Introduction: What causes turnover?
Turnover is affected by a combination of the following factors:
Individual demographic factors:
Age, tenure, married, children (-), education, ability (+)
Internal environment factors:
Stress, caused by work pressure or bad psychological climate (+)
Lack of attention from colleagues and, importantly, line manager (+)
Performance on the job (-)
Job-worker-organization fit (-)
Individual attitudes to the organization factors:
Job satisfaction
Commitment to organization
Organizational justice perceptions
—>all factors decreasing turnover
External environment:
Wage differences between current organization and outside market
Availability of jobs
Institutions and regulations affecting the costs of turnover (e.g., severance pay, Kündigungsschutz, etc.).
Voluntary turnover
Voluntary turnover is when workers leave of their own free will. —>While some turnover may be good (recall the last lecture), here we focus on preventing excessive (above optimal) turnover. There are several levers managers can pull.
Dealing with voluntary turnover
Screen job applicants for relevant psychological characteristics. Frequently done in many organizations, but this practice may be perceived as discriminatory.
Accommodate worker differences and changing life circumstances by providing more flexible working conditions. Example: Bloom, Liang, Roberts and Ying (QJE, 2014) find, in a field experiment, that allowing to work from home reduces quit rate by a half, from 35% to 17% over the 9-month experimental period (p. 204).
Set attractive wages and make counteroffers to the workers with an external job offer (works up to a point).
Rely on colleagues and line managers for the provision of support and coaching for their employees.
Counteroffers
A counteroffer is an offer a firm can make to its existing employee who have received a job offer from outside as an attempt to keep them.
—>Making a counteroffer, firm will reduce the worker's likelihood of quitting.
—>However, higher wage boosted by the counteroffer will reduce the worker's value to the firm and may increase incentives for job search for other workers who may be hoping for a similar reaction from the firm.
Factors affecting the likelihood of a counteroffer
Positive:
Employee having above-average skills for a given position, because their value to the firm (i.e. productivity minus wage) is higher.
Firm-specific human capital and its co-attributes: longer tenure in the firm, worker's having a supervisory function, greater difficulty of finding a substitute. Replacement costs for such workers are higher.
Negative:
Longer labor market experience (but not tenure), as productivity of more experienced workers was more often evaluated by the market.
More co-workers in the same position, since their search intensity will increase if a counteroffer is made to one of them.
Larger firm size, because a counteroffer would magnify the others' search intensity. Source: Baron, Berger and Black (2006) Selective counteroffers, Journal of Labor Economics, 24: 385-409
Using line managers to control employee turnover
The differences in average turnover by workplace and by manager can be really large.
Therefore, managers can be a powerful force shaping employee turnover.
Friebel, Heinz and Zubanov (2017) did an experiment in a large retail firm suffering from very high turnover among its employees (6% per month)
Treatments:
Manage: A personal letter was sent to the store manager asking them to do what they can to reduce employee turnover in their store.
Career: Letters to employees highlighting career opportunities at the firm.
Career + Manage: Both above treatments.
How managers achieve lower turnover
Evidence from employee questionnaires and manager interviews shows:
Managers in all treatment groups have increased the amount of time spent on HR activities in their stores.
In particular, managers spent more time talking to their employees.
Cashiers in the “Manage" treatment report a higher level of supervisor attention and support.
No changes in hiring practices. Store managers were neither promoted, nor given a bonus for achieving lower turnover.
What if valuable workers want to leave despite efforts to retain them?
Turnover cannot be fully prevented, but the costs of turnover may be reduced by keeping knowledge possessed by the workers within the firm.
Standardize jobs: Create standard job descriptions and protocols and incorporate those in the training of new workers.
Design work to be done in teams, so that the knowledge is shared by team members and may be retained in the firm even if part of the team leaves.
Have a “knowledge management" strategy of collecting and recording the knowledge created by the workers in the form of patents, proposals, ideas and the like.
Dealing with involuntary turnover
Involuntary turnover (i.e. layoffs, firings rather than voluntary quits) is a fact of working life. It happens for three main reasons:
Downsizing: Firms face economic difficulties that require them to cut down costs, which often means reducing scale of operations.
Restructuring: Firms respond to changing environments by refocusing on different products or markets, or taking advantage of new labor-saving technologies that cut costs.
Bad match or inadequate behavior: Workers are not a good enough match with their firms, there are others that can do the same job better or more cheaply. Both inadequate performance and bad work behavior fall into this category.
Managing involuntary turnover is a challenge because of difficulty of communicating the bad news, the negative reactions of the affected employees (and possibly of the “survivors", too), and compliance with labor law.
Alternatives to layoffs
Communicating the bad news
Managing employee reactions
Layoffs and labor law
Are there alternatives to layoffs?
Cutting (labor) costs: benefits and pay freeze or even cuts.
Layoff with the option of reemployment on altered conditions (Änderungskündigung).
Cutting working hours or introducing “work sharing". There are typically legal constraints that pay cuts or work sharing must satisfy.
Hiring freeze. May be ineffective when a lot of jobs need to be terminated soon.
Offering cash for voluntary resignation or early retirement: Incentivising voluntary resignation may be counter-productive, because people with better outside options will be more likely to go for it, but these are precisely the people firms do not want to lose.
Layoffs are unavoidable
Communicating bad news is stressful for both the messengers and the recipients. To reduce stress, to treat everyone equally, and to better anticipate the recipients' reactions, formal communication schemes (“protocols") are recommended.
Literature on bad news communication protocols in health care. Example: SPIKES communication protocol in oncology.
HRM departments in organizations often devise their own layoff communication protocols.
Follow the layoff communication protocol. Richter et al. (2016) find that layoff victims who have been communicated with according to the protocol feel less negative towards their employer than those who have received the news in an un-structured way.
Treat affected employees fairly and with respect. Richter et al (2016) found that the extent to which layoff victims perceived respect from the layoff agent (who delivers the message) mitigated their negative reactions.
Communicate a reason: Richter et al. (2016) also find that managers who explained the reasons for layoff to victims (“economic difficulties in the firm") received less negative reaction. Source: Richter, M., König, C. J., Koppermann, C., & Schilling, M. (2016). Displaying fairness while delivering bad news: Testing the effectiveness of organizational bad news training in the layoff context. Journal of Applied Psychology, 101(6), 779.
Provide support to the affected employees: Offer severance pay (may be a legal requirement as well), provide help with readjusting, retraining, finding a new job etc.
—>Important not only for the victims but also for the survivors of layoffs, because it signals the organization's care and commitment to its employees
5 Steps to Giving Bad News to Your Employees
by Cameron Morrissey (HR coach): www.youtube.com/watch?v=cfJ8_tfXX5k
In person
Quick
Give a plan
Be transparent
Tell it at once
Layoff practices are often regulated by law
“At-will" employment (in U.S.): both the firm and the worker may quit an employment relationship at any time, for whatever reason, and without notice.
However, most employment relations, especially in Europe, is less free. There are obligations on both sides concerning the termination of an employment contract.
There are two major types of employment contracts: temporary and permanent.
The easiest way to lay off a worker on a temporary contract is simply to let it expire.
To lay off a permanent worker, there needs to be a legally recognized reason. A notice must be given in advance, there may be a severance pay, and there may be a selection of employees into being laid off based on their characteristics (most importantly, seniority).
German Termination Protection Act „Kündigungsschutzgesetz"
Applies to all firms with more than 10 employees.
Employment can be terminated for no specified reason during the probation period (max. 6 months).
Thereafter, one of the following reasons are required:
Expiration of a temporary contract.
Health reasons: A negative health prognosis and attempts to accommodate the employee's health problems (treatment or an alternative job) need to be shown in court.
Behavioral reasons: Bad work discipline (e.g., lateness), criminal action (stealing, harassment), low performance or breach of confidentiality. First, the case needs to be referred to the Works Council (Betriebsrat), where it must be heard. Most of the time, the case needs to be proved in a court.
Operational reasons: Economic difficulties or a permanent elimination of the specific position. Needs to be proved that workers cannot be relocated or retrained.
Notice period: 2 weeks during the probation period, then 1 month and more, increasing with tenure. These are minimum notice periods, can be longer periods in employment contracts.
Social selection (Sozialauswahl): Employees less likely to find a new job are less likely to be laid off. Social selection criteria: tenure (typically, 1 point per year), age (1 point per year), partner (8 points), children (4 points per child), disability (5 points). Those with lowest points are first to go.
Severance pay (“Abfindung") is not a legal requirement, but many dismissal law suits are settled this way. The negotiations start with half of a gross monthly salary per year of employment, but can vary depending on the case.
Summary
Firms should always be interested in keeping the better workers and letting the worse ones go.
Retaining good workers is possible by offering them better working conditions, but this may have implications for other workers.
Managers are a powerful force affecting turnover, but we do not advise incentivising managers based on turnover, to avoid dysfunctional response.
If turnover is inevitable, its costs can be contained by ensuring that the workers' knowledge stays within the firm, and by managing the process in a fair and transparent way.
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