Labour Turnover: Meaning, Mechanism and Its Calculation

After reading this article you will learn about Turnover:- 1. Meaning of Turnover 2. Classifications of Turnover 3. Mechanism 4. Calculation.

Meaning of Turnover:

In a human resources context, turnover or labour turnover is the rate at which an employer gains and loses employees. Simple ways to describe it are “how long employees tend to stay” or “the rate of traffic through the revolving door.” Turnover is measured for individual companies and for their industry as a whole.

If an employer is said to have a high turnover relative to its competitors, it means that employees of that company have a shorter average tenure than those of other companies in the same industry. High turnover can be harmful to a company’s productivity if skilled workers are often leaving and the worker population contains a high percentage of novice workers.

Turnover costs for many organizations are very high and can significantly affect the financial performance of an organization. Direct costs include recruitment, selection, and training of new people. Much time and expense go into this process. Indirect costs include such things as increased workloads and overtime expenses for co-workers, as well as reduced productivity associated with low employee morale.

Classifications of Turnover:

i. Internal vs. External Turnover:

Like recruitment, turnover can be classified as ‘internal’ or ‘external’. Internal turnover involves employees leaving their current positions and taking new positions within the same organization.

Both positive (such as increased morale from the change of task and supervisor) and negative (such as project/relational disruption, or the Peter Principle) effects of internal turnover exist, and therefore, it may be equally important to monitor this form of turnover as it is to monitor its external counterpart.

Internal turnover might be moderated and controlled by typical HR mechanisms, such as an internal recruitment policy or formal succession planning.

ii. Skilled vs. Unskilled Employees:

Unskilled positions often have high turnover, and employees can generally be replaced without the organization or business incurring any loss of performance.

The ease of replacing these employees provides little incentive to employers to offer generous employment contracts; conversely, contracts may strongly favour the employer and lead to increased turnover as employees seek, and eventually find, more favourable employment.

However, high turnover rates of skilled professionals can pose as a risk to the business or organization, due to the human capital (such as skills, training, and knowledge) lost. Notably, given the natural specialization of skilled professionals, these employees are likely to be re-employed within the same industry by a competitor.

Therefore, turnover of these individuals incurs both replacement costs to the organization, as well as resulting in a competitive disadvantage to the business.

iii. Voluntary vs. Involuntary Turnover:

Practitioners can differentiate between instances of voluntary turnover, initiated at the choice of the employee, and those involuntary instances where the employee has no choice in their termination (such as long term sickness, death, moving overseas, or employer-initiated termination).

Typically, the characteristics of employees who engage in involuntary turnover are no different from job stayers. However, voluntary turnover can be predicted (and in turn, controlled) by the construct of turnover intent.

iv. Causes of High or Low Turnover:

High turnover often means that employees are unhappy with the work or compensation, but it can also indicate unsafe or unhealthy conditions, or that too few employees give satisfactory performance (due to unrealistic expectations or poor candidate screening).

The lack of career opportunities and challenges, dissatisfaction with the job-scope or conflict with the management have been cited as predictors of high turnover.

Low turnover indicates that none of the above is true: employees are satisfied, healthy and safe, and their performance is satisfactory to the employer. However, the predictors of low turnover may sometimes differ than those of high turnover.

Aside from the fore-mentioned career opportunities, salary, corporate culture, management’s recognition, and a comfortable workplace seem to impact employees’ decision to stay with their employer.

Many psychological and management theories exist regarding the types of job content which is intrinsically satisfying to employees and which, in turn, should minimise external voluntary turnover. Examples include Hertzberg’s two factor theory, McClelland’s Theory of Needs, and Hackman & Oldham’s Job Characteristics Model.

Mechanism to Prevent Turnover:

There are many potential causes for turnover. Area economic conditions and labor market conditions affect general turnover rates and can be very difficult to manage. However, certain causes associated with turnover in any specific job or organization can be managed.

These include such things as non-competitive compensation, high stress, working conditions, monotony, poor supervision, poor fit between the employee and the job, inadequate training, poor communications, and organization practices.

For a company to develop a retention strategy, several steps must be taken. First, they must assess the current situation and measure the turnover rate in their company. Turnover is calculated simply by dividing the number of annual terminations by the average number of employees in the work force.

The average employee turnover rate is 14.4 per cent annually, according to the Bureau of National Affairs. How does your company compare?

A company must also measure the cost of turnover, develop retention strategies, and plan for some expected turnover and a changing workforce culture. Employers must recognize that quality of work life is becoming more and more important to employees.

What initial steps can be taken to reduce turnover?

First, hire the right people and continue to develop their careers. Does your company have an ongoing career development program, tuition reimbursement, or skills training program? An investment in upgrading the workforce is one of the best investments a company can make when looking at long-term growth.

Hiring the people that are a good “fit” with the culture of the organization meaning that their values, principles, and goals clearly match those of the company and then training as necessary will go a long way toward ensuring employee loyalty and retention.

Second, most companies with low turnover rates are very employee oriented:

They solicit input and involvement from all employees and maintain a true “open-door” policy that avoids closed-door meetings. Employees are given an opportunity for advancement and are not micromanaged. Intrinsic rewards are critical.

Employees must believe they have a voice and are recognized for their contribution. Remember that “trust” and “loyalty” are a two-way street. Does your company’s culture encourage open communication and employee input?

Third, develop an overall strategic compensation package:

Third, develop an overall strategic compensation package that includes not only base and variable pay scales, but long-term incentive compensation, bonus and gain-sharing plans, benefit plans to address the health and welfare issues of the employees, and non-cash rewards and perks as well.

To be competitive in today’s labour market, most companies find it necessary to offer a standard benefit package, including health, dental, and life insurance, vacation and leave policies, and investment and retirement plans. But what more could be done that would be cost effective toward creating an employee-oriented work environment?

Creativity in compensation and benefits can make quite a difference to the welfare of the employee. A company should assess overall employee needs when addressing retention issues.

If employee welfare is a genuine concern, what about child care? How much employee absenteeism is attributable to not having a dependable babysitter? Although the costs and liabilities involved in providing onsite day care can be prohibitive, perhaps a company could subsidize childcare in some manner.

Sometimes, just negotiating rates for your employees with area childcare providers could be very helpful. Maybe some kind of a company match would be possible. Household chore assistance is another possibility that is being used by some companies.

Consider other options such as alternative work schedules or flexitime, or perhaps preventative health care and wellness programs such as fitness center memberships as possible cost-effective benefits. Do not forget that perks or non-cash rewards to recognize exceptional performance can be critical.

Service recognition, event tickets, trips, and public recognition can send strong messages to the public regarding company culture and values. Simply examine the issues and needs of your employees and try to develop creative programs to address these needs.

Calculation of Turnover:

Step 1. Calculate the average number of employees:

The number of employees is calculated by adding the number at the start of the period, to the number at the end of the period. Then dividing by 2 to arrive at the average number of employees.

For example:

At the start of the year the firm employed 1000 people. At the end of the year the firm employed 1200. To arrive at the average we add together 1000 + 1200 = 2200. Then divide by 2 to get our answer 2200/2 = 1100 .This figure is the average number of people employed during the period.

Step 2. Calculate the number of departures during the period:

The key here is to make sure that we only include those departures that are actually relevant. That means those that come within the definition we are using. So for the definitions we are using in this example the relevant figures are: Total number of exits = 220 Voluntary = 110 Early = 55

Step 3. Divide departures by number of employees:

To arrive at our final figures, we divide the number of relevant departures by the average number of employees. Then multiply by 100 to get the percentage rate. For total turnover we have: 220 / 1100 (x 100) = 20%. For voluntary turnover we have: 110/1100 (x100) = 10% For early turnover we have: 55/1100 (x100) = 5% Calculating Employee Turnover.

However, there are a number of complications:

Let’s say there were 100 employees at the beginning of the year, and 100 employees at the end of the year, and at the end of the year, 84 of those employees were the same ones as were there the previous year. You might say that the turnover rate was 16%.

But suppose one of those 16 who left was actually replaced three times. The employee quit in January, the replacement quit in April, and another person was hired who lasted only until November. Then you might want to count every time an employee left the company and another one was hired – in this case you’d get 18%.

Another complication: suppose the work force is 100 at the beginning and 90 at the end of the year. Perhaps 16 people have left, but only 6 have been hired during the year, while 2 more were hired and retired within the same year.

You might define turnover as 18/100 or as 18/90, or as 18/95, since 95 is the average of 90 and 100. Instead of 95, you might want to do a fancier average, where you actually add up the number of employees on each day of the year, and divide the total by 365.

One more complication:

Who decided it was a calendar year that we should use for sampling the turnover rate? Perhaps there was no turnover at all for 3 years prior, and then a shift in management caused a lot of people to leave this year. Then a more representative measure would average over 2 or 3 or 4 years.