The Relationship Between Employee Turnover and Organizational Performance

Background Information

Employee turnover is a significant factor in the attainment of organizational goals and objectives. In addition, it is of vital importance to an organization’s employees. The retention of skilled and talented employees has become a major challenge for all organizations. In order to fully comprehend the rationale behind employee turnover, researchers across the world have conducted several studies and used their findings to formulate various models to explain the phenomena. Employee turnover is a complex concept because it is linked with economic, organizational, and psychological outcomes.

In all organizations around the world, employee turnover is receiving more attention because it slows down the performance of employees and organizations. Moreover, it increases organizational expenses that accrue from employee recruitment and training. Research has indicated that employee turnover is a persistent challenge that all organizations face. It influences both employees and the organizations they work for: employees may be required to learn new skills in new jobs, while firms may incur costs due to the hiring and training of new recruits.

Despite its disadvantages, employee turnover could benefit firms. Newly hired employees could be more talented, educated, and highly skilled. Therefore, they may increase organizational performance. Existing literature contains a few studies that explore how employee turnover increases organizational performance. In many cases, the majority of the studies explore the negative impacts of employee turnover on organizational performance.

Employee Turnover Concept

The concept of employee turnover is one of the most studies concepts in the field of organizational behavior because many organizations are facing many challenges that are related to employee turnover. However, a proper understanding of the concept remains elusive because of the highly dynamic work environment in the contemporary business world. In that regard, many researchers and scholars have developed several definitions in an effort to provide the most comprehensive definition of the concept.

According to CIPD (2014), employee turnover may be defined as the number of employees who leave an organization for varied reasons within a specific time frame. Similarly, Machado & Davim (2014) define employee turnover as the rate of employee departure and replacement within an organization. Research has shown that employee turnover can either be voluntary or non-voluntary. Voluntary turnover involves the departure of an employee at will due to the expiration of a contract, retirement, natural causes, or resignation (Machado & Davim 2014).

On the other hand, involuntary turnover involves termination by the human resource team, job promotion, or transfer within an organization. Both types of employee turnover can harm an organization. However, they can be helpful in case employees are replaced with better talents.

Ferreira & Almeida (2015) list job dissatisfaction as one of the major causes of staff turnover. Job satisfaction is defined as a state of fulfillment that originates from an employee’s contentedness with their job based on the attainment of specific needs or wants. Employees who express high levels of job satisfaction indicate low intentions of abdicating their jobs. Likewise, Miller (2017) indicates that high levels of job satisfaction are associated with low turnover intentions within organizations. In that regard, employee turnover is enhanced by an internal environment that does not promote job satisfaction (Rajan 2017).

Insufficient remuneration has also been cited as a major cause of job dissatisfaction, and hence employee turnover (Miller 2017). Proper pay alone cannot mitigate the problem of employee turnover. However, it is important for organizations to consider staff compensation as a factor that has a significant contribution to employee retention.

Several studies have also cited work-life balance as one of the reasons why employees leave their jobs. Today’s business world is characterized by increasing economic pressures and stiff competition. These factors have compelled organizations to demand higher work output from employees, thus compromising the personal lives of workers (Machado & Davim 2014). Many employees leave their jobs in search of more flexible jobs that allow them time to spend with their families. Organizations with high turnover experience more problems because the works are overloaded (Ferreira & Almeida 2015).

They experience more stress because of long work hours and less recreation time. In that regard, many employees leave their organizations in search of better employment opportunities. The lack of a work-life balance statute in many organizations leads to overworked employees and accumulation o stress that lowers performance and organizational effectiveness (Machado & Davim 2014).

Employee turnover leads to poor performance, increased costs of operation, and low organizational efficiency. According to research studies, the turnover rate is higher in developed countries than in developing countries (Miller 2017). Furthermore, gender inequalities with regard to pay and job descriptions are a contributing factor. Employees perform optimally if they are satisfied with their organization’s internal environment (Ferreira & Almeida 2015).

Organizational effectiveness is one of the most significant factors in the attainment of economic success. In early theories of organizational performance, the effectiveness of an organization was linked to higher employee productivity, maximization of profits, and high levels of employee motivation and engagement (Miller 2017). According to Machado & Davim (2014), organizational effectiveness emanates from the alignment of business objectives, employee management models, organizational structure and culture, and employee engagement to the firm’s overall strategy. This alignment and a commitment to the attainment of a firm’s mission result in high employee retention and a lower rate of employee turnover.

According to Miller (2017), the effectiveness of an organization’s leadership plays a key role in determining the level of employee turnover in a firm. Staff management is a complex process that requires the concerted efforts of an organization’s top management team. Therefore, it is important for an organization’s leadership to put into consideration the participation of employees in the process of decision-making in order to enhance job satisfaction (Ferreira & Almeida 2015).

It is important for employees to have the freedom to innovate and apply creativity in their tasks in order to increase job fulfillment. Failure to facilitate the application of creativity and innovation at work reduces job satisfaction and increases the rate of employee turnover. However, Ferreira & Almeida (2015) argue that the efficiency of employees is a key determinant in employee retention because high performance and output enhances job satisfaction and lowers work-related stress.

Existing literature explores the concept of turnover widely. However, there is a gap in the research conducted between voluntary and involuntary turnover. Many studies focus on voluntary turnover and disregard the effect or extent of involuntary turnover in organizations (Batt and Colvin 2011). For example, many researchers ignore dismissals when investigating organizations. On the other hand, some studies conceptualize dismissals as distinct from quits even though they have a similar effect on employee turnover (Batt and Colvin 2011).

Organizational Performance Concept

Organizational performance is difficult to define because it is a multi-dimensional concept that encompasses several aspects and that cannot be evaluated using a single measurement tool. Regardless of its dynamics, researchers have proposed several definitions. Organizational performance can be defined as a measure of an organization’s actual output as compared to the projected output based on goals and objectives (Ozolina-Ozola 2014).

Organizational performance can be determined by evaluating aspects such as shareholder returns, employee job satisfaction, product markets, and the bottom line (Batt and Colvin 2011). This concept is important because it aims to evaluate the value that employees bring into an organization, as well as the degree of efficient utilization of a firm’s resources.

Organizational performance is evaluated from three main perspectives: financial performance, shareholder value, and market performance (Saridakis & Cooper 2016). Financial performance is determined based on the results obtained from an organization’s return on investment and return on assets. Market performance refers to an organization’s ability to produce and sell its products and services (Ozolina-Ozola 2014).

The production process must be cost-effective, and the price of the outputs should be reasonable in order to benefit the organization, consumers, and suppliers. In addition, it refers to an organization’s ability to meet the demands of customers regarding the quality and prices of products and services. Shareholder value refers to an organization’s ability to give value to investors in the form of dividends and share growth. Organizational performance is closely linked with the concepts of efficiency and effectiveness (Miller 2017).

Other dimensions applied in the measurement of organizational performance include corporate social responsibility, performance improvement, customer service, employee stewardship, and organizational engineering. All these aspects of organizational performance are affected in different ways by employee turnover because they are dependent on employee input. For example, increased productivity, waste reduction, alignment of the supply chain, and innovation depend on employee efficiency (Saridakis & Cooper 2016). Therefore, the degree of employee efficiency within an organization is a key determinant of an organization’s performance.

The Impact of Turnover on Organizational Performance

Employee turnover is one of the most prevalent problems that the human resource departments of organizations deal with in their operations. Many organizations spend a large percentage of their resources trying to mitigate this challenge because of its negative impact on performance (Ozolina-Ozola 2014). The main reason for trying to annihilate employee turnover is to lower the costs related to employee recruitment, training, development, and reimbursement planning (Miller 2017). Studies have shown that a rising rate of employee turnover can impede an organization’s growth, performance, and overall effectiveness. In that regard, the main goal of human resources is to devise strategies that lower the rate of employee turnover (Miller 2017).

The available literature on the relationship between employee turnover and organizational performance is unbalanced with regard to exploring the negative and positive aspects. Most studies on turnover are based on the largely untested idea that employee turnover is a bad concept that has negative outcomes for organizations, and that should be minimized (Rajan 2017). In that regard, many studies treat turnover as a dependent variable.

Some researchers have offered theoretical challenges to the belief that employee turnover is dysfunctional. They have argued that turnover should be evaluated based on the costs incurred and the benefits gained. Organizations that dismiss poor-performing employees benefit because they replace them with talented and high-performing individuals (Ozolina-Ozola 2014). The costs of recruiting and training are compensated by the higher performance exhibited by new recruits.

Benefits to organizations can also be achieved in two main ways. First, the replacement of low-performing workers acts as a source of motivation for employees in the organization to improve their output. Second, the recruitment of new employees acts as a new source of ideas and innovation that can propel the organization to new levels of performance (Miller 2017). Ampomah & Cudjor (2015) have argued that low to moderate levels of employee turnover are beneficial to organizations because they are a source of new ideas, creativity, and innovation.

Better-trained employees introduce new ways of doing things that could enhance an organization’s performance (Ampomah & Cudjor 2015). However, these benefits are eroded by an increasing rate of turnover. At a certain point, additional turnover introduces more costs that render the benefits accrued insignificant because it reduces organizational performance. Turnover can broaden the experiences of employees and breed fresh perspectives.

Several research studies have been conducted to examine the fundamental relationship between employee turnover and organizational performance. Saridakis & Cooper (2016) argue that employee turnover is harmful to organizational performance even though some studies have established a positive relationship. The loss of talented and experienced employees can harm performance, and replacement could fail to mitigate the problem (Miller 2017). There are four main ways in which employee turnover can impact organizational performance. They include innovation, customer satisfaction, financial outcome, and productivity and efficiency.

Financial Performance

The attainment of optimal financial performance is one of the major goals of organizations. Saridakis & Cooper (2016) have shown that high turnover rates result in negative financial outcomes due to expenses related to compensation, recruitment, training, and employee development. According to Rajan (2017), the replacement of employees is costly because the cost of recruiting and training a new employee could overshadow the value the employee brings to the organization. The competence of incoming employees is the main determinant of the degree of financial loss incurred by an organization.

However, a study conducted by Upadhaya et al. (2014) revealed that the majority of the organizations studied reported that high employee turnover was associated with negative financial performance. Negative financial outcomes are usually experienced when high-performing employees are replaced by low-performing individuals who are inefficient and unproductive (Ampomah & Cudjor 2015).

The cost of training them is not recovered from their output. On the other hand, high turnover leads to overloading of employees. Overworked employees experience high levels of stress that lower their effectiveness and productivity (James 2014). Low productivity is directly related to dismal financial results. Therefore, employee turnover is usually associated with poor financial performance.

Productivity and Efficiency

Productivity can be defined as the rate of production expressed as a ratio of unit time. According to Saridakis & Cooper (2016), experienced employees exhibit a higher rate of productivity than non-experienced employees. In that regard, when a large number of inexperienced employees come into an organization due to high employee turnover, the overall productivity of the firm decreases. Competence and skills are the primary factors that determine the productivity of an employee (Saridakis & Cooper 2016).

They further argue that the length of time an employee has been working is insignificant in the determination of productivity. Experienced employees (individuals with higher job tenure) exhibited higher levels of productivity than inexperienced employees (Saridakis & Cooper 2016). This argument supports the idea that high employee turnover has a negative impact on the productivity of an organization, hence its performance.

Efficiency can be defined as the ability to produce effectively with a minimum amount of effort or waste. Employees who have high output volumes and low energy or effort expenditures are described as effective. An experienced employee possesses the skills and knowledge necessary for the effective completion of tasks (Saridakis & Cooper 2016). In that regard, work experience is linked with high levels of efficiency.

New employees are usually associated with waste because of a lack of knowledge regarding the optimal functioning of organizational processes. Resources such as energy and time are limited, and new employees tend to waste them as they struggle with acclimatizing themselves to an organization’s way of doing things (Rajan 2017). Experienced employees use these resources with caution and, and as a result, enhance their efficiency. On this basis, a conclusion can be made that employee turnover negatively affects an organization’s performance because it lowers productivity and efficiency.

Customer Service and Satisfaction

The quality of customer service and the quality of products and services are critical in determining the level of customer satisfaction. Quality can be either tangible or intangible. Therefore, it is important for organizations to retain experienced and talented employees who are conversant with the quality requirements of company services. Experienced employees are required in order to maintain a high quality of products and services. According to James (2014), employees with prior experience in providing satisfactory customer service express higher levels of effectiveness than employees without prior experience.

The loss of experienced employees could lead to low-quality services that could result in low customer satisfaction. Replacing experienced and talented employees with inexperienced ones compromises the quality standards of an organization’s products and services. A study conducted by Batt and Colvin (2011) showed that organizations that reported a higher rate of quits and employee dismissals had significantly lower customer service. New employees can bring fresh ideas and viewpoints that could enhance the quality of customer service. However, many studies have shown that employee turnover is usually associated with negative quality attributes of an organization’s products and services.

Innovation and Product Development

Today’s business world is characterized by a high rate of globalization and stiff competition. Therefore, it is inevitable for companies to retain experienced and talented employees who can innovate and generate ideas for new products. The success of innovation and new product development is primarily determined by the competence of the workforce (James 2014). Companies that have highly dynamic product lines and innovation exhibit lower rates of employee turnover than companies that do not innovate. The reason for this phenomenon is that inexperienced employees struggle with innovation and the generation of new ideas while experienced workers easily innovate (James 2014).

Employee Retention

According to Guthrie (2001), high-involvement work practices such as internal promotions, information sharing, employee stock ownership, profit-sharing, and participatory programs can aid in employee retention. He argues that companies introduce high-involvement work in their organizations as a form of investment in human capital. Investment in employees increases productivity, and as a result, justifies the introduction of high-involvement work practices in firms. High-involvement work has two main implications with regard to employee turnover. First, high-involvement work enhances job satisfaction and enhances employee retention (Guthrie 2001).

Second, these practices could increase exposure to disruptions due to employee turnover. Organizations that implement high-involvement work are more employee-centered and involve employees at all levels in decision-making. The achievement of efficiency occurs through the use of human resource practices that allow employees to program and manage themselves without stifling control of the management (Guthrie 2001). In a study conducted by Guthrie (2001) involving firms in New Zealand, the findings revealed that employee turnover affects organizational productivity. The use of high-involvement work practices lowers turnover when the practices are used sparingly.

Research by Batt and Colvin (2011) supports the idea of high-involvement work by arguing that it aids in retaining employees in an organization. They also found out that strategies such as inducements and long-term investments foster employee retention, while short-term performance-enhancing expectations led to higher rates of employee turnover (Batt and Colvin 2011). Existing literature does not provide sufficient insight into the distinct antecedents of quits and dismissals.

The results of existing studies are inconclusive because they have mixed results. Higher relative pay, job security, and employee benefits are also effective strategies for retaining employees, according to the labor market theory (Batt and Colvin 2011). Employees who are offered long-term incentives are likely to stay in an organization.

Numerous studies on employee turnover have been conducted. However, a few studies have been conducted to study employee retention. A study conducted by Hausknecht, Rodda, and Howard (2009) revealed that some of the reasons why employees stay in an organization include job satisfaction, advancement opportunities, organizational prestige and commitment, and flexible work schedules. Organizations that give employees flexible work schedules reported higher rates of retention because employees were satisfied with their jobs. Organizational prestige aids in employee retention because workers are proud of working in an organization that has a good reputation. Lee et al. (2018) argue that job satisfaction, non-work alternatives, and on-boarding are effective employee-retention strategies.

References

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Lee, TW, Hom, P, Eberly, M & Li, J 2018, ‘Managing employee retention and turnover with 21st century ideas’, Organizational Dynamics, vol. 47, pp. 88-98.

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Ozolina-Ozola, I 2014, ‘The impact of human resource management practices on employee turnover’, Social and Behavioral Sciences, vol. 156, no. 1, pp. 223-226.

Rajan, D 2017, ‘Employee turnover and employee performance: a comparative study among nurses’, MOJ Applied Bionics and Biomechanics, vol. 1, no. 5, pp. 1-12.

Saridakis, G & Cooper, CL (eds.) 2016, Research handbook on employee turnover, Edward Elgar Publishing, Northampton, MA.