Employee Turnover

In a human resources context, turnover or labour turnover is the rate at which an employer gains
and loses employees. Simple way to describe it are "how long employees tend to stay" or "the
rate of traffic through the revolving door." Turnover is measured for individual companies and
for their industry as a whole. If an employer is said to have a high turnover relative to its
competitors, it means that employees of that company have a shorter average tenure than those of
other companies in the same industry. High turnover may be harmful to a company's productivity
if skilled workers are often leaving and the worker population contains a high percentage of
novice workers.
Excessive turnover can be a very costly problem, one with a major impact on productivity. One
firm had a turnover rate of more than 120% per year! It cost the company $1.5 million a year in
lost productivity, increased training time, increased employee selection time, lost work
efficiency, and other indirect costs.
But cost is not the only reason turnover is important. Lengthy training times, interrupted
schedules, additional overtime, mistakes, and not having knowledgeable employees in place are
some of the frustrations associated with excessive turnover. Turnover rates average about 16%
per year for all companies, but 21% per year for computer companies.54 Computer companies
average higher turnover because their employees have many opportunities to change jobs in a
hot industry.
Many studies show that companies with low turnover rates are very employee oriented.
Employee oriented organizations solicit input and involvement from all employees and maintain
a true "open-door" policy. Employees are given opportunities for advancement and are not
micro-managed. Employees believe they have a voice and are recognized for their contribution.
There are three cost categories associated with employee turnover. Separation costs account for
exit interviews, termination administration, severance pay, and unemployment compensation.
Replacement costs account for attracting applicants, interviews, testing, and moving expenses.
Vacancy costs account for increased overtime or temporary employee costs incurred while the
position is unfilled.
Employee turnover costs can significantly affect the financial performance of an organization.
On average, it costs a company about one-third of a new hire's annual salary to replace an
employee. The cost to replace a minimum wage employee is about $3,700.

A vacated or unfilled job within an organization results in tangible, measurable costs as well as
intangible costs. The intangible costs include the uncompensated increased workloads other
employees assume during the vacancy, the added stress and tension during and after the turnover,
declining employee morale, and decreased work group synergy.

TYPES OF TURNOVER
Turnover often is classified as voluntary or involuntary. The involuntary turnover occurs when
an employee is fired. Voluntary turnover occurs
when an employee leaves by choice and can be caused by many factors. Causes include lack of
challenge, better opportunity elsewhere, pay, supervision, geography, and pressure. Certainly, not
all turnover is negative. Some workforce losses are quite desirable, especially if those workers
who leave are lower-performing, less reliable individuals.

MEASURING TURNOVER
The turnover rate for an organization can be computed in different ways. The following formula
from the U.S. Department of Labor is widely used. (Separation means leaving the organization.)
Number of employee separations during the month X 100
(Total number of employees at mid month)
For example, in a business with an average of 300 employees over the year, 21 of whom leave,
labour turnover is 7%. This is derived from (21/300)*100
Internal vs. external turnover
Like recruitment, turnover can be classified as 'internal' or 'external'. Internal turnover involves
employees leaving their current positions and taking new positions within the same organization.
Both positive (such as increased morale from the change of task and supervisor) and negative
[such as project/relational disruption, or the Peter Principle (Peter Principle: Observation that in
an hierarchy people tend to rise to "their level of incompetence." Thus, as people are promoted,
they become progressively less-effective because good performance in one job does not guaranty
similar performance in another. Named after the Canadian researcher Dr. Laurence J. Peter
(1910-90) who popularized this observation in his 1969 book 'The Peter Principle.')] effects of
internal turnover exist, and therefore, it may be equally important to monitor this form of
turnover as it is to monitor its external counterpart. Internal turnover might be moderated and
controlled by typical HR mechanisms, such as an internal recruitment policy or formal
succession planning.
Employee turnover is caused by external and internal factors. External influences include local
economic conditions and labor market conditions. Internal causes include such things as noncompetitive compensation, high stress, poor working conditions, monotony, sub-par supervision,
dysfunctional job fit, inadequate training, poor communications, and loose organization
practices.

The Importance of Employee Turnover to an Organization

Turnover has such an impact on companies that executive bonuses are being conditioned on
retaining a certain percentage of employees. "The Wall Street Journal" reported in June 2008 that
the executive officer of a global car dealership was paid 8 percent of his bonus for keeping
overall turnover below 31 percent, and one technology executive found half his bonus was
dependent on "undesirable attrition." The cost of turnover to the bottom line, in addition to the
impact of turnover on the workforce and operations make it essential for employers to manage
the process effectively.
Cost of Turnover

Turnover represents a significant cost to the organization. One study by Harvard Business
School researchers, published in the January-February 2008 issue of the journal
"Organization Science," estimates that the turnover costs from just one departing
employee -- earning approximately minimum wage -- could amount to as much as
$25,000. These figures are primarily based on direct costs, including any severance costs
plus the expense to recruit and train a new employee, but can also incorporate indirect
costs such as a resulting decline in productivity or employee morale. According to
Michael Watkins, in his 2003 book "The First 90 Days: Critical Strategies for New
Leaders at All Levels," it takes more than six months before a new employee begins to
provide as much value to the organization as the company is expending to train the
employee. Combine this with another finding from George Bradt, Jayme Check and Jorge
Pedraza, in their 2006 book "The New Leaders 100-Day Action Plan" that says 40
percent of leaders will fail before 18 months in the job -- and more than 60 percent if the
leader came from the outside, according to 1999 findings by Dan Ciampa and Michael
Watkins in the book "Right From the Start: Taking Charge in a New Leadership Role" -and it becomes obvious that turnover represents a significant expense.

Turnover, Performance and Productivity

The report published in "Organization Science" also indicates that the effect of turnover
on the organization's overall performance and productivity will be "pronounced" when
operational processes are fairly standard and routine. This might be explained with the
theory that fresh ideas from people new to the organization can add value more quickly to
a company that has complex, non-standard processes; whereas an organization in which
the procedure must be learned and repeated will suffer a greater loss in efficiency until
the new employee is fully trained and a cohesive member of the team.

Turnover as a Symptom

Turnover itself can be a symptom of a deeper problem within the organization. A 2003
study conducted by the U.S. General Accounting Office titled "Child Welfare: HHS
Could Play a Greater Role in Helping Child Welfare Agencies Recruit and Retain Staff,"
found that ineffective supervision, unmanageable workloads and inadequate salaries were
the primary cause of most turnover amongst Child Protective Services workers. If the

organization identifies an unusually high rate of turnover in a particular job classification

or from a specific division of the company, this indicates a problem that needs further
investigation. Exit interviews, surveying current staff or a workload analysis might all
shed light on the potential issues.
Positive Effects of Turnover

Employers welcome and actually encourage some turnover -- particularly involuntary

turnover. Involuntary turnover is important to the organization in a different way: It refers
to employees who have been dismissed from the company, generally due to a failure on
probation, poor performance or misconduct. It is extremely damaging to an organization
to leave poor-performing employees on the books, or fail to deal with misconduct
appropriately and in a timely fashion. Inaction is not only detrimental to morale and work
group relations, but could cost far more in terms of employer liability -- for example,
allowing a sexual harasser to remain employed -- than the cost of replacing the employee.
Employers should distinguish between voluntary and involuntary turnover and monitor
the separate percentages on a regular basis. If involuntary turnover is unusually low, there
are probably some poor performers being allowed to slide by, and if it is extremely high,
this could possibly indicate issues with the recruitment process -- the right candidates are
not being selected -- or signify a change in management tolerance levels