Consequences of employee turnover on Organizational Performance
Companies make large investments for their employees’ training, development and exert a great desire to retain top-performing employees. Therefore, it is of the highest importance that those employees truly stick with the company and remain engaged at the workplace.
Studies have shown that turning over one employee with an hourly wage of $8 per hour could cost a company from $3,500 up to $25,000. Depending on the industry, this can in some cases range from 50% to 200% of the salary and benefits that the employee would have received during the year.
The employee turnover topic has received much attention throughout the years, however the focus has generally been on the causes of employee turnover and less often on the consequences this has on the organizational performance of a company. In what follows, we will be addressing these consequences.
There are contradictory points of view on the effects of turnover on the operating performance of a company. On one hand, experts argue that employee turnover has a negative impact on it because:
1. It disrupts the company’s routines that are already in place;
2. Generates direct turnover costs (e.g. recruitment and training);
3. Generates indirect costs because it creates operational disruption after a vital employee leaves.
The employee might be either very knowledgeable about firm-specific aspects or serve as an important link, either between the employees themselves or the employees and organization;
4. Demoralization of the employees remaining at the company, due to the loss of a popular colleague or due to the increased workload following the turnover.
On the other hand, there are some beliefs pointing out to the fact that companies can also profit from increased turnover:
- New employees bring a fresh attitude to the company and are highly motivated;
- According to Boyan Jovanovic, from an economic perspective, thorough evaluation of turnover levels frequently reflects on the efforts of matching the right employees with the right organization.
The effects are dependent on the setting in which the turnover takes place.
Exploration of new possibilities or exploitation of old certainties?
The effect of turnover on performance depends on the nature of the task.
Exploration refers to things that involve research, variation, risk taking, experimentation, playfulness, flexibility, discovery and innovation. Exploitation refers to things such as refinement, choice, production, efficiency, selection, implementation and execution.
Hence, turnover will have a positive or negative effect on the performance of a company, as a consequence of the increased diversity of perspectives that the new employee brings.
Low-turnover rate or a high-turnover rate?
Turnover side-effects depend on whether the company has a low-turnover rate or a high one. Those affecting low-turnover companies are generally higher than those affecting the performance of high-turnover companies. Essentially, a low-turnover rate means that an employee stays longer within a company he/she works for and thus gains more experience and knowledge. If this employee were to leave, the company would lose a hefty portion of its experience with that employee.
A high-turnover rate means that employees are replaced regularly and therefore, do not possess much experience regarding the work they undertake for their respective companies. These employees are therefore easily replaced by a new employee with a similar level of experience.
Low-process-conformance or high-process-conformance?
At low-process-conformance companies, standardized task processes do not exist and staff members will perform their tasks in a different manner, concentrating knowledge and experience into each individual employee.
If this employee quits, the company’s organizational performance will suffer, since any new employee does not have the same amount of experience and knowledge as the old one; moreover, work mastery cannot be passed on from the previous employee to the current one.
Contrastingly, at a high-process-conformance company, the tasks are standardized and consistent across all members of staff, which means that all work-related information resides in the routines of the organization rather than the individual. This knowledge can be easily transferred to a new employee.
Whether it is exploration, exploitation, low-turnover, high-turnover, low-process-conformance or high-process-conformance, it is important to note that the side-effects of the turnover rate on the organizational performance can be reduced by applying standard task processes wherever it is possible. These are better suited for exploitation-oriented situations with high turnover rates, but other scenarios are also affected by such measures.