CHAPTER 1

Myth: Turnover Is Bad

Understanding the Real Impact of Turnover

Manager Green is worried. The annual turnover rate in his business unit has increased from 14% last year to 18% this year, more than a 25% increase. Being a proactive manager, he decides to develop a plan to address the rising turnover rate. Based on exit interview data, conversations with other managers, and his own experience, Manager Green develops a comprehensive plan involving retention bonuses, a market-based salary survey, and hiring a consultant to improve employee engagement.

Manager Green presents his turnover reduction plan to his boss, Manager Savvy. The first thing she asks is how much the plan will cost. Manager Green has learned that Manager Savvy always asks him tough questions, so he is prepared with a well-developed investment estimate: $200,000. Ok, Manager Savvy continues, how much is each instance of turnover costing the organization? Hmmm, Manager Green didn’t calculate an estimate for that. The questions from Manager Savvy continue. What is the average turnover rate in our industry? It turns out the average annual turnover rate approaches 25%. Wasn’t Manager Green at the meeting where the company leadership discussed plans for consolidating some operations? Some natural attrition is desired right now. How valuable are the employees who are leaving? Manager Savvy believes a new performance management system is encouraging some of the lower performers to leave and she’d like some data to show whether this is the case. Manager Savvy concludes by telling Manager Green that she agrees with him that retention of key employees is very important, but that she needs more data concerning how the increasing turnover rate is affecting the organization. Back to the drawing board!

Kernel of Truth

There is no question that turnover can be extremely harmful to organizations. If that were not the case, we wouldn’t bother writing this book, and you certainly wouldn’t bother reading it. Consider this quote from two noted turnover scholars regarding the impact of higher turnover rates: “Collective turnover can lead to undesirable outcomes because it entails the loss of firm specific human and social capital, disrupts operations and collective function, saddles remaining members with newcomer socialization and training, and increases recruitment and selection costs” (p. 360).¹ In fact, our recent research documents that decreases in turnover rates can be associated with hundreds of thousands or even millions of dollars in improved organizational performance.² However, that same research shows that sometimes turnover doesn’t hurt organizational performance, and in over 20% of studies reviewed, higher turnover rates were associated with better organizational performance. To strategically address turnover and retention, the savvy evidence-based manager needs to recognize that all turnover is not created equal.

What the Research Says

People leave organizations for all kinds of reasons, and they don’t all have the same implications for managing turnover. An adequate performer who quits because their spouse took a job in another state may have quite different implications than the loss of a star performer who quits to escape a stifling boss. Turnover research has focused on making several key distinctions in defining turnover, for example: voluntary–involuntary, functional–dysfunctional, and avoidable–unavoidable, as shown in Figure 1.1.³

Figure 1.1. Turnover classifi cation scheme.

Source: Reprinted with permission, SHRM Foundation.

With voluntary turnover, the individual employee makes the decision to leave the organization, whereas with involuntary turnover, the organization makes the decision that the individual has to leave. Most organizations attempt to make this distinction, and the implications are quite different. In the case of involuntary turnover, the organization most often makes the decision either because the employee is not working out (e.g., violating policy, poor performance, or a poor fit) or because of organizational restructuring (e.g., downsizing). The assumption underlying involuntary turnover is that it is likely positive (or at least necessary) for the organization—or else why do it? Certainly, involuntarily terminating an employee for performance-related issues often makes sense, although we have seen cases where involuntary turnover was extremely disruptive. For example, one organization we researched was conducting drug testing and verification of a required state license months after hiring, and was terminating almost a third of new hires after socializing and training them. (Socialization is the process of learning about role appropriate behavior, cultural norms, and expectations for behavior in the work environment. Both socialization and training require investments in time and resources and losing out on the benefits of these investments can be costly.) There is also a growing body of research on the effects of involuntary turnover resulting from organizational restructuring.⁴ Perhaps surprisingly, this research suggests that no more than half of organizations that significantly downsize perform better financially three to five years later. Thus, the proper management of involuntary turnover is important.

However, most turnover research has focused on voluntary turnover, because these are often valuable employees the organization would prefer to retain. Even within the category of voluntary turnover, though, it may matter who is leaving, why they are leaving, and where they are going. In terms of who is leaving, an important distinction to be made is between functional and dysfunctional turnover.⁵ Turnover that is problematic for the organization is considered dysfunctional. Examples might include the loss of high performers, the loss of individuals with difficult-to-replace skill sets, the loss of hard-to-recruit populations, or very high turnover rates that are disruptive to operations. However, not all voluntary turnover is dysfunctional. Some instances of voluntary turnover may even be positive or functional for the organization. Examples might include the exit of low performers, natural attrition that meets business needs, or turnover that enables the organization to replace leavers with better performers, lower cost employees, or individuals with diverse new perspectives. Evidence suggests that higher turnover rates have a more negative impact on organizational performance in manufacturing and transportation industries; among managerial employees compared with employees without supervisory responsibilities; in mid-size and larger organizations compared to smaller ones; in the United States compared to Europe; and when organizational performance is measured in terms of customer service or quality and safety metrics.⁶Thus, the impact of turnover is not the same across individuals or contexts, and organizations can benefit by assessing the extent to which the turnover they are experiencing is functional or dysfunctional.

In terms of why people are leaving, one important distinction is between avoidable and unavoidable turnover.⁷ Avoidable turnover is driven by reasons that are at least somewhat under organizational control. Examples may include turnover driven by job dissatisfaction, poor supervision, inadequate growth opportunities, or a negative organizational culture. However, even if an organization does everything right, some productive, valuable employees will still leave for reasons that the organization has little or no control over. Examples of unavoidable turnover may include turnover driven by trailing a relocating spouse, health problems, or winning the lottery. This distinction is important because it may make little strategic sense to invest resources to counteract unavoidable turnover. Another perspective on why people leave suggests that there are eight key types of forces or motivations that drive turnover decisions: affective, calculative, contractual, behavioral, alternative, normative, constituent, and moral/ethical.⁸ We return to these forces in more detail in Chapter 3. The key point, though, is that designing evidence-based strategies for managing turnover requires having a clear understanding of why people are leaving.

Recent research also suggests that defining turnover requires expanding the criterion space by considering in more detail where people go, not just whether they stay or leave.⁹This research suggests going beyond simple stay or leave classifications and defining employee mobility decisions in terms of, for example, retirement, disability, death, firing, layoff, unpaid employment, an alternative job, a nonwork option, voluntarily staying with the organization, and involuntarily staying with the organization because they are unable to find a suitable alternative. It may be that these different types of turnover decisions are the result of different drivers and processes. Thus, more fine-grained measurement will provide more information for understanding the real impact and causes of turnover in your organization.

In assessing the impact of turnover, it is also important to estimate the costs and benefits associated with any particular instance of turnover. Estimates suggest that the total costs associated with turnover can range from 90 to 200% of annual salary.¹⁰ Turnover costs can be classified into separation costs and replacement costs.¹¹ When somebody leaves, there are usually direct separation costs associated with managing this process. Examples may include HR staff time to process the exit and conduct an exit interview, manager time, costs for overtime or temporary employees to cover the exiting employee’s duties in the short run, and accrued time off. There may also be myriad indirect or intangible costs associated with turnover, such as loss of organizational memory, teamwork disruptions, loss of productivity, or diminished diversity. There may also be separation costs associated with replacing the departing employee. These can include HR time, manager time, recruitment costs, selection costs, orientation costs, training costs, and even costs associated with lower quality, productivity, or customer service while replacements master the job.

As noted above, though, there can be benefits associated with turnover. For example, in some cases the organization may reduce labor costs by not hiring a replacement or by hiring a less expensive replacement. In some cases, turnover could energize the organization by creating an opportunity for someone else, by bringing in a better performer, or by infusing new skills, new perspectives, or increased diversity into the organization. See Table 1.1 for an outline of major costs and benefits associated with voluntary turnover.

It is also important to keep in mind that the impact of turnover is not the same for every employee who leaves, because not every employee is of equal value to the organization. Research suggests that some positions are more pivotal than others.¹² For many positions, retention is important up to a point, because high turnover in these positions would be costly. However, improving retention beyond a certain point may present diminishing marginal returns. For highly pivotal positions, however, improving retention continues to have a significant impact on organizational success.

Evidence-Based Management Implications

Turnover research clearly demonstrates that turnover can be good or bad. Here are several key points for savvy evidence-based managers to keep in mind to strategically manage turnover:

•Carefully define turnover. Turnover can be voluntary, involuntary, functional, dysfunctional, avoidable, unavoidable, pivotal, or not, and may result in very different effects on the organization. Managers and HR professionals need to develop a common frame of reference for understanding what turnover means.

•Watch for fuzziness of measurement. An employee is told to quit or be fired, and then classified as a case of voluntary turnover. Exit interviews reveal that nobody leaves because of their supervisor, but supervisors are conducting the exit interviews. These are examples of measurement errors that commonly creep into turnover data.

•Collect as much data as possible. Turnover rates by themselves tell you very little about the extent to which turnover is a problem. Evidence-based turnover management requires data on the performance, value, and difficulty of replacement of leavers; the reasons why individuals are leaving, where they are going, and whether the organization could have done anything to prevent it; and the relative costs and benefits of turnover.

•Develop a turnover cost formula. Savvy managers need to know how much each instance of turnover costs the organization, accounting for direct and indirect costs, as well as potential benefits. A consensus on the appropriate cost is more important than any one formula. Recognize that the formula may differ by position.

Final Thought

Turnover is not always harmful, some turnover is likely inevitable and positive, and turnover rates by themselves are not particularly useful. Effectively defining and measuring turnover and the relative costs and benefits associated with it are keys to strategically managing it. Returning to Manager Green, next time he will have data on who is leaving, why they are leaving, where they are going, and how much it is costing the organization. This will enable him to develop a more evidence-based retention plan, and to justify the required investments.