Employee turnover is neither good nor bad in itself. What determines this is whether it is functional or dysfunctional turnover. Human resources managers should understand the differences between these two types of turnover so that they can understand how to encourage turnover that benefits the firm rather than harming it.
Employee turnover is the rate at which employees are leaving a firm on an annual basis. It can be expressed as a percentage, by dividing the number of employees who have left over the year by the total number of employees who were with the firm at the beginning of the year. For example, if a firm has 100 employees at the beginning of the year and it loses 12 employees, it has a turnover rate of 12 percent.
Functional turnover occurs when people leaving the firm are underperformers. This is common in large consulting, accounting and law firms that employ an "up or out" philosophy. Employees in such a company must develop and improve to move up in the ranks. Those who are unable to progress are let go. Consequently, these firms have high turnover, but the employees who remain are the best and brightest.
Dysfunctional turnover is the exact opposite of functional turnover, as the best employees leave. This can happen for a variety of reasons, but a common cause is low potential to advance. If, for example, a company fills its management positions with external candidates and does not offer them to internal employees, employees are likely to seek external opportunities for advancement.
Human resources managers should encourage functional turnover while attempting to avoid dysfunctional turnover. They should implement an evaluation system that can identify underperformers and those who excel. Underperformers should be encouraged to improve and if they cannot, they should be let go. The top performers should be provided with challenging, new opportunities and promotions so the firm can keep them.