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Employee Turnover: A Key Ratio to Monitor

October 1, 2012

Labor availability and employee turnover have been hot topics among metalformers during the last several months. Most companies have rising concerns about the availability of skilled labor to meet projected demands. While hiring new and qualified employees is critical to meeting future demands, retaining solid existing employees is equally critical.

Fig. 1

One to track how effective a company is at retaining current employees is to look at its employee turnover ratio and compare individual performances to industry benchmarks. This article looks at the employee turnover ratio presented in the annual Precision Metalforming Association’s Benchmarking Report for the Metalforming Industry.

How to Track Employee Turnover

PMA’s Benchmarking Report calculates employee turnover as the number of employees who were terminated, quit or retired during a given period (typically quarterly of annually) divided by the average number of employees, multiplied by 100 (Fig. 1). Note that employee layoffs are not typically included in the number of staff who were terminated, quit or retired. Most companies also exclude probationary, part-time and temporary workers.

Fig. 2

From 2007 to 2010, the industry average for employee turnover ratio was stable, in the range of 20 to 22 percent. In 2011, the average dropped significantly to 15 percent (Fig. 2). Says one industry insider, when asked why he thought the average dropped so significantly: “I think the answer here is the general condition of the economy. Things have been improving at such a slow rate and in such an inconsistent manner that people are not secure enough to make a change. They are waiting to see if things will get better or worse.”

In addition to the industry average, the PMA Benchmarking Report also tracks best-in-class performance. Best-in-class, which represents the performance level of the 90th percentile company for this ratio, ranged from a high of 6 percent in 2007 to a low of 2 percent in 2011.

Relationship to Profitability

Fig. 3

The Benchmarking Report data suggests that having a lower-than-average employee turnover ratio is better than having a higher-than-average ratio. In four of the last five years, the most profitable companies (as measured by operating income) had an employee turnover ratio that was lower than the least profitable companies (Fig. 3).

From a profitability standpoint, the data suggests that it’s important to be better than average in this ratio. However, as one senior executive in the metalforming industry indicated, achieving best-in-class performance should not be a company’s sole objective.

“Balance is extremely important,” he said. “You want to retain your key people and strong performers, but you also want to have new people coming into the organization that can provide a fresh perspective and ideas for improvement.”

A Deeper Look at the Data

Looking at subsets of the companies that participated in the Benchmarking Report, the data showed little variation. Companies that identified themselves as automotive suppliers had an average employee turnover ratio of 15 percent, while nonautomotive companies reported an average ratio of 13 percent. Companies that indicated they had a unionized workforce had a slightly lower than average turnover ratio of 12 percent. However, there was one exception: the one that looked at employee turnover ratio by size of company, based on annual sales (Fig. 4).

Fig. 4

Companies participating in the 2011 survey with sales less than $5 million had an average employee turnover ratio of only 5 percent—significantly below the industry average of 15 percent. Companies with sales from $5 to $50 million experienced an average employee turnover of 16 percent. Finally, the largest companies in the survey, those with annual sales exceeding $50 million, outperformed the average with an employee turnover ratio of 10 percent.

Flexibility Is the Key

It will be interesting to see what this ratio does in 2012. The consensus is that, like most things, it’s tied to the overall condition of the economy within manufacturing. Those that believe the economic outlook is positive see the employee turnover rate increasing on the basis that people have more confidence in looking for new and better jobs. On the other hand, those who feel the economy might be softening expect the employee turnover rate to remain stable.

Said another senior-level executive in the industry: “The only constant in this business is change—it’s fluid, and you have to adjust as you go.” MF

Technologies: Management