Employee Turnover

What Is Employee Turnover?

“Employees are our most valuable assets” declares the management of every organization. And they mean it. When such valuable asset walks out of the organization out of the blue the management has every reason to feel perturbed.

Modern industry is largely banking on the knowledge power of its employees and the quality of its manpower alone is responsible for the rise or fall of an organization. Hence any loss of this precious resource, is bound to be a major cause of concern for any organization.

Employee Turnover (sometimes called labor turnover or wastage or attrition) is the rate at which employees leave an organization and are replaced by other people.

Employee turnover generally refers to the movement of workers around the labor market between firms and among the states of employment, unemployment and inactivity (Burgess, 1998). It is sometimes defined as a measurement of inarticulate employee unrest.

Managers refer to turnover as the entire process associated with filling a vacancy. Each time a position is vacated, either voluntarily or involuntarily, a new employee must be hired and trained immediately. Woods (1995) describes this replacement cycle as turnover, the term often utilized in efforts to measure relationships of employees in an organization as they leave, regardless of reason.

Employee turnover can be disruptive and costly. It is the cause as well as effect of instability of employment. It is also considered as a measure of the morale and efficiency of workers. An excessive movement is, therefore, expensive and undesirable.

Employee turnover or attrition is perhaps the biggest problem faced by IT industry, especially Business Process Outsourcing Industry (BPO) Opens in new window, today. The industry that is solely dependent on its human resources for its survival and growth can hardly afford to lose any employee.

But, as the organization can do very little to persuade an employee who has already decided to quit, the measures are to be taken to prevent such occurrence before it happens. Hence, the weapon in the hand of employers to get an employee’s satisfaction and commitment to organizational goals and aspirations is employee retention strategy—a process in which the employees are encouraged to remain with the organization for maximum period of time. This enables an organization to focus and effectively prevent to a great extent—at the stage where an employee starts thinking in the direction of changing the job.

Factors that trigger employee turnover

There can be many reasons for employees leaving the organization. Cynthia (2007) was of the opinion that for meaningful retention strategies, efforts should be made to understand the various reasons why employees leave their organization.

Among the reasons identified to cause employee turnover include, but not limited to following:

  • job is not what the employee expected to be,
  • no growth opportunities,
  • job and person mismatch,
  • lack of appreciation,
  • lack of trust and support for co-workers,
  • stress form over work,
  • work life imbalance,
  • poor compensation package and
  • new job offer.

These reasons were supported by Arik (2011) but went further to divide it into two i.e pull and push factors where the factors within the organization that make employees to leave are called push while those factors outside the organization within external environment are called the pull factors.

Impact of Employee Turnover

Employee turnover has both positive and negative effects. On the positive side comes the following assumption.

  • Some believe that percentage of turnover is unavoidable and also desirable as this infuses new blood in the organization.
  • It makes an organization come out of traditional mindset and open to new thinking.
  • It is also believed that the employees having exposure to many organizations generate better ideas, more open to new ideas and experiments and contribute more to the development from their vast experience.

But these remain a possibility only when the turnover is within control and in small fraction. But when it exceeds the grasp of control, it has only negative impacts.

Its negative impact has monetary as well as non-monetary impacts on the organization.

Some of these negative impacts include:

  • It involves increased costs on recruitment, selection and training.
  • It may lead to disruption of production and problems in quality control.
  • Employee turnover makes it difficult in building teamwork and morale.
  • It is a major obstacle in framing in any future activity since the employees, relying on whom the activities are planned, are not sure of staying till its completion.

In essence, the management cannot have any future vision, plan for the future, timely execution of the projects and cost effectives resulting in reduction of overall effectiveness of the organization.

Measuring Employee Turnover

It is necessary to measure employee turnover and calculate its costs in order to forecast future losses for planning purposes and to identify the reasons that people leave the organization.

Data on turnover is one of the basic metrics that can be used in human capital management and the evaluation of HRM effectiveness.

Attempting to measure employee turnover, Price (1977) posited that the term turnover is the ratio of the number of members who have left an organization during the period being considered divided by the average number of people in that organization during the period.

There are a number of different methods of measuring turnover, which are summarized in Table 1.1.

Table 1.1
Method Description Comment
Employee (labor) turnover index The number leaving over a period as a percentage of the average number employed over the period. The most common method — easy to calculate and understand, and can be used readily for benchmarking (comparing rates of turnover with other organizations). But it can be misleading — the percentage may be inflated by the high turnover of a relatively small proportion of the workforce, especially in times of heavy recruitment.
Survival rate The proportion of employees who are engaged within a certain period who remain with the organization after so many months or years of service. A good indication of the effectiveness of recruitment procedures as well as, typically, the high proportion of people who leave after relatively short periods of service. It can therefore highlight where action is required.
Stability index The number of employees with one year’s service or more as a percentage of the number employed a year ago. The purpose is similar to the survival index and it provides a simple, if rather limited, basis for measurement. Not much used.
Half-life index The time taken for a group or cohort of starters to reduce to half its original size through turnover. A variety of survival rate analysis which facilitates turnover comparisons for successive entry years or between different groups of employees. A useful approach but survival rate analysis is more popular because it is easier to grasp.

Cost Involved in Employee Turnover

Employee turnover is expensive from the view of the employer or organization. The reason a lot of attention has been paid to the issue of turnover is because turnover has significant effects on organizations.

A business organization, where cost reduction is an important strategic activity, is hit very hard when employees leave the organization, as it involves the following costs:

  • direct cost of recruiting replacements (advertising, interviewing, testing, etc.);
  • direct cost of introducing replacements (induction cost, i.e. induction of the chosen substitute and formal and informal training of the chosen candidate until s/he attains performance levels equivalent to the individual who quit [John, 2002]);
  • direct cost of training replacements in necessary skills;
  • leaving costs — payroll and HR administration;
  • opportunity cost of time spent by HR and line managers in recruitment, induction and training;
  • loss of output from those leaving before they are replaced;
  • loss of output because of delays in obtaining replacements;
  • loss of output while new starters are on their learning curves acquiring the necessary knowledge and skills.

Turnover has many invisible costs (Philips, 1990) which are a result of incoming employees, morale of co-workers closely associated with the departing employee, pressure on remaining staff, loss of social capital and filling of the vacant position.

Catherine (2002) argues that turnover includes other costs such as lost productivity, lost sales and management time. Each time an employee leaves the firm, it is presumed that productivity drops due to the learning curve involved in understanding the job and the organization. The loss of intellectual capital adds to these costs. Not only do organizations lose the human and relational capital of the departing employee, competitors are also potentially gaining these assets (Meghan et. 2002).

Too high employee turnover may cause organizational problems while too low or no turnover may cause a lack of idea generation and resistance to change.

A 5% annual turnover is generally acceptable as healthy since old employees give experience but are resistance to change while new employees are motivated and receptive to their job demands (Kevin et al. 2004). If employee turnover is not managed properly, it would adversely affect the organization in terms of personnel costs and in the long run it would affect its liquidity position.

related literatures:
  1. Innovation in Management Challenges and Opportunities in the next decade, Innovative Approaches to Manage Employee Turnover in Business Process Outsourcing Industry of Bangalore — Nagaraj Shenoy (p. 57-59), edited by M.S. Rangaraju, S. Hanuman Kennedy
  2. Armstrong's Essential Human Resource Management Practice: A Guide to People ..., Measuring Employee Turnover (p. 198-200)— By Michael Armstrong.
  3. Need and Importance of Employee Retention in Organization Related to Human ...Why Employees Leave their Organization (p.57) By S.Tephillah vasantham, Dr.C. Swarnalatha.