Employee Growth Rate

What the employee growth rate is

The employee growth rate is the change in the number of people in post between two dates, expressed as a proportion of the number at the first of them. It is a net figure: joiners minus leavers, not the number of people hired.

Everything turns on that qualification. The figure describes where the headcount settled, not the work it took to get there, and in an organisation that people leave, the gap between the two is not small. In the first example below, the hiring needed is more than twice the net increase that gets reported.

One caution belongs at the start. The rate can be counted in people or in full time equivalents, and the two results differ in any organisation that employs people part time. A growth figure published without saying which unit was counted cannot be compared with anything.

Net growth and gross hiring in the same year

Take an organisation that starts the year with 250 employees and has a growth target of 12%, which means ending it at 280. Its separation rate, the share of employment relationships that end over those twelve months, is 15%, calculated on the average headcount:

• Average headcount: 250 plus 280, divided by two, which is 265.
• Separations: 15% of 265, which is 39.75, or about forty people.
• Hires needed: the net increase of 30 plus 39.75 replacements, which is 69.75, or about seventy.

Hiring as a share of the average headcount is therefore 26.3%, while the growth reported for the same year is 12%. Both numbers describe the same twelve months. Growth accounts for 30 of the 69.75 hires, or 43% of the recruitment effort, so more than half of that effort went into keeping the headcount where it was rather than raising it.

The consequence is that a growth plan cannot be read off the growth rate. Anyone who approves 12% and sizes the recruitment effort at thirty hires has sized it at less than half of what is required, and the shortfall shows up as vacancies opening faster than they are filled.

The figures here, and in every example that follows, are hypothetical. They are there to show the relationship between the net figure and the gross one, and they are neither a benchmark nor taken from any source.

A shrinking organisation still hires

Reverse the target: a reduction of 5%, which takes the organisation from 250 to 237.5, with the separation rate still at 15%.

• Average headcount: 243.75.
• Separations: 15% of 243.75, which is 36.56, or about 36.6.
• Hires: 36.56 minus the net reduction of 12.5, which is 24.06, or about 24.

So an organisation with a negative growth rate still hires about 24 people in the year. A negative rate does not mean a hiring freeze. It means that replacement runs below departures by a known amount. This is the point at which the rate has to be read with the headcount plan: the question becomes which of the vacated positions are filled, not how many.

The definition of the employee growth rate settles no legal question about contracting or about the end of an employment relationship. Those questions are covered in our guides to the mandatory particulars of the employment contract and to notice periods and termination.

One year, three employee growth rates

The net increase in the first example is 30 employees. The percentage depends on the denominator:

• On the starting headcount: 30 divided by 250, which is 12%.
• On the average headcount: 30 divided by 265, which is 11.3%.
• On the closing headcount: 30 divided by 280, which is 10.7%.

The starting headcount is the usual choice, because the question growth asks is how much has been added to what there was. Whatever the choice, the denominator should be stated every time. Comparing a figure calculated on the starting headcount with one calculated on the average is meaningless, and the mistake is easy to make when an organisation sets its own figure beside external figures built on a different base.

An organisation’s employee growth rate can hide units moving in opposite directions

The thirty net additions are not necessarily spread across the organisation. They can be the sum of two movements pulling against each other. Suppose the same organisation has two units:

• Sales: from 90 to 135, an increase of 45 and a growth rate of 50%.
• Operations: from 160 to 145, a fall of 15 and a negative rate of 9.4%.

The total is 280, the overall rate is 12%, and no unit in the organisation grew by that amount. Sales added 45 people against a net 30 for the whole organisation, so all of the net growth, and more, sits in one unit. An organisation that reports only its overall figure conceals that concentration, and conceals that the other unit is going through a reduction that has not been announced as one.

For that reason the rate is presented at unit level before organisation level, and the organisation figure is read as a total rather than as a description. The practical test is a single question: how many units have a rate close to the overall one? If the answer is few, the overall figure is correct arithmetic and describes none of the units.

The measurement dates make the figure

The rate is measured between two dates, and nothing between them shows up in it. An organisation that starts at 250, reaches 310 in the eighth month and ends the year at 280 reports growth of 12%. At its peak it had grown by 24%, and its headcount then fell by 30 in four months.

Both figures are correct; they answer different questions. The reported figure says where the year ended, and the hidden one says what happened along the way. Where an organisation has a pronounced season, its rate should be tracked as a monthly series alongside the figure for the two end points. Otherwise a net fall of thirty people in four months passes for steady growth.

Employee growth compounds rather than adds

Annual growth of 12% for four years does not reach 250 plus four increases of thirty each, which would be 370. It reaches 250 multiplied by 1.12 four times, which is 393 employees. The difference is 23 employees, and it is what a plan misses when it extends the first year’s increase across the following years in a straight line.

The effect on recruitment is larger than the effect on headcount, because replacement is calculated on a base that grows every year. An estimate built on the first year’s hiring therefore falls short of the actual need by the fourth year, by a gap that builds up year after year. This is part of workforce planning, which establishes the need before it turns into vacancies.

What changes in the organisation besides the headcount

About seventy joiners in a year that ends at 280 employees means that, if all of them are still employed at the end of the year, 24.9% of the people in the organisation have been there for less than a full year. Three effects follow, and they should be weighed alongside the figure, not after it:

• Supervision. A manager a quarter of whose team is new spends time on guidance that a settled team would not need, and that time is taken from the manager’s own work, not added on top of it. That guidance is part of employee onboarding.
• Productivity. A new joiner does not reach normal output on the first day, which is what the measure known as time to productivity describes. A fast growing organisation carries a share of that cost in proportion to its speed.
• Tenure indicators. Growth pulls average length of service down by arithmetic alone, even in a year when nobody leaves, because every joiner enters the average at close to zero. A fall in average tenure in such a year is therefore interpreted in the light of the growth rate, not taken as a retention signal.

The definition of the employee growth rate does not establish that growth in the number of employees is growth in results. The relationship between the two has to be measured separately, and the growth rate itself does not decide it.

What spoils the measurement of employee growth

• Counting different things at the two dates. Including trainees or temporary contract holders at one end and not the other produces growth that never happened. Define once, in writing, what is counted, and apply that definition at both ends.
• Confusing the signed contract with the start date. Someone whose contract was signed in December and who started work in January belongs to the year in which they started. Counting them in the year of signature moves that growth by a whole year.
• Ignoring internal transfers. Ten employees moving between two units appear as an increase in one unit’s rate and a decrease in the other’s, and do not appear in the organisation’s rate at all. Reading a unit’s rate without separating transfers from hires credits recruitment with work it did not do.
• Calculating a rate on a small number. A unit of seven employees that takes on one person has grown by 14.3%, which is above the organisation’s overall 12% and cannot sensibly be compared with it.

How the employee growth rate differs from its neighbours

What separates the growth rate from its neighbours is what each one counts. The growth rate counts the difference between two end points, and the measures it gets mixed up with count something else: a flow, a capacity, or a decision.

The hiring rate counts a flow, the joiners alone. It can run high in an organisation whose growth rate is zero, if many people are leaving, and the first example showed hiring at 26.3% of the average headcount in a year of 12% growth.

Capacity is measured in hours rather than heads. An organisation that grew by 12% in people may have grown by less in available working hours if most of its joiners are on part time arrangements, which is why the unit of count has to be declared.

Decisions sit upstream of the rate. The growth rate is the outcome of two earlier ones: what was approved in the headcount plan, and how much of it was actually filled. An organisation that missed its growth target may have had its full headcount approved and its vacancies open, in which case the shortfall lies in the ability to fill positions, not in the decision.

The employee growth rate is also read for its direction, not for its value alone. A year of 12% growth that follows two years at 3% is a different situation from a fourth consecutive year at 12%. The first is a jump that has to be absorbed; the second is a pace that has become normal, with capabilities already built around it. The number is the same in both, and the decision built on it is different. In the sources we reviewed we found no general figure for a correct employee growth rate; the rate follows the state of the business and the nature of its market.

Before an employee growth rate goes into a plan

The most useful test before approving a growth figure is to translate it, on the same line, into three numbers: how many hires it takes, over how many months, and at what cost. The cost comes from cost per hire multiplied by the gross number of hires, not by the net increase. Multiplying by the net figure is the error to avoid: in the first example it would price 30 hires instead of about 70.

Then look at the end of the year, which the figure does not show: the last date on which a vacancy can be opened with any hope of the new person starting in time. If it takes about two and a half months from opening a vacancy to the new hire’s first day, a request opened after the middle of the tenth month produces no joiner within the year. Growth for the year is then effectively decided in its first nine and a half months, whatever effort goes into the final weeks.

This is an explanation of the concept, not legal advice.

Related terms

• Cost per Hire
• Employee Onboarding
• Exit Interview
• Succession Planning