7.1 The costs and benefits of employee turnover

Introduction and definitions

• Employee turnover is the movement of workers in and out of firms.

• Hires: the total number of additions to the payroll during the reference period.

• Separations: the total number of terminations of employment during the reference period.

  • Quits: voluntary, initiated by the workers

  • Layoffs and discharges: involuntary, initiated by the firm

  • Other: transfer, retirement, death

  —>Lots of “gray areas", for example “voluntary" quits after being pressurized, excluded, denied promotion, etc.

Turnover measure

Turnover is measured in terms of the separation rate, often by separation type as

Turnover happens all the time, and differs widely: So what?

• Turnover has costs and benefits to the firms where it originates.

• It also may be of consequence to the firms where the separating workers go.

  —>Hence, the importance of turnover for personnel management.

Costs and benefits of turnover

• A view deeply held in mainstream HR: Any turnover is bad, and so should be kept to a minimum.

• But turnover has both costs and benefits.

Costs of Turnover:

• HR administration

  • Time spent doing exit interviews and hiring replacements

• Training and human capital

  • Loss of return on investments in leavers human capital

  • Direct costs of training

  • Supervisor time spent on job induction and training

• Performance

  • Losses from de-motivated leavers and inexperienced new hires

• Reputation?

Benefits of turnover:

• Job-worker match

  • Ability and fit to the organization are not perfectly known, so bad job-worker matches are possible. Thus we see higher turnover earlier in the tenure

  • Turnover allows to weed out bad job-worker matches

• Flexible workforce

  • Turnover helps adjust workforce size to demand fluctuations

• Access to outside knowledge

  • Knowledge spillovers between firms through worker mobility.

Is there an “optimum" quit rate?

• The marginal benefits of turnover are constant (at best) or decreasing with turnover.

• The marginal costs of turnover are constant (at best) or increasing.

• At some point, marginal benefits = marginal costs, this is the optimal quit rate.

• But the marginal benefits of turnover may never exceed its marginal costs. In this case we have corner solution, the optimal quit rate= 0.

—>We need to understand how turnover affects performance, i.e. which factors determine the optimum quit rate, if any.

Empirical evidence

Siebert, W. S., & Zubanov, N. (2009). Searching for the optimal level of employee turnover: A study of a large UK retail organization. Academy of Management Journal, 52(2), 294-313.

• Testing the inverted U hypothesis by looking at how sales in a UK retail network correlate with turnover, and how this correlation changes with the contextual factors affecting the turnover-performance link.

—>For the full-time workers (≥ 30 hours per week, 20% of workforce), who are more carefully selected, longer and better trained, and form the elite of sales personnel, any turnover is bad for productivity. (𝜙 is small, c is high)

—>There is an inverted U for part-time workers (<30 hours per week, 80% of workforce, higher 𝜙, lower c), with an optimum quit rate of 0.15 in FTE, provided there is no turnover among the full-time workers.

• Turnover is an important fact of working life. It happens all the time and has benefits as well as costs.

• There is an optimum level of turnover, and it is not always zero.

• We have presented a theory and empirical evidence backing this statement.

• Next topic: how firms achieve what they think is the optimal level of turnover for them.