Measurement of Labour Turnover

Labour turnover is the ratio of the number of workers leaving the factory during a given period to the average number of workers in employment during the same period.

Measurement of turnover is an important problem for determining the numbers of people to be recruited at a particular point of time. Its knowledge assists the management in a number of ways.

Labour turnover is  measured by the following methods:-

1. Separation Rate Method 2. Replacement Method 3. Flux Rate Method.

How to Measure and Calculate Labour Turnover: Separation Rate Method, Replacement Method, Flux Rate Method (With Formula)

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Measurement of Labour Turnover – Top 3 Methods: Separation Rate Method, Replacement Method and Flux Rate Method (With Formula)

The measurement of turnover is an important problem for determining the numbers of people to be recruited at a particular point of time. Its knowledge assists the management in a number of ways. It may be measured by any of the following methods. The choice of a particular method will depend on whether emphasis is given on labour separations, replacements or both.

1. Separation Rate Method:

This is the most commonly used method.

According to this method, turnover rate is measured by dividing the usual number of separa­tions during a period by the average number of workers on the payroll during the same period, that is,

2. Replacement Method:

This method takes into consideration only the actual replacement of employees, irrespective of the number of people leaving. It is to be noted that in case new workers are employed on account of expansion of the business, they should not be included in replacements. Thus,

3. Flux Rate Method:

This method takes into consideration both the number of replacements and the number of separations.

It is to be noted that turnover can neither be completely avoided nor is it desirable. However, its rate can be kept at a considerably low level by taking such steps which improve employee morale and create a congenial atmosphere in the organisation.

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Measurement of Labour Turnover – With Formula for Calculating Labour Turnover

Labour turnover is normally measured as the ratio of the number of employees leaving in a particular period to average number of employees on the payroll. It should be noted that all employees who leave voluntarily or dismissed, must be included. The average number of employees can be calculated simply by adding the opening number of employees to the closing number and dividing the total by two.

The moving average technique can also be adopted for this purpose. At the time of calculating average, normally part-time employees are taken as ‘halves’. It means two part-time employees will be counted as one full-time employee.

The formula for calculating labour turnover is:

The above method is called ‘Separation Method. Many organisations calculate labour turnover by taking both leaving employees and replaced employees in the numerator. However, the denominator remains same as previous formula.

The formula for calculating labour turnover is:

The above method is called ‘Flux Method’.

It should be appreciated that the first formula is more logical than the 2nd one, as management is primarily concerned with cost associated (e.g., training cost) with the leaving of the employees.

There is another method of calculating labour turnover which is very rarely used by the organisations. Here, in the numerator only the number of employees replaced during the period is only taken into consideration. However, the denominator remains same as the previous methods.

The formula for calculating labour turnover is:

The above formula is called ‘Replacement Method’.

Treatment of Labour Turnover Cost in Cost Accounting:

In the cost ledger, a separate account should be set up to record the cost of training. This account will be debited with the wages of the learner during the period of training, salary and other allowances of the instructors, the cost of materials, incidental expenses relating to facilities provided for training.

Generally, an average cost per worker trained is ascertained from the above account. The cost of training is charged to different departments according to the number of employees trained as production overhead. Many organisations are treating the training and related cost as administrative overheads.

Remedial Steps to Minimise Labour Turnover:

Labour turnover is unavoidable but high labour turnover is not a good sign for any organisation. Labour turnover affects the smooth working of the organisation. Therefore, it is the responsibility of the management that there should be minimum labour turnover. A study of the reasons for labour turnover will normally indicate the steps which management should take to reduce its occurrence.

Generally, the following steps are taken to minimise the labour turnover:

1. Exit Interview – To ascertain the reasons for leaving the organisation, the personnel department may arrange an exit interview for each out-going employee.

2. Job Analysis and Evaluation – To find out suitable employee for particular job, the job evaluation and job analysis should be undertaken before recruitment.

3. Scientific System of Recruitment, Placement and Promotion – Different employees are suitable for different jobs. At the time of selecting employees, some scientific approach should be adopted. For example, very intelligent but ‘shy’ candidate may not be suitable for sales department.

However, the same candidate may be suitable for back office work. At the time of selection and placement the objective should be clear. If right candidate is selected for right job, the chance of labour turnover will be minimum.

4. The work culture of the organisation should be healthy so that everybody can do his best. The promotion policy should be very transparent so that there is no ill-feeling amongst the employees. The right person should get the right treatment from the management. If best practice is followed, the employees will think twice before leaving the organisation.

5. The management should try to provide adequate medical and housing facilities to employees.

6. The management should encourage higher studies and skill development training of the employees.

7. The management should try to provide education facilities for the children of the employees.

8. The establishment of grievance cell to address the complaints of the employees. Prompt action by management will create a sense of belonging among the employees.

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Measurement of Labour Turnover – With Minimization and Treatment of Cost

In order to know whether labour turnover is excessive or not, it becomes necessary to measure the rate of turnover. This is done by comparing the number of workers leaving the organisation during a given period with the average number of workers on rolls during the same period. A comparison between the two gives us the ratio of labour turnover.

There are three different methods of computing labour turnover rates. The choice of a particular method, however, depends upon the practice prevailing the concern.

These methods are:

a. Separation Method:

This method considers, and gives importance only to the number of separations, without reference to the replacements. Accordingly, we get the separation rate under this method. If, for instance, the total number of workers on rolls during the year under review was 10,000 and the number of leaving is 500, the turnover rate would be –

b. Replacement Method:

Under this method, the turnover ratio is obtained by dividing the number of replacements during a given period by the average number of workers on rolls during the same period. This method thus considers only the number replacements and not the number of separations. Taking the example given above, if out of 500 workers who left, only 400 are replaced, the turnover ratio would be –

c. Flux Method:

This method is a combination of the separation and replacement methods. As such, it considers not only the number of workers who are displaced but also those that are appointed in their places during the same period. Suppose the number of workers on rolls during the commencement of the year were 10,000, and at the end of the year 8,000, the number of separations and number of replacements during the year were 1,500 and 1,200 respectively, the flux rate of turnover would be –

Minimisation of Labour Turnover:

Labour turnover cannot, in modern times, be eliminated at all. Even if it is possible to eliminate it completely, it should not be eliminated. If done so, it would result in stagnation and laziness on the part of workmen. It does not also afford any scope for injecting fresh blood into the organisation. Hence, attention should be directed to the causes of excessive labour turnover leading to minimisation of the same.

Maintenance of a happy and contented labour force is adjunct to industrial efficiency. Such a labour force is bound to reduce high labour turnover. It is, therefore, the responsibility of the personnel manager to find ways in which the rate of labour turnover can be reduced or minimised.

The steps in this direction are:

a. Collect statistical data about the reasons for leaving on the basis of confidential interviews with the employees who leave;

b. Analyse the causes, and send periodical reports to management with the necessary recommendations;

c. Frame a suitable personnel policy and improve upon the selection procedure to prevent situations arising from discontentment or unsuitability of employees:

d. Plan properly the labour requirements in order to avoid redundancy;

e. Devise a suitable wage policy by which a satisfactory wage system based on time and motion study could be introduced;

f. Provide working conditions conducive to health and efficiency;

g. Develop better human relationship between workers and management;

h. Provide job security and promotion opportunities;

i. Introduce incentive plans, financial and non-financial;

j. Introduce satisfactory social security measures;

k. Introduce internal transfer system to remove causes of dissatisfaction;

I. Introduce the system of annual medical check-up to prevent ill-health at a later date;

m. Introduce a quick and an effective grievance procedure;

n. Institute an employee suggestion scheme, and reward those who suggest improvements in the methods of production; and

o. Encourage labour participation in management.

Treatment of Cost of Labour Turnover:

The cost of labour turnover comprises – (a) leaving costs, (b) replacement costs, (c) training costs, and (d) learning costs. These costs cannot be a direct charge to any or work order. Hence, these should be collected under different standing order numbers, and apportioned to different departments on the basis of the number of workers of each department.

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Measurement of Labour Turnover – With Costs (Preventive and Replacement Costs)

There are three principal methods of measurement of labour turnover which may be summarised as follows:

1. Separation Rate Method:

This method takes into consideration the number of workers left or discharged during the period. Labour turnover is determined by dividing the total number of separations during the month/year by the average number of workers employed during the month/year and multiplying that by 100.

2. Replacement Rate Method:

This method takes into consideration the number of workers replaced during the period irrespective of the number of workers left or discharged. Labour turnover is determined by dividing the number of workers replaced during the month/year by the average number of workers employed during the month/year and multiplying that by 100. Thus labour turnover,

It must be remembered that while calculating the number of replacements, new recruitments made in connection with the expansion programme shall not be considered.

3. Labour Flux Rate Method:

This method takes into consideration both the number of workers left or discharged and the number of workers replaced during the period. Thus, this method is the combination of the previous two methods. The formula for calculating labour turnover under this method is as follows –

Cost of Labour Turnover:

The cost of labour turnover can be broadly divided into two parts –

(a) Preventive Costs.

(b) Replacement Costs.

Preventive costs denote the costs which are incurred to prevent excessive labour turnover by keeping a contented labour force.

These include:

(i) Cost of personnel administration.

(ii) Cost of medical services.

(iii) Cost of welfare activities.

(iv) Cost of gratuity and pension schemes.

(v) A portion of high wages, bonus and perquisites.

Replacement costs refer to the costs of the recruitment, training and absorption of new workers.

These include:

(i) Cost of recruitment and training of new workers.

(ii) Loss of output due to interruption and inefficiency of new workers.

(iii) Cost of wastage, scrap and defective work.

(iv) Compensation due to frequent accidents.

(v) Cost of additional supervision.

Treatment of Cost of Labour Turnover:

Cost of labour turnover is treated as an item of overhead and should not be charged directly to a particular job or work-order.

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Measurement of Labour Turnover – With Example of Costs

Labour turnover is the percentage change in the labour force of an organization. The reason may be retirement, resignation or retrenchment. High ratio of labour turnover indicates that labour is not stable and number of workers left or replaced is large as compared to the average number of workers during a particular period. High labour turnover is not good for an organisation.

Methods of Measurement of Labour Turnover:

There are three methods:

A) Separation method

B) Flux Method

C) Replacement Rate method.

A) Separation Method:

According to this method, the definition of labour turnover is:

The main disadvantage of this method is that it does not take into account the surplus labour and thus if surplus workers are discharged result will not be accurate according to this method.

B) Flux Method:

This method takes into account the new worker engaged and the formula is:

No. of Accession (Additions) = No. of workers recruited in place of left workers and also number of recruited workers due to expansion program.

This method cannot be applied in case an organisation is expanding as these will be no separations.

C) Replacement Method:

This method takes into account only the number of actual replacements. In replacement only recruited workers in place of leavers are included. Recruited workers due to expansion programme excluded.

No. of workers replaced = No. of workers recruited in the vacancies of workers who have left (Excluding recruitment under expansion scheme).

Cost of Labour Turnover:

There can be two types of labour turnover cost:

1. Preventive Cost:

These are the costs which are incurred to prevent high labour turnover ratio to motivate the workers and include:

i. Cost of good working conditions and safety measures.

ii. Cost of medical facilities.

iii. Welfare Facilities – Rest, Canteen etc.

iv. Educational Facilities to children of workers.

2. Replacement Cost:

These are the cost incurred in relation to new employees recruited in place of employees who have left.

Examples are:

i. Recruitment cost.

ii. Cost of Induction & training.

iii. Cost of production loss & work.

iv. Accident cost.

v. Defective work.

vi. Cost of Machine & Tools Breakdown.

vii. Lower productivity due to inefficiency of new workers.

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Measurement of Labour Turnover

Labour turnover may be measured by any of the following methods. The choice of a particular method will depend on whether emphasis is given on labour separations, replacements or both. But once a particular method is chosen, it should be adopted consistently so that comparison may be possible.

(i) Separation Rate Method:

This is the most commonly used method. According to this method labour turnover is measured by dividing the total number of separations during a period by average number of workers on the pay-roll during the same period.

(ii) Replacement Rate Method:

The method takes into consideration only the actual replacement of labour irrespective of number of persons leaving. It is to be noted that in case new workers are employed on account of expansion of the business, they should not be included in number of replacements –

(iii) Flux Rate Method:

The method takes into account both the number of replacements as well as number of separations.

Equivalent Annual Rate of Labour Turnover:

In case it is desired to relate the labour turnover rate for a month or fraction to annual rate of turnover, this may be done by finding out “Equivalent Annual Rate” with the help of the following formula:

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Measurement of Labour Turnover – Methods Used for the Purpose of Measuring the Rate of Labour Turnover

One of the common features which one can witness with any organization is the change, during a specified period, in the composition of its labour force. The change takes place due to some employees leaving their jobs and some new employees filling the vacant posts. These separations and replacements cause the change in the composition of labour force of the organization.

This change is called labour turnover. Prof. B. Banerjee has, therefore, defined labour turnover as the rate of change in the labour force of an organization during a specified period. The rate of labour turnover varies from one organization to another, from one type of company to another, etc. Though the labour turnover (LTO), at a minimum level, is desirable, a very high rate is not only undesirable and unsolicited but also costly.

Causes of Labour Turnover:

In order to keep the labour turnover rate at the minimum level, it is necessary to understand the various reasons as to why the people leave the organization. Though it is a very difficult task to list all the reasons for, or causes of, labour turnover, an attempt is made to present some of the important and usual causes which can be classified into two broad categories.

Measurement of Labour Turnover:

Three important methods are available to measure labour turnover. The companies may use any one of these methods for the purpose of measuring the rate of labour turnover. But for the purposes of facilitating both the trend analysis (e.g., for comparing the labour turnover rate during the year just ended with the preceding years) and the inter-firm comparison (e.g., comparing the rate of labour turnover of a company with that of others), it is necessary to use the method selected consistently year after year.

The three methods are:

1. Separation Method,

2. Replacement Method, and

3. Flux Method.

1. Separation Method:

Under this method, labour turnover is measured by dividing the total number of separations during a period by the average number of employees on the pay-roll. The result is multiplied by 100 to express it in the form of percentage. Therefore –

2. Replacement Method:

Labour turnover is measured, under this method, by dividing the number of replacements made, irrespective of number of separations, during a period by the average number of employees on the pay-roll. The important point to be noted is that only the replacements made to fill the vacancies caused by the separations are considered for measuring labour turnover under this method.

That means, the new employees appointed during the same period (i.e., the period for which labour turnover is measured) for expansion purpose should be excluded for computing the number of replacements. However, they (i.e., new appointments for expansion purpose and for other purpose) are considered for computing the average number of employees. Therefore –

3. Flux Method:

Under this method, both the number of separations and replacements are considered. Hence, labour turnover is computed by dividing the aggregate of number of separations and replacements during a period by the average number of employees. Therefore –

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Measurement of Labour Turnover – Measured by 3 Main Methods

Labour turnover is the ratio of the number of workers leaving the factory during a given period to the average number of workers in employment during the same period.

It is defined by the ratio:

If the rate of labour turnover is more, this is a sign of instability of labour and it adversely affects their efficiency as well as the profitability of the factory.

Measurement:

Labour turnover may be measured by any of the-following methods. The choice of a particular method will depend on whether emphasis is put on labour separations, replacements or both.

(1) Separation Method:

In this method, labour turnover for any period is measured by dividing the total number of separations by the average number of workers on the roll, then multiply by 100. Thus –

(2) Replacement Method:

In this method, only the actual replacement of labour during a period is taken into consideration irrespective of the number of workers leaving. Thus –

When new recruitment takes place for expansion purposes, such new recruits should be excluded from the number of replacements.

(3) Flux Method:

Labour turnover is obtained by dividing the total number of separations and replacements by the average number of workers. Thus –

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