Turnover: Decoding It’s Effects on Performance

Key Points:

1. Relationship between turnover rates and organizational performance is significant and negative.
2. Voluntary and reduction-in-force (RIF) turnover have more negative impact than involuntary turnover rates in the context of organizational performance.
   

We have been going through a tough job market with lots of uncertainties: Covid lockdowns, rising and waning inflation, disruption of supply chains, a conventional war breaking out followed by another possible war, the surge of generative AI. The Issue of job loss/ cuts and turnover has never been this relevant. In our previous article at science for work we covered the negative employee outcomes of job insecurity that also concern organizations (see here). In this article we are going to tackle a related issue – turnover rates – try to see whether there are any bright sides to it in certain conditions or it always leads to negative organizational performance.

In IO there have been mainly three sides on the turnover rates isle: 1)Theories that claim it has a linear negative effect on organizational performance, 2) ones that argue it has a negative effect but the effect wanes (attenuated) as it gets above moderate levels, 3) ones that claim that turn over rates are beneficial to organizations at low levels but are costly at higher levels. 

The first group that finds turnover to be negatively and linearly relate with organizational outcomes through the lense of human and social capital theories. According to human/social capital theorists employees stay long enough in organizations with low turn over rates and thus gain experience and knowledge (human and social capital) and when experienced employees leave it costs organizations time to replace lost human capital hence layoffs hurt organizational performance. On the other hand from Organizational Learning and Control Theories perspective, the effect of turnover will wane out as the turnover rates jump from moderate to high as in organizations with high turnover employees won’t be sticking around long enough to gain experience therefore lost human capital won’t be as difficult as to replace it with compared to low turnover organizations. In contrast, Cost Benefits theory propose that some turnovers are helpful as they reduce compensation costs (base pay, vacation, sick leave, and insurance premiums), revitalize the workforce, bring diverse opinions and sort out the poor performers. They suggest an inverted-U shaped relationship where rates are beneficial at low to moderate levels but costs start to outweigh the benefits at moderate and above levels.

What Does The Evidence Say?

The most recent meta-analysis study on the subject is by Park and Shaw (2013) where they combined 300  studies and found overall a low negative correlation between turnover rates and organizational performance.  The study investigates whether there is a difference between involuntary and voluntary turnover rates. The results show a difference where the correlation is slightly higher for the voluntary turnover indicating that voluntary turnover might be rather than being a simple choice and an issue of movement but instead an issue of poor working conditions, low-quality workforce, and hence the subsequent poor performance. Involuntary turnover rates on the other hand show a significant but non-substantial correlation slightly in support of the argument that organizations can sort out poor performers. However that would also indicate an improvement in performance which is not the case in the results. The small sampling of involuntary studies also limits our ability to make generalizations on this issue.

The study then breaks organizational performance into three: The most proximal ( Organizational performance related to employee interactions and attitudes such as customer satisfaction, absenteeism, employee attitude), moderately proximal ( e.g. safety, quality, workforce productivity), and distal (e.g., financial performance). The results show negative, small to moderate significant correlations through all types of organizational performance with a consistent pattern where the relationships get weaker as the performance measure gets from proximal to distal.

The Contextual Factors

The most recent meta-analysis study on the subject is by Park and Shaw (2013) where they combined 300  studies comprised of and found overall a low negative correlation between turnover rates and organizational performance.  The study investigates whether there is a difference between involuntary and voluntary turnover rates. The results show a difference where the correlation is slightly higher for the voluntary turnover indicating that voluntary turnover might be rather than being a simple choice and an issue of movement but instead an issue of poor working conditions, low-quality workforce, and hence the subsequent poor performance. Involuntary turnover rates on the other hand show a significant but non-substantial correlation in support of the argument that organizations can sort out poor performers and replace them with better performers. However small sampling of involuntary studies limits our ability to make generalizations.

For a more comprehensive understanding of the relationship the study examines the relationship by breaking the correlations by contextual factors: Industry: The disruptive impacts of turnover, especially voluntary turnover, on organizational performance differ across industries, with a stronger negative relationship observed in industries with higher human capital emphasis (such as technology, finance and banking, healthcare, consulting, and education). This means that when employees leave voluntarily, it tends to have a more significant negative effect on the organization’s performance in these industries compared to industries where human capital is not as critical for success. Therefore, managing turnover becomes even more critical in industries where human capital is highly valued to ensure that the organization maintains its performance levels and remains competitive.

Entity Size: When employees leave a smaller entity, the loss of knowledge, skills, and information can have a proportionally larger impact on the organization because there are fewer resources available to compensate for these losses. On the other hand, larger organizations have more resources, including a larger pool of employees, greater financial reserves, and established systems and processes, which enable them to better absorb the impact of turnover. Therefore, while turnover may still have negative effects on larger entities, they are often better equipped to manage and recover from these effects compared to smaller organizations.

Region: In European labor markets, turnover’s negative impacts on organizational performance may be less severe than in other regions. Factors such as rigid labor regulations, controlling legislation, generous unemployment benefits, and strong unionization contribute to this. These characteristics make it harder for employees to leave their jobs, reducing turnover rates and minimizing disruption to organizational performance compared to regions with less rigid labor markets and weaker employment regulations.

Take-Aways for Your Practice

Organizations need to acknowledge the negative impact that turnover can have on various aspects of performance, including productivity, customer satisfaction, and financial outcomes. Since voluntary turnover has the strongest relationship with organizational performance according to the study, we can focus on two things; retaining talent and addressing turnover. To retain talent, organizations are encouraged to invest more in talent acquisition procedures, provide competitive compensation, and offer opportunities for career development and growth. These measures aim to create a decent work environment and incentivize employees to stay with the organization. Finally, addressing the turnover is important and can be achieved through certain strategies such as job enrichment and realistic job preview interventions (McEvoy and Cascio, 1985) or conducting exit interviews to understand the reasons for employee departures which can help address underlying issues contributing to turnover hence allow implementing tailored interventions to specific issues at hand. For more extensive practical recommendations you can resort to our timely article (see here).

Despite the seemingly modest statistical significance, the impact of turnover rates on organizational performance cannot be underestimated. As Prentice and Miller (1992) argue, even small effects can be significant in complex systems like organizational performance, influenced by numerous factors. Given the critical role of factors such as location, strategy, and technology, turnover rates may seem like just one piece of the puzzle. However, overlooking their impact can lead to substantial consequences for profitability, employee engagement, and overall organizational health. Therefore, addressing turnover rates is crucial for maximizing profitability and fostering employee engagement. By investing in initiatives to reduce turnover and retain top talent, organizations can create a more stable and productive workforce, driving better performance and profitability in today’s competitive business landscape.

Trustworthiness score:

The trustworthiness of the study is moderate (80%). This means there is a 20% chance that alternative explanations for the effects found are possible.

Learn how we critically appraise studies to assign them a Trustworthiness Score.

We aim to provide you only the best available scientific evidence to inform your decisions.

Did you like this article? share it with your network by clicking on the buttons below!

Follow us on  LinkedIn, Twitter and subscribe to our newsletter to receive all the quality of scientific research in less than 1000 words!

References

Prentice, Deborah & Miller, Dale. (1992). When Small Effects Are Impressive. Psychological Bulletin. 112. 160-164. 10.1037/0033-2909.112.1.160. 

Park, Tae-Youn & Shaw, Jason. (2012). Turnover Rates and Organizational Performance: A Meta-Analysis. The Journal of applied psychology. 98. 10.1037/a0030723.

You can find the original article here!