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.

Facts [+]

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.

Facts [+]

Employee turnover is calculated by dividing the number of annual terminations by the average number of employees in a given work force. The average employee turnover rate in the U.S. is about 12% to 15% annually. At the high end, fast food retailers experience up to 300% employee turnover. At the low end, advanced, market leading technology companies experience turnover of less than 8%.


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 non-competitive compensation, high stress, poor working conditions, monotony, sub-par supervision, dysfunctional job fit, inadequate training, poor communications, and loose organization practices.