Rethinking Employee Turnover

For decades, experts in talent management have emphasized the costs that are produced by turnover. It is usually said that depending upon the complexity of the job and the level of management, the cost of turnover can equal anywhere from one month’s to several years’ salary for a departing employee. The more complex the job and the higher level of the job, the greater the cost.

The costs associated with turnover often lead to recommendations that organizations should monitor turnover and reduce it to a “minimum.” This can be done by paying higher wages and having a satisfied workforce. What most of the writing and thinking about turnover fails to take into account is that the cost of turnover greatly varies, depending upon who turns over and the organization’s strategy.

It is one thing to lose a highly valued, high-performing employee and quite another to lose a disgruntled, underperforming employee whose skills are outdated. Indeed, the turnover of some employees may end up saving an organization more money than it would cost to replace that employee. The obvious point is that not all turnover should be avoided—some should be sought. For this reason, Zappos and other companies offer exit payments to new employees who come to understand the organization, and then decide that they are not a good fit.

Lack of turnover can also lead to high-cost seniority driven benefits. In most organizations, rewards from salary to parking spaces vary depending upon the seniority of employees. As a result, having a workforce with high seniority often means having a higher cost workforce.

But the key issue in today’s rapidly changing environment, with respect to turnover, is not the cost of benefits—it is organization agility. As Chris Worley, Tom Williams, and I point out in our book The Agility Factor, vital to creating an agile organization is having an agile workforce. There are essentially two ways to have an agile workforce: one is to change who is in the workforce, and the other is to change the individuals who are already in the workforce.

The latter is often more difficult and more expensive than changing the workforce. This realization is leading increasingly more companies to create an agile work relationship with their employees. Companies accept that turnover can be a positive, one that leads to a change of the mix of skills and motivations of the workforce and that fits an agile strategy-driven business model. This is precisely why Zappos recently offered a bonus, to all the members of its workforce, for turning over.

Zappos wanted to change their management approach and realized that they could not do this if their current employees were ill-fitted to work in their new management approach. The solution was to offer all employees a severance package, which 14% of the workers took. The Wall Street Journal said that this approach “back fired,” and was a costly way to introduce change because of the loss of skilled employees. However, it may have been more costly to introduce change and have it fail, or to have the company flounder through several years of a difficult and expensive change process that not all employees favored. All too often, this is exactly what happens when organizations try to make major strategic changes in how they conduct business and how they are managed.

In short, turnover can be beneficial if it leads to the right individuals leaving and if it produces an organization that is more agile and better able to adapt to the rapidly changing business environment that most organizations face today. The key issue is not how much turnover occurs, but about who leaves and who stays!

By Edward E. Lawler III