As the labor market continues to tighten, employers are increasingly concerned about maintaining a stable workforce. They need competent, dedicated, and effective workers to serve their customers to fulfill their missions. Without a sufficient qualified and productive workforce, employers are vulnerable to competitive forces as well as the impact of negative relationships with their customers. It is frustratingly difficult to find, recruit, and hire the caliber of employees that companies desire today. To assure that they have qualified people in their jobs--at all levels, companies are faced with several alternatives:

Unable or unwilling to make the investment to pursue any of these alternatives, some companies turn to outsourcing to reduce their need to maintain their customary workforce. This strategy can have its advantages, but sends messages to employees that their job security is in jeopardy and thereby encourages departures . . . higher turnover.

Our Changing Times

Employers have managed well with acceptable rates of employee turnover for years. People left, for one reason or another, and employers simply hired replacements. With over 76 million people in the Baby Boomer generation (born between 1946 and 1964), employers enjoyed a virtual cornucopia of workers flowing into the labor pool.

The work culture suggested that people should remain in their jobs for a long time. The tradition of the majority was clearly to work for decades for the same employer, earn the gold watch, enjoy the retirement party, and bask in the respect of peers and successors. Longevity was a good quality, to be cherished by the worker and highly valued by the company. Employee turnover was not a problem. People who moved from job to job too frequently were described as "job-hoppers," a term that was regarded as less than complimentary. Questions were raised about why the employee couldn't hold a job. The custom was to stay in a particular job track, climbing the proverbial ladder of success with the fervent hope that it was leaning against the right building. All too often, workers completing 25-30 years with the same employer eagerly anticipated retirement so they could do things they enjoyed during their retirement years. Their careers had not been satisfying, but social mores encouraged them to accept their circumstances and "make the best of it."

Until relatively recently, work was seen as a sort of necessary evil. One had to work to support self and family. Needing a steady job, employees were reluctant to "rock the boat" or "bite the hand that fed them." They endured oppressive autocratic management and silliness just to keep that all-important paycheck coming in. Discontinuity on the resume was a bad thing, something to be avoided at all costs--including remaining in a job that was distasteful, unfulfilling, or unwanted. Consequently, large numbers of people simply "attended work," putting in their time. Their bodies were there, but their hearts were not.

We're in the midst of a transition--from people "living to work" to people "working to live." We're moving away from continually identifying ourselves occupationally to "getting a life," to quote the vernacular. People now actively seek balance in their lives; they're no longer interested in working long hours just to bring in more money. The monetary rewards have become less important than time . . . time to lead a balanced, happy life.

Young people today--the twenty-somethings--have some significantly different attitudes about work and careers. They want to control their own careers, rather than place their work futures in the hands of managers or human resource administrators who may or may not have their best interests at heart.

The New Values Generation

The oft-discussed work ethic is still alive and well. It's just different. People still want to work hard, take pride in their work, and make a difference in the world around them. In stark contrast to the last couple of generations, today's young workers want to control their own work lives, make their own decisions, and develop their own relationships with employers. They're no longer content to "go along with the program" as their employers, or at least their immediate supervisors, would like them to. They don't want to simply take orders and obey them; they want to actively participate in making the decisions that affect their work.

Today's workers--particularly those in their twenties and early thirties, but also a large proportion of those in their late thirties, forties, and fifties--seek greater meaning from their work. They want to see that their labors make a difference . . . somewhere: for society, for humanity, for global peace, or at least for an appreciative customer. They want to go home each day (or night) with a sense of satisfaction that they've made a viable contribution. Too many people have the feeling that they simply "attend work," showing up, doing what they're told, and going home. That's not enough anymore.

Management Discomfort

This divergence in attitude, from just following along and going with the flow to a substantially more independent attitude toward their work experience, is making life very uncomfortable for a lot of managers. Accustomed to subordinates obediently doing what they were told without question, interacting with workers who challenge the status quo and the procedures that suggest "we've always done it this way" is upsetting. Managers are not eager to accept civil disobedience in the world of work. These traditional managers are challenged to manage differently than their predecessors did. It's a new workplace lifestyle.

For many managers, the shift to a radically different style is difficult, if not impossible. They continue to "rule" with their customary style, in direct conflict with the relationship desired by today's employees. Result: today's employees, with plenty of other job opportunities, will leave much more readily than in past years. Their departures, usually unexpected, build a higher level of stress for the traditional managers--and their employers, exacerbating the problem and creating a fragile workplace that's decidedly not the kind of environment desired today.

Unstoppable Downward Spiral

The clash of old attitudes and expectations with the new has produced a dangerous vulnerability for employers. I describe this serious, potentially fatal, risk as "the unstoppable downward spiral." Here's the way it works.

With the internal and external pressures to produce at high levels with minimal costs and maximum turnaround efficiency, companies shave their overhead by cutting corners, reducing the workforce and sometimes downgrading payroll benefits, and increase the stress on those workers remaining. After every layoff, there's a palpable and persistent paranoia about who will be next.

The most competent and valuable employees are not content to remain in such a counterproductive and enthusiasm-dampening environment. There are plenty of opportunities for them with other employers, so they leave. The efforts of aggressive recruiters make the move to another company more attractive and more actionable.

A significant share of the knowledge and capacity that makes companies successful rests with the few most competent employees. The Pareto (80/20) Rule is certainly applicable here. When the best people leave, a disproportionate amount of corporate strength leaves with them. If too many of these valuable workers leave--and the number varies by company size, structure, and systems--the company can suffer deeply.

Customers will no longer be able to depend on those high performers who are gone. They begin to develop replacement relationships with other employees, but the linkages are more tenuous. Remaining employees feel the loss of wisdom, efficiency, and effectiveness because those highly competent top performers are gone.

The next most competent performers try to fill the shoes of those who have left. They're uneasy. On one hand, they wonder if they should be leaving, too. On the other hand, they may be unsure of their ability to rise to the occasion to truly perform as their mentors did. As they look at the capability of the new hires being brought into backfill open positions, they question the potential of the remaining employees to get the job done. Soon their emotions and logical analysis of the company's position motivate them to leave as well.

In a tight labor market, it's difficult to recruit replacement workers of equal caliber to what you lose in this kind of erosion. Customers sense this reduced ability to perform and seek alternative suppliers. Cash flow begins to wane, slightly at first and then more seriously. When the company has problems paying its bills, suppliers balk. The remaining competent employees get jittery and some abandon ship.

Before long, the company is struggling to serve a dwindling customer base with less-than- competent employees. Inevitably, unable to serve existing customers or attract new ones, the company is forced to close its doors. The whirlpool effect of this downward spiral is difficult to stop once it has begun.

This vulnerability is real. We've seen the downward spiral suck once-vibrant companies into the vortex of a fatal whirlpool of inadequacy. A large number of employers is at risk. Though most owners, executives, and managers choose to ignore the threat or minimize it, the exposure is substantial, Suddenly (we use this word, but the process is usually rather plodding), the company's best people are gone and the employers are trying to figure out what happened. As they ponder their circumstances, the second wave goes out the door. Most employers don't realize their problem until too late, so they get caught in the wake of crippling high turnover and have to work vigorously to save their companies.

Advantages of Workforce Stability

Stability in a company's workforce has a number of advantages for the company's health, for workers, for customers, for suppliers, for investors, for the industry, and for the economy at large.

Company Health. If the workforce is stable, management can invest its energy in moving the company forward. Leaders are not distracted by the need to continually hire new (replacement) employees, so they can concentrate on product/service development, marketing, quality and process improvement, and investment of surplus funds. They aren't required to staff their human resources department to feed "the revolving door. "Stable workforce employers have a greater potential of strong profits.

Workers. With a stable workforce, employees are surrounded by co-workers who know their jobs, know each other, and know what they're all striving to do together as a company. They're able to focus on productivity and satisfaction instead of continually showing new people how to fulfill their responsibilities. Training and development can be invested in helping dedicated employees grow and improve, rather than aimed at constantly rebuilding foundation skills in an ever-changing workforce.

Customers. With a need to depend on their suppliers, customers are most happy when they can concentrate on their own work and not worry about how suppliers will perform.

If suppliers have unstable workforces, customers are thrown off-balance by that nagging feeling that inadequate workers will miss critical deliveries or provide product/service that can't be used. If they can't have confidence in their suppliers, customers will seek alternative resources . . . quickly. Today's just-in-time designs have precious little tolerance for failure.

Suppliers. With a drive toward meeting customer needs efficiently and effectively, suppliers like to know who they're dealing with. What are their customer's expectations? What background do the customers have? How do those suppliers prefer to operate? Often suppliers depend on standardized procedures and productive relationships that assure open communication with minimal hassle. Workforce instability at a customer location dampens those relationships and anticipated performance. This confusion draws valuable resources to repeatedly rebuild connections and understandings to minimize service problems and boost billings.

Investors. Increasingly, savvy investors monitor workforce stability in companies where they invest--or consider investing. Stability is vital to them--they want to know that the company will be able to produce to improve shareholder value. Pumping resources into recruitment, training, and rebuilding efficiencies defeats expansion, growth, and even the company's efforts to maintain status quo. If investors are leery of putting money into a corporation that will not make the highest and best use of that capital.

The Industry. Recruiting new workers into an industry is essential for the continued health of all companies in the field. Workers usually look for career paths that show promise of personal and professional growth, expanding opportunity, and dependable employment with good working conditions and rewards. Rampant instability may send loud signals that this career path is not a wise decision and qualified workers will seek other alternatives. Faced with this kind of circumstance, trade associations are often tasked with generating interest in the industry, sponsoring multi-company recruiting activities, and developing industry-focused entry-level training programs.

Each of these efforts draws resources away from endeavors that can strengthen the industry's market position, use of technology, and strength in the economy. While continual marketing of opportunities in the field to promote career choice is important, resources are drained when the heavy recruitment becomes a mandate instead of an option.

Economy at Large. Workforce instability creates an unstable marketplace in a community--whether that community is a small town, metropolitan area, state, or national collection of similar companies. Corporate resources are directed toward stabilizing, backfilling, and maintaining, rather than research, technology development, and global positioning. The economy's growth is inhibited by a sort of paranoia that metaphorically ties together the feet of resources that could be running into a stronger future. Progress becomes considerably slowed, diminishing enthusiasm for investment in essential infrastructure. Entrepreneurs and moguls lose their inspiration and reduce the drive that creates greater job opportunities for others. It's all connected.

Forces Behind Turnover

To understand the costs of turnover, it's helpful to understand some of the forces behind the uncontrolled movement of workers out of a company's employment. Part of the movement is driven by societal forces; part is driven by internal forces.

Societal Influences. There are several forces driving employee movement between companies. One, discussed above, is the greater tendency of younger workers to change jobs relatively frequently. We expect this career management design to continue for the next 10-15 years. Younger workers will be the most obvious with this kind of behavior because they'll be watched more carefully. We anticipate that middle-aged workers (35-54) will gradually adopt this behavior to the point that a significant portion of our working population will be much more fluid than today. Clearly, the inclination to change jobs every 2-4 years (or even more frequently) will become stronger, contributing to workforce instability. Reducing this turnover inspired, condoned by society will require working against increasingly powerful trends.

Another influence, that will be most prevalent until about 2003-2005, is the consequence of something we call "corporate cocooning." We coined this phrase a few years ago to describe the phenomenon of workers remaining with employers when they would have preferred to change jobs. With the barrage of messages they received from the news media and other sources about the lack of jobs in the early 1990s, unhappy workers reluctantly stayed in the jobs they had--begrudgingly maintaining their "cocoons" of safety, security, and employment continuity. They felt trapped, however, and looked forward to the day they could escape their circumstances and move to other employment. Now, as people take advantage of the opportunity to escape, the availability of jobs will stimulate and recharge an unprecedented churning in the labor marketplace.

We forecast that the first wave of job-jumpers will be motivated by a desire to simply change jobs. Get another job, any job. The second change, six to 24 months later, will be more deliberate with a focus on a particular career opportunity. The third change will be more motivated by career development issues and compensation.

Dilbert. Another driver for people to change jobs is best characterized by Scott Adams' popular cartoon, Dilbert. There is a rising impatience with inept management and corporate silliness. As ridiculous as many of the Dilbert strips seem to be, they are most definitely real in corporate environments from coast to coast. Many workers are tired of laughing and shaking their heads at the craziness and will change jobs in hopes of finding more sane situations. Unfortunately, the majority of these folks will jump the fence to greener grass only to discover that it's the same crab grass they just left.

This irritation and frustration with thick-headed management will inspire many people to start their own businesses. Many of these operations will be home-based businesses, but certainly not all of them. Start-ups in many fields will be combined with the purchase of existing businesses and franchising to provide thousands with the opportunity to realize their dream. While success may not come as quickly or as strongly as desired, this shift away from working for current employers will pull a lot of good, qualified workers out of the national pool of available labor.

Each of these trends and influencers will feed the need for a growing number of jobs to search for people in a shrinking pool of eligible workers. Employers, almost desperate for decent workers, will intensify their recruiting of employed "targets," challenging further the fragile employment stability in most companies. The resource of unemployed or underemployed workers will no longer be sufficient, so every working person is now fair game for the recruiters.

Other Internal Influences. Unenlightened management is frequently cited as the motivation for people to change employers. Dilbert cartoons and books address these issues so well, we won't go any further into that domain. It is, however, important to appreciate that much of this management "misbehavior" flows from the organization's perceived culture. Assessing and modifying corporate culture is a responsibility--an obligation--of the senior leaders. Unfortunately, most leaders are ignorant or insensitive about culture and its impact . . . and the power of their involvement to make substantial positive change. These leaders must become more educated and more involved in guiding their organizations' cultures, or risk the dangerous consequences of greater workforce instability and the attendant problems.

Other major factors affecting employee stability include a wide range of relationship issues, collaboration and support enabling people to get their jobs done, training and education, and the always-mentioned compensation concerns. Research suggests that financial compensation is becoming less and less important as a determinant of job

preference. In fact, anecdotal evidence reveals that people are actually switching to employment opportunities that offer less income . . . but offer more of the other values sought by today's workers. The lateral career paths of the past are now "hop-scotch" patterns that are much less predictable.

[More discussion of the reasons people leave one job for another can be found in Keeping Good People, Roger E. Herman, Oakhill Press, 1999.]

Costs of Uncontrolled Employee Turnover

There are several different approaches to measuring employee turnover, defections, terminations, etc. Realistically, we must explore both "hard costs"--the numbers, as well as the many "soft" costs of uncontrolled turnover. Some of these costs, both hard and soft, defy accurate measurement. Others are rather easy to calculate.

Let's begin with a perspective on what we describe as "indirect" or "soft" costs of employee turnover. The following lists are not complete. They're designed to be a start--to get you thinking more broadly about the consequences of not hiring, optimizing, or retaining employees at the greatest possible levels.

As a statement of harsh reality, let us not forget that employee turnover costs come right off the bottom line. The extra expense of replacing workers who leave unexpectedly eats away at profits . . . profits that take much greater numbers in sales to generate. A relatively small negative impact on the bottom line requires a significant increase in sales to compensate. Large impacts on the bottom line cause substantially higher sales to be necessary, perhaps even beyond the company's capacity.

Indirect Costs

Indirect costs can be far-ranging and difficult to measure, yet they are as real as dollars flowing out of your pocket. Some observers suggest that the soft costs, with all their ramifications, have a far deeper impact that the dramatic dollar amounts that are lost through the hard, measurable costs of inadequate or unstable staffing.

Externally-Related Costs

  • unhappy customers due to inferior quality/service

  • continuing initiatives to establish and re-establish relationships with customers

  • uncertain reputation in the field--will this company have the capacity to serve me?

  • Internally-Related Costs

  • low employee morale

  • difficulty recruiting to company with a reputation for high turnover

  • stress suffered by managerial and supervisory staff

  • workers' resistance to new and untrained workers

  • constant efforts to build and re-build ever-changing teams

  • lack of corporate cohesiveness

  • increased costs of promoting and maintaining corporate culture

  • inefficiency due to people not knowing the system, procedures, where things are

  • Direct Costs

    Many of the costs associated with employee turnover--mostly with the replacement of people who leave unexpectedly--can be accurately measured and tracked. Various employers have engaged in exhaustive studies to collect and analyze these costs, and their numbers range from hundreds to thousands of dollars.

    The Workforce Stability Institute is interested in learning about calculations used by employers. If you're willing to share your information and insights with us, please write to:

    Turnover Cost Research
    Workforce Stability Institute
    3400 Willow Grove Court
    Greensboro, North Carolina 27410-8600

    Your contribution to our knowledge base will be sincerely appreciated!

    Please note: the costs delineated in the following list are not specified with actual numbers in this report. They vary dramatically from company to company, so any numbers we presented probably would not be legitimate for your company. We present these categories to give you guidelines to begin building your own database relating to your unique circumstances.

  • marketing costs to attract applicants

  • cost of hiring new employees--screening, interviewing, testing, checking, processing

  • orientation and training new employees

  • cost of temporary workers or overtime required from regular employees to fill-in

  • lost production due to slower new employee

  • lost production due to increased accidents, unfamiliarity

  • expense of equipment and facilities not used/under used/improperly used

  • increase in unemployment insurance premiums

  • increase in costs of processing extra personnel files, W-2 reports

  • additional staff needed in human resources to manage exit interviews, follow-up

  • extra costs of processing drop/add paperwork for employee benefits

  • administrative costs of excessive uniform issue, cleaning, collection

  • cost of executives' time participating in meetings about reducing turnover

  • Calculating Turnover Rates

    To appreciate the high cost of uncontrolled employee turnover, we need to explore some methods of calculating turnover and its impact. There are several approaches to determining this important measure of organizational success--or vulnerability.

    Fundamental Turnover Rate

    The US Department of Labor's formula for computing turnover is to divide the number of employee separations by the total number of people in the workforce, expressing the result as a percentage. This formula is considered a standard in the field.

    Once computed, this rate can be compared against similarly-computed rates for other periods to analyze trends. Subgroups and industry groups can be compared against each

    13 other or against national averages. Useful sources of national data are the Monthly Labor Review and the Quarterly Report on Job Absence and Turnover published by the Bureau of Labor Statistics in Washington, D. C.

    Avoidable Separation Turnover Rate

    To reach a more valuable measure, you can calculate the turnover rate for avoidable separations. This figure is more significant since it represents the portion of employee turnover that is controllable. To compute this ratio, deduct separations over which the organization has no control, such as pregnancy, illness, death, pre-planned return to school, marriage, spousal relocation, and involuntary terminations. The remaining number is divided by the total midperiod workforce to produce the Avoidable Separation Turnover Rate.

    Longevity Turnover Rate

    Many employers experience higher turnover among newer employees. Applicants think they understand what will be expected of them on the job, accept the position, report for work, and quickly discover that this work is not something they want to do. Including these short-term departures in your calculations may inappropriately skew your results.

    Isolate the figures that represent your new employee terminations. Use the formulas to evaluate new employee turnovers and turnover rates for employees who have been with you for a while.

    Consider average term of employment in your assessment of turnover. Explore length of time with your organization in analyzing turnover rates . . . and strategizing management of this aspect of human resources.

    Special Group Analysis

    As you conduct an in-depth assessment of your turnover rates--and causes, give some thought to your areas of greatest vulnerability. A high turnover rate among easy-to-replace positions is sometimes not as critical as a moderate rate in hard-to-fill occupations. Examine turnover and longevity among managers, salespeople, research scientists, truck drivers, or other special interest groups in your company. This approach will enable you to appraise qualitative turnover as well as quantitative.

    Macro Turnover Costs

    While it's valuable to understand what it costs to replace an employee--in terms of both productivity and re-hiring, the real impact of these numbers occurs when we look at the big picture. Few companies have only one employee leave unexpectedly each year. So, the real impact is when we multiply our per-person costs by the number of people who leave during a given period.

    From what we've seen, many companies calculate their turnover costs with a limited view of the true exposure. Their focus is on replacement costs--recruiting, hiring, testing, and maybe training. As described in this report, the real costs go much deeper and broader.

    When we survey employers about their calculation of turnover cost, we hear a wide range of figures. This diversity is expected, since each company manages costs and their accounting in different ways. Our concern is what categories of costs are included to give executives and managers a realistic picture of the impact of turnover on their bottom line.

    A fast-food giant concentrates on the expense of hiring and providing initial training to enable an employee to begin work. For counter clerks, their cost is documented to be $600 per hire. This particular company has a 130% turnover rate. In one of their operations (not the entire company), they employ several thousand people. Let's just look at a universe of 2000 employees. At 130% turnover means that 600 extra people are hired during the year at $600 hiring cost. Not even considering the other hard costs and the soft costs, this company lost $360,000 . . . off the bottom line! Let's assume a 10% profit margin for the sake of discussion. With these factors, the company would have to gross $3,600,000 in sales to earn the 10% profit that is "neutralized" by the cost of employee turnover. And margins are not that great in the grocery industry.

    A major hotel chain calculates their cost in hiring and providing initial training to front desk and guest service personnel at $1,200. They're working with a turnover rate of 80%. The numbers speak for themselves. Another major hotel has 7,000 employees. The vice president of human resources tells me he's computed that it costs $6,800 to replace an employee who leaves unexpectedly. He's proud of having a 12% turnover rate, very low for that industry. At 12% of 7,000 employees, we generate a need to hire 840 people . . . at a turnover cost of $5,712,000.

    Employee turnover is a bottom line issue. While we will never completely eliminate turnover, every bit of reduction makes a tremendous difference to the health of the organization--financially and otherwise. Investing in deliberate employee retention is clearly a wise strategy.

    The Workforce Stability Institute is a not-for-profit research and education organization whose mission is to gather and share information and techniques regarding recruiting and retaining employees to stabilize the corporate workforce for our country's economic health.

    2000, The Workforce Stability Institute, Greensboro, NC USA.