Analysing Human Resource Performance

Labour Turnover Rates

Human resources managers need to analyse data to understand their employees’ performance. Human resources managers use calculations to analyse data about labour turnover, retention, productivity, and costs.

Labour turnover

• Labour turnover refers to the percentage of staff that leaves the business per year. Retention refers to the percentage of staff that stays at the business per year.

Calculating labour turnover

• Labour turnover is expressed as a percentage. It is calculated using the following formula:

  • Labour turnover = (Total number of staff leaving ÷ Average number of total staff) × 100

• To calculate the average number of total staff, use the following formula:

  • Average number of total staff = (Number of staff at the beginning of the year + Number of staff at the end of the year) ÷ 2

Example of calculating labour turnover

• For example, in January 2017 a business employs 100 staff and in December 2017 the business employs 90 staff. During the year, 10 of these staff left.

  • Total number of staff leaving the business is 10.

  • The average number of employees throughout this time is calculated by adding the number of staff at the beginning of the year with the number of staff at the end of the year and dividing by two. 100 employees at the beginning of the year plus 90 employees at the end of the year equals 190 employees, divided by 2, equals an average of 95 employees.

  • Therefore, 10 staff leaving divided by 95 average staff multiplied by 100 gives 10.53% labour turnover. 10.53% of the business’ staff left during the period of one year.

Labour turnover percentage

• The higher the labour turnover percentage, the higher the number of staff leaving during the period calculated. This could be because:

  • If competitors offer higher wages and salaries, employees may leave.

  • If employees are demotivated, they may leave.

Advantages and disadvantages of staff turnover rates

• Low staff turnover means that experienced employees remain within the business.

• Low staff turnover means that training and recruitment costs are low as there are fewer vacancies to be filled.

• Low staff turnover means that there are fewer opportunities for the business to recruit new talent, skills, and ideas.

Retention Rates

When labour turnover is high, the number of employees leaving the business is high, which means that retention, the number of employees choosing to stay at the business, is low.

Calculating retention rates

• Retention rates are expressed as a percentage. They are calculated using the following formula:

  • Retention rates = (Total number of staff who worked at a business for the whole period of time ÷ Total number of staff at the beginning of the period of time) × 100

Example of calculating retention rates

• For example, in December 2016, a business employs 90 staff. During the year, 15 of these staff left.

  • Total number of staff leaving the business is 15.

  • Total staff at the end of the year = 75.

  • Total staff at the start of the year = 90.

  • Staff at the end of the year ÷ staff at start of the year = 0.833.

  • 0.833 X 100 = 83.33%.

• A retention rate of 83.33% shows that the business retained 83.33% of its staff during the time period.

Causes of high retention rates

• High retention rates could be because the business pays a higher salary or wage than its competitors.

  • High retention rates could be because employees are motivated, empowered and valued.

Labour Productivity

Labour productivity is a measure of the units produced by an employee in a given period of time. HR managers use this as a measure of an employee’s performance during appraisal reviews to inform decisions about employee pay and any possible training requirements.

Calculating labour productivity

• Labour productivity is expressed as a number of units. It is calculated using the following formula:

  • Labour productivity = Total output ÷ Total number of employees

Example of calculating labour productivity

• If a business has 1,000 employees, and during a one month period, produces 250,000 bottles of orange juice, the labour productivity can be calculated by dividing 250,000 units by 1,000 employees to give 250 units per employee.

• A Human Resources manager could compare a labour productivity calculation with previous years to assess how productive the current workforce is. HR managers may reward employees if productivity is increasing, though may plan training for employees if productivity is decreasing.

Employee Costs as a Percentage of Turnover

For many businesses, employees are the biggest cost of the business. In all businesses, and especially in labour-intensive businesses, HR managers must understand how the level of spending on employees compares to the overall size of the business.

Calculating employee costs

• Calculating employee costs as a percentage of turnover allows HR managers to assess, as a proportion of total revenue, or turnover, the amount that is spent on staffing costs.

• Employee costs as a percentage of turnover are expressed as a percentage and are calculated using the following formula:

  • Employee costs as a percentage of turnover = (Total employee costs ÷ Total revenue) × 100

Example of calculating employee costs

• If a newsagent had staffing costs of £105,000 in 2017, and had total revenue of £1,100,000, employee costs as a percentage of turnover could be calculated by dividing £105,000 by £1,100,000, to get 0.095, multiplied by 100 gives 9.55%. This means that the business spends 9.55% of its total revenue on employee costs.

Employee costs as a percentage of turnover

• A Human Resources manager could compare their employee costs as a percentage of turnover with data from previous years, with data from competitors, if it is available, or with data from the industry.

• If employee costs as a percentage of turnover are higher than they have been in previous years, a Human Resources manager may decide to try and reduce their total employee costs.

Lower employee costs as a percentage of turnover

• Some businesses, for example, Aldi, have much lower employee costs as a percentage of turnover, because they place emphasis on cutting costs by operating minimum numbers of checkouts and limited numbers of shop floor staff, compared with supermarkets such as Sainsbury’s and Marks and Spencer.

Labour Cost Per Unit

Labour cost per unit allows a business to calculate the cost of labour for every one unit produced.

Calculating labour cost per unit

• Labour cost per unit can be calculated using the following formula:

  • Labour cost per unit = (Total labour costs ÷ Total units produced)

Example of calculating labour cost per unit

• If a business has total labour costs of £250,000 and produces 1,500 products, the labour cost per unit can be calculated by dividing £250,000 by 1,500 products to get £166.67.

• For every one unit produced by the business, there is a labour or employee cost of £166.67.

Importance of labour costs per unit

• HR managers may use the calculation of labour cost per unit to compare data to previous years, to competitors and to the wider industry.

• If HR managers are unhappy with their current labour cost per unit, they may decide to increase productivity, so that employees produce more, or they may reduce employee costs.

Improving labour costs per unit

• Increasing productivity or reducing employee costs would improve the labour cost per unit.