Understand labour turnover and how you calculate it.
Labour turnover (LTO) is usually defined as the total movement of people in and out of the organization. A reasonable amount of turnover is healthy as it brings in new blood, techniques, ideas and energy. However, should the turnover rate get out of hand, it becomes problematic because it often involves losing people who are disproportionately expensive and time consuming to replace, and one loses customer continuity which can affect bottom line
Which circle are you in?
Sheila Rothwell makes reference to two circles, namely a vicious circle and a virtuous circle.
Different types of labour turnover and their interpretation
LTO could be analyzed by five categories:
- Dismissal
- Voluntary separation;
- Retrenchment;
- Other (example retirement, pregnancy)
With high LTO, it would be important to note in which of these categories most separations primarily fall. For example, consider two companies with a high LTO
In company A, 70% of the workers are fired, which might indicate supervisor problems, training problems, company systems and procedures problems and selection and induction problem. In company B, there may be problems with pay, future prospects and promotion opportunities.
Median Length of Service (MLS) within an organization adds even more insight to the matter. If people leave voluntarily after three years, they are more likely to be in company B where the prospects are bad. This could be more serious than in company A as the company has already invested considerable time and money in training and developing these people. These costs will have to be re-incurred to replace the lost staff.
How much is too much?
One must realize that labour turnover is not always bad; it is either good or bad depending on the consequences for the organization which may be either economic or behavioural. Allen Bluedorn presents an interesting way of looking at LTO. He proposes that a “specific turnover rate should be thought of as a purchasable commodity”. If you are thinking of changing the turnover rate in your organization, you should think in terms of “acquiring” the change: the greater the changes, the greater the benefits will have to be in order to outweigh the cost.
Since the marginal utility of a commodity decreases as more of it is obtained, a point will be reached when one more unit will not be worthwhile to the buyer. The optimal turnover rate then is the rate at which the marginal cost equals marginal utility of the turnover rate. This is illustrated in Figure 3
What does it cost to lose staff?
The cost involved can be analyzed in three distinct phases:
- Psychic absenteeism cost. This is intangible, but could be the most expensive. The mind leaves the organization between six and twelve months before the body follows;
- Separation cost. This could includes the cost of separation pay, the loss of efficiency prior to separation and the effects of any period of vacancy during the replacement search period;
- Acquisition cost. This includes the cost of recruitment, interview assessment time, selection and replacement or alternatively, the cost of promotion or internal transfer; and
- Learning cost. This includes the cost of the new incumbent formally or informally acquiring the knowledge, skills and attitudes required to perform the job and integrate into a team. Included here are cost consequential errors that one may make during the period of learning
The cost for an executive earning R1 million basic salaries (and assuming the recruitment is done from outside the company) can be expected to be as follows:
Separation cost:
Three months period of notice below:
Average effectiveness - R250 000
Administration cost – R140 000
Acquisition of knew employee:
Recruitment expenses (20% of employee’s salary) – R200 000
Cost of advertisement – R90 000
One day’s interviewing time for two executives – R50 000
Learning cost:
Three months at below average
Effectiveness – R250
Total cost - R804 000
The costs in losing an employee are high and there is a considerable amount of wastage.
Labour turnover trends over past three years:
Labour turnover in the last three years has been around 13% to 15% on average. For scarce skills like artisan engineers and top executive specialists it has been higher- around 25%.
In the recent recessionary times, the LTO figure has been as low as 3% to 5%. Owing to supply and demand, the lack of growth and poor education, the LTO amongst the lowest end of the organization has always been low
How do reduce unwanted labour turnover?
One can control labour turnover successfully but since it usually has more than one cause, action in more than one area may be necessary to control it effectively. Most organizations will need to look at some of the basics or “hygiene factors (to use Hertzberg’s terminology) and one or more of the “motivating factors”. This will mean examining the “terms and conditions” and other “employment practices” as well as at least one of those factors relating to environment or personal circumstances. The factors that need to be considered, as identified by Rothwell are as follows:
To reduce avoidable turnover which is job related, one could consider the following if applicable:
- Improve pay. Pay systems, differentials of skilled and professional employees and fringe benefits;
- Change hours. Scrutinize recruitment and selection procedures, plan induction and training, select and develop supervisors and improve working conditions and facilities (for example heat, light, ventilation, dirt and noise, canteen, restroom, toilet facilities and child care facilities);
- Develop management functions and procedures;
- Plan manpower. Make opportunities for promotion and train existing staff;
- Redesign jobs;
- Communicate. To reduce “avoidable Turnover”. Turnover which is home related (for example provide transport, help with housing, adjust to domestic responsibilities recognize personal and marital problems, plan for “outside commitments” minimize dismissal, layoff and redundancy, prevent ill health and phase retirement); and
- Conduct “stay interviews”- find out what makes people stay.
An old proverb says: “A man must be very brave who attempts to kill a porcupine by sitting on it”. Too many managers have been sitting on their “turnover porcupines” for too long. However, one must bear in mind that less is not necessarily better. Companies may actually profit from labour turnover by carefully selecting their turnover reduction targets.
