Employee turnover, which is defined as the rate at which employees join or depart from a company expressed as a percentage of the total labor force, has been something frequently measured to evaluate the health of a company. Traditionally lower turnover rates have been interpreted as a sign that management is doing things “right”.
In my years in management, companies used this matrix to judge the effectiveness of the leader. Higher turnover pointed to something the manager was doing “wrong”.
Turnover certainly has its costs. According to Josh Bersin of Deloitte, the total cost of employee turnover can range from tens of thousands of dollars to 1.5-2X of their annual salary. Forbes stated that for entry-level employees, mid-level employees, and highly skilled-level employees, the associated cost comes to 30-50 percent, 150 percent, and 400 percent of their annual salary respectively. In US companies, employee turnover already costs $160 billion a year.
High turnover can also reduce employee morale. This may result from overworked employees who have had increased workloads and responsibilities due to a lack of an active or trained workforce.
Traditionally employee turnover typically has had a negative connotation, mostly due to the potentially high costs associated with replacing a departed worker. However, about 25 percent of turnover can be considered desirable, according to Ere.com. There are several instances where the positives of a worker leaving can outweigh the negatives.
As stated by Chron.com “If employee turnover means losing an individual who is a “bad actor,” the impact can be beneficial to your company. In smaller work environments, even one individual who constantly complains, gossips or doesn’t pull his weight can have a negative effect on company morale. For the remaining workers, the departure of an employee with a negative attitude can seem like a breath of fresh air. For the business owner, it means no longer having to deal with the headaches that employee caused.”
In his book The Agility Factor, Edward E. Lawler states:
Vital to creating an agile organization is having an agile workforce. There are essentially two ways to have an agile workforce: one is to change who is in the workforce, and the other is to change the individuals who are already in the workforce. The latter is often more difficult and more expensive than changing the workforce. This realization is leading increasingly more companies to create an agile work relationship with their employees. Companies accept that turnover can be a positive, one that leads to a change of the mix of skills and motivations of the workforce and that fits an agile strategy-driven business model. This is precisely why Zappos recently offered a bonus, to all the members of its workforce, for turning over.
Putting an accounting spin on this, it would appear an organization could have “addition by subtraction,” meaning that instead of looking at turnover as a bad thing, new employees can reshape the organization.
Turnover can mean positive changes that are necessary for growth and improvement. A few ways in which turnover can be a good thing for a company:
Some companies have effectively implemented a culture where employees continually improve or leave. Jack Welch, former CEO of General Electric, created a policy of annually evaluating staff in order to replace the bottom 10 percent of performers. With this GE has long been recognized for its industry and innovation leadership. According to Thomas F. O’Boyle, author of At Any Cost: Jack Welch, General Electric, and the Pursuit of Profit, Welch, during his tenure at GE, produced more money for shareholders than any other CEO, with the exception of Bill Gates at Microsoft.
Dick Grote, author of Forced Ranking: Making Performance Management Work, 60 percent of Fortune 500 companies have engaged in some form of forced or stacked ranking, including Microsoft, Dell and Accenture. The process requires that managers rank their employees according to one of three categories:
- Top 20 percent. These people are the “A” players—potential stars-in-the-making who will lead the company in the next generation. They typically receive the largest raises and stock options and the most extensive training.
- Middle 70 percent. The “B” players, these employees make up the bulk of an organization’s staff. This staff-level performs their jobs, do what is expected of them and don’t rock the boat. They typically receive smaller bonuses tied to tenure, and the bulk of management’s time is usually directed here, encouraging good employees to become great.
- Bottom 10 percent. These employees contribute the least to the organization, even if they meet company expectations. They’re either given training in order to improve, encouraged to resign, or fired.
2. Keeps a company competitive
Companies with static employment may fall victim to the Peter Principle. The Peter Principle is an observation that the tendency in most organizations is for every employee to rise in the hierarchy through promotion until they reach a level of respective incompetence. In other words, a front-office secretary who great in her current position may be promoted to manager (for which she is not trained or prepared). In this case, she may be more productive for the company if she had not been promoted.
Encouraging turnover for employees who are happy with the status quo, least willing to take appropriate risks, or unable to learn from their mistakes will energize your workforce and give you an edge on the competition.
3. Reduces “Bad Employees” and “Low Morale”
This isn’t popular to say, but there are some people who may be just overall bad employees and will bring with them low morale no matter where they work. Not all employee issues are caused by bad management.
These employees tend to complain often. Legendary executive coach Marshall Goldsmith interviewed more than 200 of his clients. What he discovered matched previous research, that “a majority of employees spend 10 or more hours per month complaining — or listening to others complain — about their bosses or upper management. Even more amazing, almost a third spend 20 hours or more per month doing so.” This means lost productive time, reduction of morale of those around them, and overall company dissatisfaction.
The American Psychological Association reports that having positive relationships with co-workers increases job satisfaction. It makes sense that if you enjoy an environment, you want to be in that environment more and to also be successful in that environment. Motivation is enhanced when the atmosphere is set up for success. By filling the workplace with employees who maintain a positive mindset you will see increased production, higher morale, and overall increased job satisfaction.
Turn over can be a good or bad event, depending on how you look at it. In my private practice over the last seven years, I have used it as an event to re-evaluate how we run our business. Though I openly admit I’ve made mistakes in managing people as we learned how to run our business, many of the instances of turnover that we’ve experienced ended up making us a better, more efficient company with increased overall employee morale.