Employee Turnover and Its Impact on HR Departments

Introduction

With the realization that organizational staff members represent a company's most valuable asset, managers have strived harder than ever to create favorable working environments in which employees can flourish both professionally and personally. This trend is evident across the entire business community, and perhaps the most relevant indicator is the fact that the large majority of modern organizations maintains its own human resources department.

The human resource department is essentially responsible for all operations related to staff members. Its primary goal is to improve the nature of the relationship between employees and managers, to the ultimate benefit of both parties. Companies pursue this goal through numerous means, including enhanced communications, training programs, and the provision of financial and non-financial incentives.

In a context of intensified organizational efforts to improve employee job satisfaction — and, by extension, performance — a situation has emerged in which economic agents no longer compete solely for customers, but also for workforce. This has led to an intensified movement of staff members from one employer to another, driven by the search for better remuneration, enhanced promotional opportunities, and improved prospects for professional development. This movement, commonly known as employee turnover, generates significant costs for employers, including those associated with replacing departing staff and training new personnel.

Background and Global Context

The organizational community began placing greater emphasis on their staff members during the 1980s, as businesses recognized the pivotal role employees play in overall success. Until that time, personnel had largely been perceived as the labor force operating machines. Over time, however, they came to be recognized as the most valuable organizational asset. While this holds true across all economic sectors, it is particularly applicable within service-based companies. Sir Colin Marshall, former Chief Executive Officer of British Airways, captured this sentiment well: "In an industry like ours, where there are no production lines, people are our most important asset and everything depends on how they work as a team. This means that, to get the best results, managers have to care about how they live and function, not just about how they work and produce" (Boyd, 2003).

This growing emphasis on staff members has led to a competitive environment in which economic agents vie for the best employees, ultimately driving higher employee turnover rates. Simultaneously, employees have become more demanding, continually leaving jobs in search of better ones. Higher turnover rates have created additional challenges for employers, who are forced to invest more financial resources in staff replacement and training.

At a global level, employee turnover rates vary considerably by location. Low turnover rates are generally found in highly developed and mature markets, where employers recognize and embrace the role of staff in organizational success. In these regions, employment offerings tend to be competitive, incorporating various financial and non-financial incentives. Low turnover rates are also common in less developed and underdeveloped economies, where the number of employers is limited and opportunities for workers are scarce.

Emergent markets, by contrast, tend to exhibit the highest levels of employee turnover. In these economies, the number of employers is gradually increasing and staff members identify new possibilities for improving their quality of life. New employers in emergent economies often offer higher salaries and better working conditions. While some workers flourish within these new roles, others eventually return to previous employers or continue their search for better opportunities — a pattern that sustains high turnover rates.

A compelling illustration of the contrast between developed and emergent economies is provided by comparing China and Japan. In automobile manufacturing, Japan long held the title of the world's largest producer; more recently, however, China has assumed that position. Japan is a highly developed economy in terms of income, output, and technology, while China, despite decades of significant liberalization and economic restructuring, remains an emergent economy.

The difference in employee turnover rates is marked. Japan has one of the lowest employee turnover rates in the world, whereas China registers the highest turnover rates on the Asian continent. At the national level, China's turnover rates are more than double those of Japan. At the organizational level, nearly half of Chinese companies reported an employee turnover rate exceeding 10% in the previous year; 13% of companies experienced a rate above 20%. The primary causes cited were unsatisfactory wages combined with insufficient opportunities for professional development (Han, 2008). This is particularly alarming given that modern organizations typically target turnover rates of no more than 2%.

Literature Review

While these benefits are real, they are typically observed only when turnover occurs at low rates. As rates rise consistently, negative consequences follow. Some of the most significant include:

Extrapolating from the case of China, it can be concluded that high employee turnover rates are characteristic of economic agents that fail to professionally and financially stimulate their staff. Despite the growing emphasis modern businesses place on human resource management, persistently high turnover rates reveal ongoing shortcomings in certain organizational practices. The key finding is that human resource departments should refocus their efforts — shifting from a primary concentration on selecting and hiring new staff toward a greater emphasis on retaining existing employees.

Current employees are already familiar with internal organizational processes; they are trained in their roles and possess valuable institutional knowledge. They are also fully integrated within the organizational culture. A new employee, by contrast, must be identified, hired, trained, and integrated — all at considerable cost. These factors make investing in the loyalty and satisfaction of existing employees far more cost-efficient and effective than continually replacing departing ones.