Expert Advice - August 2005

Employee Turnover

Pay Now or Pay Later

by Mark Keays

How much turnover is too much? Depending on an organization’s location and industry, its turnover rate can be anywhere from 5 percent to over 100 percent. Determining the causes of turnover is critical. If the company does formal exit interviews or asks informally, people often say they are leaving for more money. Because few people leave for less money, the next question should be, "What were the other reasons?" What made them start looking for another job in the first place? There are numerous reasons people leave their employers:

Research shows in most cases people don’t leave organizations – they leave people. Poor or ineffective leadership is one of the top reasons an organization will have high turnover. Employers need to look for trends and take steps to correct the problem. In one company, it was found that 25 percent of the turnover was in one department of one division, and nearly all had worked for the same supervisor.

Organizational culture issues are a huge factor in turnover. It has been estimated that as much as 80 percent of turnover among first-year employees is due to a bad "fit" in the company. People either don’t fit the culture of the organization or can’t adapt to its operating style. The solution is to do a better job of matching employees to the company.

Far too often, managers and supervisors have never really been trained in the hiring process. If their organization is production-driven, the "fogged mirror" approach to hiring may be the norm, and warm bodies are cycled through the company until one is found that works out. Well-trained and prepared supervisors and managers should be given the time and resources to find the right people for the job. This will give them more time to focus on keeping employees productive and motivated, instead of spending the bulk of their time dealing with poor performers or behavioral problems.

People will work for less pay if they like the company and its people, enjoy their jobs and feel connected. On the other hand, some organizations offer the highest compensation packages in town, but because of their poor job in addressing the items mentioned earlier, they become revolving-door employers. The bottom line, however, is that at some point economic survival may drive employees to leave. Inadequate compensation and benefits as factors in turnover must not be ignored. The answer to this is to make sure employees are compensated at a reasonable level for the area in which the employer does business.

Many organizations don’t have a good grasp of the cost of employee turnover. Often, identifying those costs are what it takes to get the leadership to implement changes. As a rule of thumb, it costs between 25 percent and 30 percent of an employee’s salary and benefits package to replace him or her. This cost takes in account the time and cost of the hiring process, training the new employee and lost productivity.

If a company has 5,000 employees and 40 percent turnover, and the average turnover cost per individual is $4,000, turnover is costing $8 million per year, which is a significant amount to take off the bottom line. As competition increases for market share, the most profitable organizations will be looking internally to cut their costs and improve their ability to attract, hire and retain the best people.

Mark Keays
Mark Keays is president of Desert Management Services, a Las Vegas-based management consulting firm, and a faculty member of the University of Phoenix, where he teaches in the areas of organizational change, human resources and management.