Costly Turnover

No organization wants to have a revolving door of employees. However, employee turnover is an issue almost every establishment has to face. Companies with low turnover rates often pride themselves in the commitment and satisfaction shown by their employees; those with high turnover rates have to continually invest in a great deal of resources to recruit, select, train and retain the replacements. Not to mention the economic loss an organization has to suffer while waiting for the new employees to mature and reach their maximum performance.[1]

There is no doubt that turnover is costly for organizations. One study of Burger King’s franchises showed that both employee and manager turnover leads to longer customer wait times, which has negative impacts on sales and profits for the next fiscal year.[2] A report by Center for American Progress,[3] after examining multiple studies on the costs of turnover, reveals that:

• For 90 percent of U.S. workers (whose salaries are $75,000 or less), the typical turnover costs were 21 percent of their annual salary;
• Among those who earn less than $30,000 annually (which includes more than half of all U.S. workers) the costs of turnover are 16 percent of their annual salary.

Turnover happens for a variety of reasons. Some employees quit their jobs voluntarily due to personal reasons, relocating, retirement or better opportunities. Others leave their current posts unwillingly due to poor performance, violation of company policies or layoffs. Turnover, whether voluntary or involuntary, is bad for business. A study based on franchises of a national financial institution showed all forms of losing employees negatively affect a company’s performance. The turnover will continue to hurt next year’s profits, productivity and customer satisfaction and will increase the total cost per loan.[4]

One would argue that the removal of poor performers, assuming they are replaced with more qualified workers, can be beneficial. It is true that most employees who have been fired have significantly lower levels of performance than those who stayed or quit voluntarily.[5] Letting a few poor performers go can relieve the negative impacts they have on the performance of others and the organization.[6] But when an organization is never happy with their employees and has a higher-than-normal firing rate, there can be something fundamentally wrong with the company’s personnel selection and development system.

Therefore, to avoid the cost of turnover, an organization needs to implement recruiting and selection methods developed by experts to effectively attract the right people for the organization. One should also use valid training and developmental programs to better foster and retain talents.

Last but not least, leaders who are adaptive and willing to make changes can also help an organization identify poor performance at its early stage and make plans for improvement in time.

[1] Hinkin, T.R., & Tracey, J.B. (2000). The cost of turnover. Cornell Hospitality Quarterly, 41, 14-21.

[2] Kacmar, K.M., Andrews, M.C., Van Rooy, D.L., Steilberg, R.C., & Cerrone, S. (2006). Sure everyone can be replaced… but at what cost? Turnover as a predictor of unit-level performance. The Academy of Management Journal, 49, 133-144.

[3] Boushey, H., & Glynn, S.J. (2012, November 16). There are significant business costs to replacing employees. Retrieved from: Https://www.americanprogress.org/issues/economy/reports/2012/11/ 16/44464/there-are-significant-business-costs-to-replacing-employees/

[4] EcElroy, J.C., Morrow, P.C., & Rude, S.N. (2001). Turnover and organizational performance: A comparative analysis of the effects of voluntary, involuntary, and reduction-in-force turnover. Journal of Applied Psychology, 86, 1294-1299.

[5] Wells, D.L., & Muchinsky, P.M. (1985). Performance antecedents of voluntary and involuntary managerial turnover. Journal of Applied Psychology, 70, 329-336.

[6] Meier, K.M., & Hicklin, A. (2007). Employee turnover and organizational performance: Testing a hypothesis from classical public administration. Journal of Public Administration Research and Theory, 18, 573-590.