The Mystery of the Ideal Turnover Rate

 By Helen Luketic, CHRP

 

Most of us believe that some amount of voluntary turnover is ideal. After all, if a poorly performing employee chooses to leave on their own accord, it avoids the cost and pain of documentation, perhaps severance pay or other legal costs, and of course the actual act of firing someone is completely avoided. Then there is the other logic that when employees leave, it provides the opportunity to bring in fresh talent. Practically speaking, staff come and go to live out their own lives, be it that they are returning to school, spending time with family, or traveling.


 

HR folks know instinctively that turnover shouldn’t be 0%. So, what is the ideal amount of voluntary turnover? The April 2009 issue of the Academy of Management Journal featured the article “Searching for the Optimal Level of Employee Turnover”.  The paper states that the optimal level of turnover maximizes the difference between its benefits and costs – perhaps not as simple of an answer as we had hoped!


 

While there are undoubtedly costs to turnover, the total cost depends on the job and the performance level of the individual doing the job.  The benefits of turnover vary, too.  For example, if we consider a poorly performing employee, the benefits of them leaving may be higher than the cost. On the other hand, when you lose a star performer the costs outweigh the benefits. When you lose a valuable employee, this is considered “dysfunctional turnover”. This type of turnover is the one that management wants to prevent the most.


 

Benefits of Turnover > Costs of Turnover
= functional turnover

Costs of Turnover > Benefits of Turnover
= dysfunctional turnover


 

In this particular study, the researchers discovered that there is no optimal level of turnover for full-time employees.  In fact, they found that 0% was the ideal voluntary turnover rate simply because the loss of productivity was too great when any employee left, regardless of whether or not they were a performing employee.


 

Feel free to disagree with the results. When calculating the cost of turnover, researchers only included the cost of losing knowledge, the resources spent on training and on lost productivity. The research did not account for costs such as loss in morale, loss in sales and customers due to poor performance, and legal costs associated with terminating an employee. In other words, when determining if benefits to terminating were greater than costs, they didn’t paint a complete and realistic picture.


 

Research also shows that part-time staff tend to have a higher rate of voluntary turnover than full-time staff.  Part-time staff tend to be more transient and less committed to the organization.  In turn, less resources are spent on recruitment and selection, so the chances of hiring a non-performer are greater. In this case, it’s reasonable to have a higher turnover rate for part-time staff.

 However, while part-timers have a higher rate of voluntary turnover, their cost of turnover is less. Often, part-timers tend to receive less training and as mentioned, there is less investment in the recruitment and selection process than for their full-time counterparts.


 

Here are offer some real world recommendations based on this research to discover your own organization’s “ideal” voluntary turnover rate:

  • Spend a year collecting the voluntary turnover figures for your organization to get a sense of how turnover fluctuates throughout the year (internal benchmarking). Track turnover either on a monthly or quarterly basis. Where possible, collect this data from previous years to get a sense of the trend (internal benchmarking).
  • Benchmark with competitors to learn the industry/sector norm (external benchmarking).
  • Once you have the internal and external benchmark, decide what is your own acceptable range of voluntary turnover, perhaps one range for full-timers and another higher one for part-timers.
  • Segment your workforce so you can focus on the numbers that really matter. Calculate voluntary turnover.
  • Turnover for high performers as this is considered the most dysfunctional type of turnover. Ideally, you want to use your resources towards minimizing turnover for high performance employees.
  • Calculate turnover by different cuts:  job level, department, location, age group, gender, length of service.  Determine where the voluntary turnover rate spikes and if the turnover is acceptable or dysfunctional.
  • Keep tabs on your local unemployment rate under the theory that as jobs become more available, you can expect your turnover rate to increase.

Ultimately, each organization needs to decide for itself what voluntary turnover targets are acceptable to them. One number certainly doesn’t fit all and most importantly, it’s now clear that you cannot have just one target range for your entire workforce.


 

Helen Luketic, CHRP brings more than nine years of HR experience to her current role as HRIS Analyst at Vancity, where she’s assisting the organization implement new HR systems and processes. For her innovative achievements at Vancity, Helen was the recipient of BC HRMA’s 2008 Rising Star Award. In her previous role as Manager, HR Metrics & Research at BC HRMA, she combined her CHRP, B.A. in Economics, HR information systems knowledge and experience in HR metrics to develop the HR Metrics Service and related workshops, presentations and webinars to teach HR professionals about HR metrics and benchmarking.

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