Staff retention and Turnover

The last three chapters focused on the processes used to mobilise a workforce: activities which are often expensive and time consuming. It is estimated that the costs associated with recruiting and training a new employee average between half and one and a half times the annual salary for the post in question, depending on the approaches used (Branham 2005, p. 3). In this chapter we consider the most important way in which human resource managers seek to reduce the time and money spent on these activities, namely by trying to ensure that people choose not to leave an organisation voluntarily in the first place.

The extent of interest in employee retention issues varies over time as labour markets become successively tighter and looser depending on economic conditions. In recent years, as unemployment has fallen, making it harder to recruit staff with the necessary skills and attitudes, the subject has again moved up the HRM agenda. This has led to the publication of several new books and articles exploring how organisations can ensure that they have the best chance of retaining the people they employ. The authors tend to take one of two distinct perspectives on the subject. The first focuses on the organisation as a whole, tracking staff turnover rates over time, benchmarking the figures against industry or regional averages and developing organisational policy aimed at improving retention generally. The second, illustrated in work by Hiltrop (1999), Woodruffe (1999), Williams (2000), Cappelli (2000), Larkan (2006) and Clayton (2006), concentrates primarily on retaining high-performing key players. Each of these authors uses the expression ‘the war for talent’ to illustrate the significance and difficulty faced by those competing for the services of individuals who have the capacity to make a real difference to an organisation’s competitive position. While the methods put forward to reduce turnover are similar in each case, the second group advocate more sophisticated retention practices aimed specifically at those whose talents are the most scarce.

1. TURNOVER RATES AND TRENDS

In recent years there has been a mismatch between the rhetoric about job tenure and the reality. Much mileage continues to be made by some consultants, academics and man­agement gurus out of the claim that ‘there are no longer any jobs for life’, suggesting that the length of time we spend working for organisations has fallen substantially in recent years. In fact this is a misleading claim. All the available evidence strongly suggests that job tenure has been broadly stable for several decades. The most comprehensive study to be published in recent years was carried out by Gregg and Wadsworth (1999). Their detailed analyses of data from the New Earnings Survey, the General Household Survey and the British Labour Force Survey showed that relatively little actually changed in terms of worker retention during the latter part of the twentieth century. This is illus­trated in Table 9.1 which shows how average job tenure rates fluctuated for men and women between 1975 and 1998 while the overall tenure rate for the UK as a whole remained stable. What happened over this period is that male tenure rates fell as men in their fifties and early sixties took early retirement or accepted redundancy packages, while job tenure among women rose. Gregg and Wadsworth’s study showed that the biggest increase has been among women with children. In 1975, on average, they remained in a job for 20 months; the figure in 1998 was 46 months. This reflects the greater propensity of women during this period to return to work following maternity leave and the improved career opportunities available to them. Other fluctuations are readily explained by economic conditions.

Staff turnover always rises when the economy is strong and jobs are plentiful because there are more opportunities available for people to change employers. Conversely, dur­ing recessions staff turnover falls because relatively few attractive permanent positions are advertised.

These trends appear to have continued in the first decade of the twenty-first century. While there has been no comprehensive study carried out more recently along the lines of Gregg and Wadsworth’s work, the statistics that have been published point to con­tinuity rather than to either reduced or increased job tenure. OECD statistics show that average job tenure among permanent employees in the UK remained steady at or around eight years from 1992 until 2002 (Auer et al. 2004, p. 3), Labour Force Survey data confirming that long periods of job tenure remain the norm for a substantial portion of the working population (see Table 9.2). People tend to move from employer to employer early on in their careers, often staying in one employment for just a few months. But once they find a job (or an employer) that they like, the tendency is to remain for several years. ‘Jobs for life’ have, in truth, always been a relative rarity, but the evidence suggests that they remain a reality for many employees, despite the predictions of the management gurus. Over a third of employees have already been in their current jobs for over eight years.

The overall figures mask substantial differences between tenure and turnover rates in different industries. Studies undertaken annually by the Chartered Institute of Personnel and Development persistently show retailing and catering to be the sectors with the highest turnover levels, with rates averaging over 40 per cent in recent years. By contrast the most stable workforces are to be found in the public services, where reported annual turnover rates are only 10 or 11 per cent (CIPD 2006, p. 26). Rates also vary from region to region and over time, being highest when and where average pay levels are highest and unemployment is low, and between different professions. As a rule, the more highly paid a person is, the less likely they are to switch jobs, but there remain some highly paid professions such as sales where turnover is always high. It is also interesting to observe how much more inclined younger workers are to switch jobs than their older colleagues. Macaulay (2003) calculated what proportion of employees had completed more than a year’s service with their employer. For the over-fifties the figure was 86 per cent, for the 18-24 age group it was only 51 per cent.

2. THE IMPACT OF STAFF TURNOVER

There is some debate about the level which staff turnover rates have to reach in order to inflict measurable damage on an employer. The answer varies from organisation to organisation. In some industries it is possible to sustain highly successful businesses with turnover rates that would make it impossible to function in other sectors. Some chains of fast food restaurants, for example, are widely reported as managing with turnover rates in excess of 300 per cent. This means that the average tenure for each employee is only four months (Ritzer 1996, p. 130; Cappelli 2000, p. 106), yet the companies concerned are some of the most successful in the world. By contrast, in a professional services organisation, where the personal relationships established between employees and clients are central to ongoing success, a turnover rate in excess of 10 per cent is likely to cause damage to the business.

There are sound arguments that can be made in favour of a certain amount of staff turnover. First, it is fair to say that organisations need to be rejuvenated with ‘fresh blood’ from time to time if they are to avoid becoming stale and stunted. This is particularly true at senior levels, where new leadership is often required periodically to drive change forward. More generally, however, new faces bring new ideas and experiences which help make organisations more dynamic. Second, it is possible to argue that a degree of turn­over helps managers to keep firmer control over labour costs than would otherwise be the case. This is particularly true of organisations which are subject to regular and unpredict­able changes in business levels. When income falls it is possible to hold back from replacing leavers until such time as it begins to pick up again. In this way organisations are able to minimise staffing budgets while maintaining profit levels during leaner periods. Redundancy bills are also lower in organisations with relatively high staff turnover because they are able to use natural wastage as the main means of reducing their work­force before compulsory lay-offs are needed. Third, it can be plausibly argued that some employee turnover is ‘functional’ rather than ‘dysfunctional’ because it results in the loss of poor performers and their replacement with more effective employees.

The arguments against staff turnover are equally persuasive. First are the sheer costs associated with replacing people who have left, ranging from the cost of placing a recruitment advertisement, through the time spent administering and conducting the selection process, to expenses required in inducting and training new employees. On top of these there are less easily measurable losses sustained as a result of poorer perform­ance on the part of less experienced employees. For larger organisations employing specialist recruiters these costs can add up to millions of pounds a year, with substantial dividends to be claimed from a reduction in staff turnover levels by a few percentage points. The second major argument in favour of improving staff retention results from a straightforward recognition that people who leave represent a lost resource in whom the organisation has invested time and money. The damage is all the greater when good people, trained and developed at the organisation’s expense, subsequently choose to work for competitors. Finally, it is argued that high turnover rates are symptomatic of a poorly managed organisation. They suggest that people are dissatisfied with their jobs or with their employer and would prefer to work elsewhere. It thus sends a negative message to customers and helps create a poor image in the labour market, making it progressively harder to recruit good performers in the future.

We may thus conclude that the case for seeking to reduce staff turnover varies from organisation to organisation. Where replacement employees are in plentiful supply, where new starters can be trained quickly and where business levels are subject to regu­lar fluctuation it is possible to manage effectively with a relatively high level of turnover. Indeed, it may make good business sense to do so if the expenditure required to increase employee retention is greater than the savings that would be gained as a result. In other situations the case for taking action on turnover rates is persuasive, particularly where substantial investment in training is required before new starters are able to operate at maximum effectiveness. Companies which achieve turnover rates below their industry average are thus likely to enjoy greater competitive advantage than those whose rates are relatively high.

Source: Torrington Derek, Hall Laura, Taylor Stephen (2008), Human Resource Management, Ft Pr; 7th edition.