The Importance of Employee Turnover to an Organization

Turnover has such an impact on companies that executive bonuses are being conditioned on retaining a certain percentage of employees. "The Wall Street Journal" reported in June 2008 that the executive officer of a global car dealership was paid 8 percent of his bonus for keeping overall turnover below 31 percent, and one technology executive found half his bonus was dependent on "undesirable attrition." The cost of turnover to the bottom line, in addition to the impact of turnover on the workforce and operations make it essential for employers to manage the process effectively.

Turnover represents a significant cost to the organization. One study by Harvard Business School researchers, published in the January-February 2008 issue of the journal "Organization Science," estimates that the turnover costs from just one departing employee -- earning approximately minimum wage -- could amount to as much as $25,000. These figures are primarily based on direct costs, including any severance costs plus the expense to recruit and train a new employee, but can also incorporate indirect costs such as a resulting decline in productivity or employee morale. According to Michael Watkins, in his 2003 book "The First 90 Days: Critical Strategies for New Leaders at All Levels," it takes more than six months before a new employee begins to provide as much value to the organization as the company is expending to train the employee. Combine this with another finding from George Bradt, Jayme Check and Jorge Pedraza, in their 2006 book "The New Leader’s 100-Day Action Plan" that says 40 percent of leaders will fail before 18 months in the job -- and more than 60 percent if the leader came from the outside, according to 1999 findings by Dan Ciampa and Michael Watkins in the book "Right From the Start: Taking Charge in a New Leadership Role" -- and it becomes obvious that turnover represents a significant expense.

The report published in "Organization Science" also indicates that the effect of turnover on the organization's overall performance and productivity will be "pronounced" when operational processes are fairly standard and routine. This might be explained with the theory that fresh ideas from people new to the organization can add value more quickly to a company that has complex, non-standard processes; whereas an organization in which the procedure must be learned and repeated will suffer a greater loss in efficiency until the new employee is fully trained and a cohesive member of the team.

Turnover itself can be a symptom of a deeper problem within the organization. A 2003 study conducted by the U.S. General Accounting Office titled "Child Welfare: HHS Could Play a Greater Role in Helping Child Welfare Agencies Recruit and Retain Staff," found that ineffective supervision, unmanageable workloads and inadequate salaries were the primary cause of most turnover amongst Child Protective Services workers. If the organization identifies an unusually high rate of turnover in a particular job classification or from a specific division of the company, this indicates a problem that needs further investigation. Exit interviews, surveying current staff or a workload analysis might all shed light on the potential issues.

Employers welcome and actually encourage some turnover -- particularly involuntary turnover. Involuntary turnover is important to the organization in a different way: It refers to employees who have been dismissed from the company, generally due to a failure on probation, poor performance or misconduct. It is extremely damaging to an organization to leave poor-performing employees on the books, or fail to deal with misconduct appropriately and in a timely fashion. Inaction is not only detrimental to morale and work group relations, but could cost far more in terms of employer liability -- for example, allowing a sexual harasser to remain employed -- than the cost of replacing the employee. Employers should distinguish between voluntary and involuntary turnover and monitor the separate percentages on a regular basis. If involuntary turnover is unusually low, there are probably some poor performers being allowed to slide by, and if it is extremely high, this could possibly indicate issues with the recruitment process -- the right candidates are not being selected -- or signify a change in management tolerance levels.