lack of Inclusion: When employees don’t feel safe, respected, or heard, they’re less likely to stay. Toxic workplace cultures characterized by office politics, discrimination, harassment, or exclusionary practices drive valuable talent away.
Work-Life Imbalance and Burnout: 77% of employees experienced burnout at their current job, with over half citing more than once. This includes excessive workloads, always-on expectations, and inflexible schedules that contribute significantly to burnout-related turnover.
Ineffective Leadership and Poor Management Styles: Leadership plays a direct role in shaping how employees experience their work. When guidance is unclear, support is lacking, or communication is inconsistent, it can impact how connected people feel to their role. Over time, this disconnect may lead employees to explore other opportunities where leadership styles better align with their expectations.

External Reasons

More Competitive Job Offers and Poaching by Competitors: In tight labor markets, competitors actively recruit top performers with attractive packages. Industries facing talent shortages — like healthcare, technology, and specialized manufacturing — are particularly vulnerable to this form of turnover, especially when internal compensation reviews lag behind market rates.

Economic Shifts Impacting Job Security and Employee Confidence: Economic conditions influence turnover in complex ways. During downturns, employees may hold onto stable positions despite dissatisfaction. Conversely, strong economies and low unemployment rates embolden workers to seek better opportunities. Industry disruptions and company financial instability also trigger preemptive departures as employees seek more secure positions.
Changing Workforce Expectations: Each generation brings different workplace expectations. Gen Z and younger millennials place a higher value on purpose-driven work, social responsibility, flexibility, and organizational values alignment than previous generations. Companies slow to adapt to these shifting priorities face difficulty retaining younger talent, particularly in knowledge-based industries.

The Cost of Employee Turnover

Turnover cost refers to the total money and time a company spends when an employee leaves and needs to be replaced. Most often, these hidden costs quickly add up and can strain budgets — especially when employee turnover is a frequent occurrence. Here’s how these costs show up across different parts of the business:

Direct Costs

These are visible expenses organizations face when employees leave and need to be replaced. Though easier to track than indirect costs, they take a heavy toll on budgets, especially when turnover is high. Costs include:

Recruitment Advertising and Job Board Fees: Companies often pay to post openings on job boards, career sites, and social media. These advertising costs can quickly increase when multiple roles are vacant.
External Recruiter or Agency Fees: When hiring is outsourced, agencies usually charge a fee based on a percentage of the new hire's salary. These fees have a significant financial impact, especially when there is a high turnover rate.
HR Staff Time for Screening and Interviewing: Internal teams spend hours reviewing applications, conducting interviews, and coordinating the hiring process. While not always billed directly, this time pulls resources away from other priorities.
Onboarding Materials and Training Programs: Once a hire is made, onboarding includes everything from printed materials and training tools to time spent by trainers and team leads. All of this adds to the company’s spending.
New Employee Equipment and Software Setup: Setting up laptops, logins, software licenses, and desk space (for in-office roles) comes with both time and cost implications.
Temporary Coverage through Overtime or Contractors: While the role is vacant, organizations may rely on overtime pay or hire short-term contractors to manage the workload, which can be more expensive than permanent employees.

Indirect Costs

Unlike direct costs, indirect costs are not immediately visible but are equally impactful. These costs include:

Lost Productivity: New employees typically take a considerable period to reach full productivity, varying based on the complexity of their role. During this period, organizations absorb significant productivity gaps. Teams covering for vacant positions also experience productivity decreases due to increased workloads in the interim.
Reduced Morale and Engagement: When people leave often, it affects the energy of those who stay. The remaining employees may feel overworked or uncertain about their roles. Over time, this can lower motivation and make teams feel less connected to their work.
Customer Impact: In customer-facing roles, turnover disrupts service quality and consistency. Clients may notice delays, repeated introductions, or missed follow-ups. This can hurt trust and make customers consider switching to other providers.
Loss of Institutional Knowledge: Experienced employees hold insights about systems, clients, and internal processes that aren’t always documented. When they leave, this know-how walks out the door with them. Rebuilding that experience takes time and often slows down onboarding and process evolution.
Hidden Costs on Employer Branding: When turnover is high, word spreads through reviews, social media, and word of mouth. Potential candidates may hesitate to apply, questioning the work culture and stability, making it harder to attract high-quality talent and often increases recruitment costs as well. Over time, the company’s reputation in the job market may take a hit.

Today, 50% of global organizations are struggling to address retention issues. While there’s no single solution, turnover can be significantly reduced by improving various aspects of the employee journey. From hiring to feedback, let’s break down how each approach offers an opportunity to build a high retention rate:

Hiring the Right People

Retention begins well before someone joins the team. Companies that focus on long-term fit — through realistic job previews, cultural alignment checks, and situational interviews help candidates understand what the role really demands. Involving team members in hiring also creates a sense of ownership and smoother onboarding. Structured onboarding that continues beyond week one builds early engagement. This alignment from the start directly lowers early exits and boosts confidence in the role.

Competitive Compensation & Benefits

While salary isn’t the only reason employees stay, it sets a foundation for stability and satisfaction. Reviewing compensation regularly helps prevent pay gaps or stagnation that can lead to resentment. Performance-based rewards show appreciation for high performers, while total rewards statements clarify the full value of the benefits offered. Flexible and inclusive benefits — like mental health support or parental leave show that the company values employees beyond work, which improves retention across life stages.

Building a Strong Workplace Culture

A positive work culture helps people feel seen, respected, and part of something bigger. Recognition programs that celebrate contributions — big or small — foster appreciation. Open, transparent communication from leadership builds trust and keeps teams aligned during change. Social bonds across departments and meaningful DEI efforts create a more connected, inclusive workplace. When employees feel that their values match the organizations’ and that their presence matters, they’re more likely to stay.

Professional Development & Career Growth

Employees are more likely to stay when they can see a future within the company. Providing clear development paths, learning programs, and mentoring support shows that growth is encouraged — not blocked. When people can move across teams, pick up new skills, or get promoted, they stay engaged and challenged. Career pathing that goes beyond performance reviews helps individuals align their goals with what the company offers.

Work-Life Balance & Well-Being

Supporting employees beyond work hours is key to preventing burnout. Offering flexible work models, like remote or hybrid options, gives people the autonomy to manage life and work more smoothly. Mental health resources, realistic workloads, and protected downtime all contribute to well-being. When organizations respect personal time and responsibilities — especially for caregivers — employees feel valued and supported. This not only builds loyalty but reduces the pressure that can often lead to resignations.

Leadership & Management Training

Leadership quality has a direct impact on an employee’s decision to stay or leave. Managers need strong people skills, not just technical knowledge pertaining to their teams or the company overall. Training that focuses on empathy, communication, and accountability helps leaders build trust with their teams. Regular feedback loops — where team members can also share upward input — create openness and shared growth opportunities. When managers handle conflict well and support development, employees are more likely to feel safe, heard, and invested in.

Exit Interviews & Continuous Feedback Loops

Understanding why people leave is just as important as knowing why they stay. Exit interviews, when done neutrally, offer honest insight into patterns that might be overlooked. For ongoing feedback, keep interviews short, and leverage regular pulse surveys to help catch concerns before they grow into full-scale problems. Consistent touch base should be followed up with annual engagement surveys backed by action plans that show how feedback leads to change.

Another method to ensure feedback is collected freely and often is by offering anonymous channels, which builds psychological safety in the workplace. These feedback loops help close the gap between what employees need and what the company delivers, making it easier to minimize employee turnover.

7 Ways to Reduce Employee Turnover

To reduce employee turnover, organizations need to start by understanding its scope and causes. Measuring turnover isn't just about tracking exits — it highlights patterns, reveals underlying issues, and helps connect the dots between retention challenges and business outcomes. When companies monitor turnover regularly, they’re better equipped to spot early warning signs, identify areas that need attention, and take informed steps to improve employee satisfaction.

How to Calculate Employee Turnover Rate

The formula for employee turnover for a given time period is:

Turnover Rate (%) = (Number of employees who left ÷ Average number of employees) × 100

Example:

If 12 employees left during the year and the average number of employees was 100:
(12 ÷ 100) × 100 = 12% annual turnover rate

Identifying Trends and Patterns in Turnover Data

Once the numbers are clear, the next step is to uncover what’s influencing them. Start by looking at timing — whether employees leave early in their tenure, after a promotion, or during periods of organizational change. Patterns often emerge in specific teams, roles, or locations. These insights can reveal issues like poor onboarding, misaligned expectations, or leadership challenges. By connecting these dots, organizations can focus efforts where they’ll make the most impact.

Key HR Metrics That Predict and Prevent Turnover

Turnover often builds up quietly before it shows up in resignation letters. That’s why it helps to watch related signals — like drops in engagement, frequent absences, or a slowdown in internal promotions. These indicators can flag concerns early. By responding to them in time, companies can often prevent departures and build a stronger, more connected workplace.

Future Trends in Employee Retention

The rapidly evolving workplace continues to reshape retention strategies. Organizations that stay ahead of these changes are more likely to build resilient teams and hold onto their best talent. Here’s a look at where employee retention is headed:

The Role of AI and Predictive Analytics

AI is becoming a valuable part of predictive analytics by helping companies detect early signs of potential attrition. It looks at patterns in behavior, feedback, and career movement to flag flight risks. With these AI-driven insights, HR teams can step in with tailored support or development plans to improve retention and reduce unexpected turnovers.. Over time, it contributes to a more stable and committed workforce.

The Evolving Expectations of the Workforce

Today’s employees, especially Gen Z, and millennials, require more than a fair and reasonable paycheck —flexibility, a sense of purpose, and inclusive cultures are all part of the equation. Companies are responding by offering hybrid roles, clearer DEI goals, and open feedback loops to foster a more inclusive workplace that resonates with younger generations

Hybrid Work as a Standard, Not a Perk: Many professionals now expect some level of remote work. Companies that support this flexibility tend to see better retention rates and employee engagement.
Alignment with Values: Younger talent often prioritizes organizations that reflect their social and environmental values. Communicating your employer brand and company culture while recruiting is beneficial, but make sure what you highlight is reinforced within your workforce for consistent brand messaging that keeps employees invested and engaged in your mission.

Innovative Strategies Top HR Leaders Are Adopting

HR leaders are rethinking how to engage and retain talent by building more agile and responsive work environments. Internal talent marketplaces are becoming popular — they connect employees to short-term projects, stretch roles, and mentorship opportunities. This gives people room to grow without needing to leave their teams or wait for promotions.

Skills as a Measuring Stick

The shift from job-based to skills-based organizational structures is reshaping retention. This approach allows for more meaningful development plans and opens the door for internal moves based on capability, not tenure. It also helps teams identify and fill skills gaps quickly, which supports both business needs and individual growth. When advancement is tied to skills, employees feel more empowered and valued for their contributions.

Frequently Asked Questions about Employee Turnover

1. What are the biggest reasons for employee turnover?

Research consistently shows that the primary drivers of voluntary turnover include:

Limited career advancement opportunities
Compensation and benefits below market expectations
Poor management relationships and leadership quality
Work-life imbalance and burnout
Misalignment with organizational culture or values

The relative importance of these factors varies by industry, role level, and individual employee priorities.

2. Is employee turnover good or bad?

Turnover presents both challenges and opportunities:

Potential benefits:

Bringing fresh perspectives and updated skills into the organization
Creating advancement opportunities for internal talent
Eliminating poor-fit employees who may negatively impact the culture
Preventing organizational stagnation and groupthink

Common drawbacks:

Significant replacement costs and productivity losses
Disruption to team dynamics and client relationships
Loss of institutional knowledge and historical context
Potential damage to morale and employer brand

The ideal approach balances retention of top talent with healthy renewal through strategic turnover where appropriate.

3. How do you calculate the employee turnover rate?

To calculate the employee turnover rate, divide the number of employees who left during a specific period by the average number of employees during that time, then multiply by 100. The average number of employees is calculated by taking the starting number of employees for a time period, adding the number of employees at the end of the time period, and then dividing by two.

For example, if 10 employees left and the average headcount was 100, the turnover rate would be (10 ÷ 100) × 100 = 10%. This calculation helps companies understand how frequently people are leaving. Regularly tracking this number makes it easier to spot changes and address potential issues early.

Prioritizing Employee Retention for Long-Term Success

Employee turnover represents both a significant organizational challenge and an opportunity to strengthen workforce strategies. Successful retention strategies share common elements: they're comprehensive and data-driven rather than assumption-based, and proactive instead of reactive. Organizations that excel at retention typically implement multifaceted approaches addressing compensation, culture, career development, and leadership quality simultaneously.

The shifting employee-employer relationship continues to evolve, with increasing emphasis on purpose, flexibility, and growth opportunities alongside traditional compensation concerns. Organizations that recognize these changes and adapt retention strategies accordingly gain significant competitive advantages in talent acquisition and business performance.

Begin by analyzing your organization's specific turnover patterns and employee feedback to identify priority intervention areas. Implement targeted initiatives addressing your unique challenges, measure outcomes systematically, and adjust approaches based on results. This iterative, data-driven approach to retention yields sustained improvements that directly enhance organizational performance and stability.

Ultimately, reducing employee turnover isn't just an HR priority — it's a strategic business with a direct impact on customer satisfaction, innovation capacity, and financial performance.

Discover smarter retention strategies and innovative ways to leverage AI with Phenom — download our workforce intelligence guide to get started.

Devi B

Devi is a content marketing writer who is passionate about crafting insightful content that informs and engages. When not writing, she enjoys watching films and listening to NFAK.