Employee Turnover: Causes, Costs, and HRM Solutions

Introduction

Employee turnover is a significant concern for businesses, particularly because a productivity drop occurs when an experienced worker is replaced by an inexperienced one. The company will see productivity decline, which can affect financial results; the more turnover there is, the worse the financial impact will be. If the turnover rate is high enough — as occurs in poorly managed establishments — it becomes a case of the blind leading the blind, and the organization's overall effectiveness is likely to plummet.

The influences of turnover include a perceived lack of procedural justice, below-market compensation, and a perceived lack of a career pathway. Employees want to feel that there is mutual commitment between them and the organization; they also want to feel that they are working toward their life goals and that the company is a place where they can do that. Providing such a vision is important to employee engagement. Socialization into the company is also important, beginning with the onboarding process, so HRM plays a significant role in building employee engagement.

Labor turnover is a significant problem for any company, but can be especially expensive in some industries. While there are benefits to turnover — such as the opportunity to bring fresh ideas into an organization — there are significant negatives as well. When somebody leaves, they were usually performing at a level that will be difficult to replace; fully productive workers can almost never be replaced without a dip in productivity (Silva & Toledo, 2009). Onboarding new people takes time to identify the right candidates, and then it takes additional time to train them and bring them up to speed. Institutional knowledge is lost with every departure. The cost in terms of lost productivity can be high, and if turnover is frequent enough it also disrupts organizational culture. Therefore, most organizations seek to limit turnover.

Beyond costs, high turnover is generally viewed as a symptom of dissatisfaction within the company — either it is not paying enough relative to the market, or it is not offering a positive work atmosphere. Turnover is therefore not just a cost and productivity problem; it is also a sign of deeper organizational issues. This is especially true when turnover occurs at managerial levels, where it can be incredibly expensive. As such, organizations have developed a number of techniques to limit turnover.

Definition of the Problem

Turnover is the aggregate loss of workers, usually evaluated as a percentage of the labor force per year. Most companies will experience some turnover naturally — people retire, relocate, or pursue different opportunities. A low baseline turnover rate is inevitable. But turnover carries costs, so anything beyond this natural rate is generally considered a problem. One of the biggest issues is that fully productive workers, when they leave, must be replaced by new workers who are not yet as productive. The magnitude of this productivity decrease depends on the positions being lost. Long-tenure employees typically have higher productivity because of the institutional knowledge they possess, and such workers can be very difficult to replace. They also understand the organizational culture, reducing risk, whereas a new hire may or may not fit well into that culture.

A number of studies have sought to quantify the costs associated with turnover. These costs depend on the job and how easily it can be learned. High-skilled workers are harder to replace than low-skilled workers. However, there is broad agreement that higher rates of turnover are associated with higher costs and weaker financial performance (Huselid, 1995). There is also evidence that human resource management (HRM) practices are among the key influencers of turnover (Ibid).

Influences of Turnover

Several factors can influence the turnover rate within an organization. Engagement is one of the most commonly cited reasons for workers forming an intention to leave. When employees are not engaged, they are more likely to leave. A disconnect between the culture of the company and the individual, a lack of perceived contribution, or the absence of a clear career path all affect organizational commitment and thus the intention to leave (Halbesleben & Wheeler, 2008). Faith in management is another factor — when workers do not trust their superiors or doubt their competence, they tend to become increasingly disengaged, perhaps because they do not believe in the direction the company is heading (Johnsrud & Rosser, 2002).

Turnover intentions are also influenced by perceptions of organizational justice. Employees want to feel that they are treated fairly and equitably relative to others. Some workers focus on external fairness — whether they are being paid in line with the market. If an employee feels the grass is greener elsewhere, they will seek it out. Both procedural justice and outcome justice matter to employees, and procedural justice is particularly important. For example, if an employee observes that someone less qualified is promoted to a higher position, the resulting sense of injustice contributes to disengagement. Procedural justice perceptions have been directly linked to intention to leave (Paré & Tremblay, 2007). People want to be on a winning team, feel that their contribution is valued, and believe that their relationship with the company is healthy.

Addressing turnover at the HRM level also requires understanding that different types of turnover exist. Impulsive quitters simply quit without another job offer or any plan. Comparison quitters have a better offer in hand — they know the marketplace and have concluded their value is higher elsewhere. Preplanned quitters had a long-term life plan in which leaving was always a scheduled step. Satisficing quitters report that better job offers, poor management, and unsatisfactory work responsibilities or schedules are reasons for leaving — they are seeking a different compromise in their work arrangements (Maertz & Kmitta, 2012).

References

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Huselid, M. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal. Retrieved April 22, 2016, from

Johnsrud, L., & Rosser, V. (1992). Faculty members' morale and their intention to leave. The Journal of Higher Education, 73(4), 518–542.

Maertz, C., & Kmitta, K. (2012). Integrating turnover reasons and shocks with turnover decision processes. Journal of Vocational Behavior, 81, 26–38.

Paré, G., & Tremblay, M. (2007). The influence of high-involvement human resource practices, procedural justice, organizational commitment, and citizenship behaviors on information technology professionals' turnover intentions. Group & Organization Management, 32(3), 326–357.

Payne, S., & Huffman, A. (2005). A longitudinal examination of the influence of mentoring on organizational commitment and turnover. Academy of Management Journal, 48(1), 158–168.

Silva, J., & Toledo, M. (2009). Labor turnover costs and the cyclical behavior of vacancies and unemployment. Macroeconomic Dynamics, 13(S1), 76–96.