One of the most critical issues facing organizations today is how to retain the employees they want to keep. Reducing employee turnover is a complex skill that requires an understanding of why employees leave and why they stay. Armed with this knowledge, you can then develop an effective retention management plan.
What is Employee Turnover?
Employees leave organizations for different reasons. Some find a better job, some go back to school, and some follow a spouse who has been transferred out of town. Others retire, get angry about something and quit on impulse, or never intended to keep working after earning a certain amount of money. All these reasons are examples of turnover, and they all have different organizational implications.
Voluntary turnover is initiated by the employee—it’s when they decide to leave the organization. Involuntary turnover is initiated by the organization, when the employee gets dismissed.
If the turnover is voluntary, it may be functional or dysfunctional. Dysfunctional turnover is harmful to the organization and can take numerous forms, including the exit of high performers and employees with hard-to-replace skills, departures of women or minority group members that erode the diversity of your company’s workforce, and turnover rates that lead to high replacement costs. By contrast, functional turnover does not hurt an organization. Examples of this type of turnover include the exit of poor performers or employees whose talents are easy to replace.
Finally, some voluntary turnover is avoidable, and some is unavoidable. Avoidable turnover stems from causes that the organization may be able to influence. For example, if employees are leaving because of low job satisfaction, the company could improve the situation by redesigning jobs to offer more challenges or more opportunities for people to develop their skills. Unavoidable turnover is caused by circumstances over which the organization has little or no control. For instance, if employees leave because of health problems or a desire to return to school, there may be little the organization can do to keep them.
The distinction between avoidable and unavoidable turnover is important because it makes little sense for an organization to invest heavily in reducing turnover that arises from largely unavoidable reasons.
How to Calculate Employee Turnover
Calculating employee turnover rate is straightforward. First, determine the average number of employees during a defined period, by dividing the sum of employees at the beginning and the end of the period by two. To find the employee turnover rate, divide the number of employees separated during the period by the average number of employees.
Stated as a formula, the calculation is:
Turnover Rate = 100 x (Separated Employees/((Beginning Size of Workforce + Ending Size of Workforce)/2)).
For example, if you have 75 employees at the start of the period and 85 at the end, your average number of employees is 80. If 16 employees left the company, that’s 16/80, or 20 percent.
Employee Turnover Statistics
The government routinely distributes employee turnover statistics. Here is the employee turnover rate by industry as of January 2019 according to the U.S. Department of Labor, Bureau of Labor Statistics:
Why Employee Turnover Matters
Even when the job market is tight and people are strongly motivated to stay with their current employer, it would be shortsighted to ignore retention management. That’s because even high unemployment rates have little impact on the turnover of top-performing employees or those with in-demand skills.
Moreover, businesses in all industries are facing impending shortages of overall talent, as well as a dearth of employees with specialized competencies that contribute to the companies’ competitive advantage. Organizations that systematically approach retention—in good times and bad—will stand a greater chance of weathering such shortages.
Turnover matters for three key reasons: (1) it is costly; (2) it affects a business’s performance; (3) it may become increasingly difficult to manage.
The Cost of Employee Turnover
Employee departures cost a company time, money, and other resources.
Research suggests that direct replacement costs can reach as high as 50%-60% of an employee’s annual salary, with total costs associated with turnover ranging from 90% to 200% of annual salary.
If these estimates strike you as high, keep in mind that in addition to the obvious direct costs associated with turnover (such as accrued paid time off and replacement expenses), there are numerous other costs. Those costs include:
- HR staff time (exit interview, payroll administration, benefits)
- Manager’s time (retention attempts, exit interview)
- Accrued paid time off (vacation, sick pay)
- Temporary coverage (contingent employee, overtime for remaining employees)
- New hire’s compensation
- Hiring inducements (signing bonus, reimbursement of relocation expenses, perks)
- Hiring manager and unit/department employee time
- Orientation program time and materials
- HR staff induction costs (payroll, benefits enrollment)
- Formal training (trainee and instruction time, materials, equipment)
- On-the-job training (supervisor and employee time)
- Mentoring (mentor’s time)
- Socialization (other employees’ time, travel)
- Productivity loss until the replacement has mastered the job
- Delays in production and customer service; decreases in product or service quality
- Lost clients
- Clients are not acquired that would have been acquired if the employee had stayed
- Stiffer competition as employee moves to a rival company or forms own business
- Contagion (other employees decide to leave; for example, to join defector at his/her new organization)
- Disruptions to team-based work
- Loss of workforce diversity
Clearly, turnover costs can have an alarming impact. One study estimated that turnover-related costs represent more than 12% of pre-tax income for the average company and nearly 40% for companies at the 75th percentile for turnover rate.
However, remember that not all turnover is harmful for an organization. As noted earlier, some turnover may generate important benefits. For example, the new hire may turn out to be more productive or skilled than the previous employees.
To develop an effective retention plan, you need to consider both the costs and benefits associated with turnover in your organization.
Turnover Affects Organizational Performance
A growing body of research links high turnover rates to shortfalls in organizational performance. For example, one nationwide study of nurses at 407 hospitals showed that turnover among registered nurses is positively and linearly associated with both operating and personnel costs per adjusted admission.
Likewise, reducing turnover rates has been shown to improve sales growth and workforce morale. In addition, high-performance HR practices (including reduction of dysfunctional turnover rates) increase firm profitability and market value.
These relationships become even more pronounced when you consider who is leaving. For instance, research shows that high turnover among employees with extensive social capital can dramatically erode organizational performance. Thus, a savvy HR manager can make a clear business case for tailoring turnover management strategies to the types of employees departing the organization.
Retention May Become More Challenging
Are you ready for a talent crunch? Opinions abound regarding whether demographic and labor market trends signal an impending shortage of overall labor supply.
For example, according to Manpower, Inc., “Demographic shifts (aging populations, declining birth rates, economic migration), social evolution, inadequate educational programs, globalization, and entrepreneurial practices (outsourcing, offshoring, on-demand employment) are . . . causing [labor] shortages, not only in the overall availability of talent but also—and more significantly—in the specific skills and competencies required.
Why Employees Leave
Much research on talent retention has centered on understanding the varied reasons behind employees’ decisions to leave organizations, as well as the processes by which people make such choices. By understanding why people leave, organizations can also gain a better idea of why people stay and can learn how to influence these decisions.
The theory of organizational equilibrium can shed valuable light on these matters. According to this theory, an individual will stay with an organization as long as the inducements it offers (such as satisfactory pay, good working conditions, and developmental opportunities) are equal to or greater than the contributions (time, effort) required of the person by the organization.
Moreover, these judgments are affected by both the individual’s desire to leave the organization and the ease with which they could depart. Clearly, turnover is a complex process. That is, although some individuals may quit a job on impulse, most people who leave spend time initially evaluating their current job against possible alternatives, developing intentions about what to do, and engaging in various types of job search behavior.
Specific turnover drivers affect key job attitudes such as satisfaction with one’s role and commitment to the organization. Low satisfaction and commitment can initiate the withdrawal process, which includes thoughts of quitting, job searching, comparison of alternative opportunities, and the intention to leave. This process may lead to turnover if the organization fails to manage it effectively.
Turnover drivers may also produce other work behaviors that suggest withdrawal, such as absenteeism, lateness, and poor performance, any of which may end in a departure without the person going through a job search, evaluation of alternatives, or extended consideration of quitting.
The lesson? To proactively manage retention, organizations must monitor and adjust key aspects of the work environment that influence employees’ desire to stay or leave.
When someone has numerous alternatives that are more attractive than their current role, the decision to leave grows that much easier. Retention-savvy managers should thus keep tabs on alternate opportunities, so they can ensure that positions remain competitive.
Why Employees Stay
Of course, it is also valuable to understand why employees stay.
Some recent studies have examined the ways in which employees become embedded in their jobs and their communities. As employees participate in their professional and community life, they develop a web of connections and relationships on and off the job. Leaving a job would require severing or rearranging these connections. Employees who have many connections are more embedded, and thus have numerous reasons to stay in an organization.
According to researchers, there are three types of connections that foster embeddedness:
(2) “fit,” and
Each of these types may be related to the organization or the surrounding community.
Links are connections with other people, groups, or organizations. Examples include relationships with co-workers, work groups, mentors, friends, relatives, church groups, and so forth. Employees with numerous links to others in their organization and community are more embedded and would find it more difficult to leave.
Fit represents the extent to which employees see themselves as compatible with their job, organization, and community. For example, an employee who relishes outdoor activities and lives in a community that offers excellent outdoor opportunities would find it more difficult to leave their job if doing so required moving to another community that did not provide such opportunities.
Sacrifice represents forms of value a person would have to give up if they left a job. Sacrifices include financial rewards based on tenure, a positive work environment, promotional opportunities, status, in the community, and so forth. Employees who would have to sacrifice more are more embedded and therefore more likely to stay.
Developing and Implementing a Retention Management Plan
Simple one-shot retention efforts (for example, a single employee attitude survey, a one-time bonus, or a once-offered management training program) are unlikely to exert much impact over the long run.
To manage retention most effectively, you need to engage in an ongoing diagnosis of the nature and causes of turnover, as well as develop (and constantly hone) the right mix of retention initiatives.
That calls for thinking about retention before employees are hired, while they’re working at your company, and after they leave. As an HR professional, you have a critical role to play in this process. Indeed, many organizations are integrating their retention efforts into a broader talent management strategy.
Talent management comprises workforce planning, hiring, development, and retention to ensure that the organization has access to the quality and quantity of talent it needs to compete now and in the future. A recent study concluded that 53% of organizations have a talent management initiative in place, and 76% of these enterprises identify talent management as a top organizational priority.
But keep in mind that each organization is unique, operates in its own idiosyncratic environment, and has its own human capital strategies and challenges. Even within a single organization, retention goals and challenges may differ across departments, divisions, job types, geographic locations, and even individuals. Thus, one-size-fits-all retention initiatives may backfire.
How, then, should you approach the task of developing the right retention management plan for your organization?
Step 1: Turnover Analysis
Not all voluntary turnover is harmful to an organization. Turnover among underperformers, turnover that enables your company to tap fresh perspectives and skill sets or lowers labor costs are all examples of functional turnover. Moreover, in most cases, it’s impossible to prevent every employee from leaving a company.
However, turnover becomes dysfunctional when the wrong people are leaving, or when the turnover rate becomes so high that the accompanying costs and instability outweigh the benefits.
To determine whether turnover is problematic in your enterprise, you need to conduct a turnover analysis. An effective turnover analysis examines three questions:
(1) How many people are leaving (turnover rate)?
(2) Who is leaving?
(3) What are the relative costs and benefits of your current turnover?
Use the turnover equation to calculate your turnover rate for a certain period of time.
Also, track types of turnover (such as voluntary vs. involuntary and avoidable vs. unavoidable), type of employee (part-time or full-time), job category, job level, geographic location, and other categorizations that may be important in your organization (for instance, the performance level of departing workers). These breakout data help you identify “turnover hotspots” to focus on.
Next, benchmark your turnover rate.
Through internal benchmarking, you track your organization’s turnover rates over time. If the rate is increasing, overall or among particular groups or locations, that could be a red flag.
Through external benchmarking, you compare your organization’s turnover rates against industry and competitor rates. If your rates are significantly higher than those of rival companies, your firm may be at a competitive disadvantage.
Alternatively, relatively low rates in your company could provide an edge over rivals. The best source for benchmarking data is the Department of Labor’s Job Openings and Labor Turnover Survey.
Next, ask the question “who is leaving?”
The question of who is leaving is crucial for assessing the extent to which turnover is functional or dysfunctional, because not every employee is of equal value to your organization.
Furthermore, some employees may leave for different reasons than others. Owing to these and other differences, you should track breakout data on the performance levels, skills (especially high-demand or hard-to-replace skills), tenure, and membership in underrepresented groups (e.g., minorities, females) of individuals who leave. This information will give you a more complete picture of the extent to which turnover is a problem in your organization.
Step 2: Planning
Taken together, turnover analysis, benchmarking, and needs assessment enable you to determine the extent to which turnover is problematic in your organization. These data will help you develop appropriate responses and set your retention goals. If you’ve decided that turnover is not a problem, you may want to simply maintain the status quo while still monitoring turnover in your organization.
If you’ve determined that turnover does present a problem, you might want to consider broad-based or targeted retention strategies (or a combination of both), depending on your company’s unique situation.
Broad-based strategies are based on general principles of retention management and are intended to help reduce turnover rates across the board. For example, “Decrease annual turnover in our company by 7%.”
Targeted strategies are designed for organization-specific turnover drivers and are intended to address organization-specific issues. Often, these strategies are also used to influence turnover among certain employee populations. For instance, “Increase the retention rate of female engineers by 10%.”
When turnover costs are tolerable, turnover rates acceptable, and turnover is considered functional, then turnover is not a significant current issue. Thus, your organization can focus on monitoring the situation and maintaining the status quo.
If costs are tolerable, but employee departures are considered dysfunctional, consider low-investment strategies targeted at people who leave, for example creating more flexible work arrangements.
When costs are tolerable, but the turnover rate is problematic, you may want to try low-investment but broad-based strategies.
When both the turnover rate and who is leaving are problematic, you’ll need both targeted and broad-based strategies.
When turnover costs are deemed intolerably high, look for strategies that provide a positive cost-benefit ratio, even if they require extensive resources.
Finally, when neither the rate nor who is leaving is an issue, but turnover costs are high, companies should seek to streamline and reduce the costs associated with each person who quits.
Step 3: Implementation
The actions you take to implement your plan will depend on the strategies you are pursuing and the unique circumstances of your organization. With any organizational change, you’ll want to get top management support and buy-in for your strategy.
It will also be important to develop a communications plan to ensure that managers understand the changes and are prepared to implement new policies and procedures. Try to anticipate any possible objections to your new strategy and be prepared to address those concerns.
Step 4: Evaluation
Evaluating the results is as important as planning and implementation.
Retention efforts may require substantial investments, so you’ll want to assess their impact relative to the cost. For example, consider how many employees are leaving, which employees are leaving, and what return your company is getting on its investment in the strategies.
Consider whether these results support your company’s retention goals and, in case they don’t, if some of those goals are unrealistic and need to be modified. Also, evaluate whether unsatisfactory results suggest the need to gather new kinds of data or to develop a more effective implementation approach.
Exploring these questions can help you tease out the causes behind less-than-ideal outcomes. This allows you to objectively assess your retention strategies and make the changes needed to improve the results.
Effective Retention Practice: Employee Engagement
Strengthening employee engagement in your organization can help you retain talent. Engaged employees are satisfied with their jobs, enjoy their work and the organization, believe that their job is important, take pride in the company, and believe that their employer values their contributions.
Because of this, it’s not surprising that organizations of all sizes and types invest heavily in policies and practices that foster engagement in their workforces.
Here are a few effective ways to increase employee engagement:
Job Design — Increase meaningfulness, autonomy, variety, and co-worker support in jobs.
Recruitment and selection — Use clear communication to achieve person-job and person-organization fit. Hire internally where strategically and practically feasible.
Training and development — Provide orientation that communicates how jobs contribute to the organization’s mission and that helps new hires establish relationships with colleagues. Offer ongoing skills development.
Compensation and performance management — Consider competency-based and pay-for-performance systems. Define challenging goals. Provide positive feedback and recognition of all types of contributions.
Effectively managing employee turnover in your organization can be a challenge. You need to have a comprehensive understanding of the many strategies at your disposal. You also need the ability to put a solid retention plan into action and learn from its outcomes. However, given the high cost of turnover and the impact employee turnover has on your organization, your efforts will be well worth it.
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