Employee Turnover Causes, Costs, and Control Strategies

Introduction and Problem Statement

In recent years, organizational knowledge and employee turnover have been the focus of increasing attention from management experts seeking to identify improved methods of providing effective human resource services to help companies recruit and retain qualified employees (Droege & Hoobler, 2003). The purpose of this study is to determine the relationship between high employee turnover and personal factors as they relate to preferences for compensation. This evaluation was conducted on a comprehensive services organization located in Northeast Florida that employs more than 12,000 people — one of the largest billing and customer service organizations in its county.

Today, the subject financial services company is experiencing a high level of employee turnover. The problem can be alternatively attributed to an increase in hiring, automated self-paced CD-ROM training technology, outsourced new-hire agreements, and increased competition from similar industries in the local area, as indicated by computer-generated reports, exit interviews, weekly employee surveys, and feedback from trainees. Despite the overwhelming research and focus on employee turnover, few studies have been able to link turnover to a specific personal or intrinsic characteristic. The significance of this study, therefore, is that it creates an opportunity to investigate employee behavior as it relates to the factors that motivate and retain valuable human capital. In addition, this investigation aims to uncover what factors drive employees to select a pay method or compensation structure that would motivate them toward increased performance and reduced turnover.

Definition and Nature of Employee Turnover

"In-house engineering," "revolving door policy," and "management by turnover" may sound better, but these euphemisms are being used to describe employee turnover today (Burgess, 1998, p. 55). In their essay "Turnover: The Real Bottom Line," Sami M. Abbasi and Kenneth W. Hollman (2000) report that "Turnover is the rotation of workers around the labor market; between firms, jobs, and occupations; and between the states of employment and unemployment" (p. 333). By whatever name or form, employee turnover represents one of the most significant causes of declining productivity and sagging morale in both the public and private sectors (Farrell & Whidbee, 2002; Akpotu & Nwadiani, 2002). Management theorists suggest that high rates of employee turnover are responsible for the failure of U.S. employee productivity to maintain pace with foreign competition (Abbasi et al., 2000).

According to Simon Burgess, "Worker turnover generally refers to the movement of workers around the labor market, between firms, and among the states of employment, unemployment, and inactivity. It has been known for some time that worker turnover and job turnover are 'large'" (p. 55). Likewise, Frederic D. Frank points out that employee retention and employee engagement are completely integrated concepts that represent two fundamental human resources challenges in the 21st century. "How do we keep our talent, given unprecedented shortages and erosion of loyalty," he asks, "and how do we keep them engaged, and even passionate about the work they do?" (p. 11).

Given the growing severity of these problems, it has become increasingly important for managers to better understand what employee turnover means, how it can be measured and analyzed, and what steps can be taken to mitigate its adverse impact on organizational goals. As employee mobility increases by virtue of Internet-based human resources recruiting and a volatile job market (Grossberg & Sicilian, 2004), companies are faced with the need not only to define and understand the nature of employee turnover, but to recognize its impact on their bottom line as well.

One of the most important components of making new customers happy and retaining loyal existing customers is ensuring that they receive quality customer service. A dissatisfied employee, whether new or tenured, is unlikely to provide this level of service on a reliable basis. The entire range of causes of employee satisfaction and dissatisfaction come into play, and these factors are by definition highly subjective and individualistic. Nevertheless, no customer wants to do business with an enterprise characterized by poor customer service and employees who are not motivated to deliver it.

Employee Satisfaction and Its Link to Turnover

According to Grant (1990), "it must be appreciated, however, that though the absolute level of employee satisfaction has little to do with motivation, it is an important determinant of the volume of employee turnover, employee gripes, absenteeism, alcoholism, and related variables. High employee satisfaction as well as high motivation must be developed for an organization to succeed" (p. 12). Given the make-or-break nature of ensuring that a company has satisfied employees providing reliable and quality products and services for both its internal and external customers, it becomes necessary to identify the specific causes and correlates of employee turnover within the organization.

One of the most important components of this analysis is identifying sources of employee dissatisfaction so that appropriate remedies can be developed and implemented. One such component relates to how well an employee believes an employer is living up to its end of the employment agreement. This can assume a wide variety of manifestations depending on the enterprise and type of work involved, but virtually every position has some type of psychological contract element that provides both the company and the employee with a framework for communication and mutual expectation (Bamber & Iyer, 2002). To the extent that these psychological contracts are perceived as being violated by a company's management is likely the extent to which that company will experience increased incidences of employee turnover.

Causes and Psychological Contracts

The types of guarantees made to employees — whether codified in a formal contract or conveyed through organizational practices — can be explicitly or implicitly communicated through written documents, oral discussions, or established procedures. As a result of this traditional nature of the employer-employee relationship, Kickul suggests that people will actively seek out this information in order to know what is expected of them. "For example, employees may perceive that their firm has promised them fair pay, attractive benefits, opportunities for growth, advancement, a supportive work environment, and sufficient tools and resources," Kickul notes; if companies fail to deliver on their perceived end of the contract, employees may respond by seeking employment elsewhere (p. 320).

The size of the company involved does not really matter in this regard. Both small and large companies can provide their employees with some type of job satisfaction enhancer that makes the difference between a satisfied employee and yet another vacancy for human resources to fill. For example, Kickul points out that larger companies can provide opportunities for career development and advancement in specialized roles, while small businesses can offer employees the chance to develop a broad set of skills across multiple functions and areas of the organization.

Employers breach this written or unwritten agreement at their peril. Whether intentional or not, even perceived violations of these contracts can have disastrous consequences, potentially resulting in wholesale resignations, lawsuits, and negative public relations. According to Kickul, "When breaches or violations occur within an employee's psychological contract, it can be experienced as a unique form of distributive injustice, as a variety of unfulfilled promises can deprive the employee of desired outcomes and benefits" (p. 321). From an equity theory perspective, workers attempt to identify an equitable balance between what they receive from the organization and their own contributions; however, when employees perceive that their employer has failed to live up to a promised incentive or benefit, they may likewise withhold their own contributions (Kickul, 2001).

This problem is perhaps more serious than many employers might believe. Past studies have determined that around 55% of employees believed their psychological contract had been breached or violated by their organization during the previous two years. These studies examined the impact of psychological contract breaches on the employment relationship and found that employee trust and satisfaction were negatively related to such violations; furthermore, violations were positively related to the actual incidence of turnover. The studies also determined that there was a moderate relationship between specific breaches and trust, civic virtue, performance, and intentions to remain with the organization.

According to Kickul, pay based on current performance levels, training, career development, and responsibility were all associated with employee trust. High pay, training, and development were related to extra-role behavior, while promotion and responsibility were associated with actual turnover, and development was related to job performance. Other studies have reported employees having higher levels of perceived organizational support, commitment, and lower turnover intentions when their employment relationships were characterized by mutual high obligations — that is, when both employee and employer obligations were consistently perceived to be high (Kickul, 2001).

Kickul adds that employee perceptions of contract breach "represents a cognitive assessment of contract fulfillment that is based on an individual perception of what each party has promised and provided to the other" (Kickul, 2001, p. 321). Just as an individual's perceptions of self-worth and self-esteem are unique, the manner in which psychological contracts can be breached or violated is also unique as a result of individual differences in how people view the world around them.

There is, however, a common theme throughout the analysis: people inherently appear to have a finely tuned sense of justice that alerts them when their psychological contract has been violated by their employer. Inevitably, such a breach of faith will result in a dissatisfied and unproductive employee — or yet another job announcement in the classifieds. According to Kickul, "When employees perceive that their psychological contract has been breached, they feel deceived and mistreated, and these feelings can have a pervasive impact on the relationship between the individual and his/her employer" (Kickul, 2001, p. 321). In his book The Effort-Net Return Model of Employee Motivation: Principles, Propositions, and Prescriptions, Phillip C. Grant (1990) reports that "Enriched jobs, with high salaries, status, good working conditions, fringe benefits, and so on, will not motivate unless the enrichment is granted (or experienced) as a result of higher employee effort expenditure rather than irrespective of it" (p. 12).

The growing body of evidence suggests that "the psychological contract is conceptually different from both a formal and an implied contract in that it considers an individual's beliefs about the terms and conditions of an agreement between the individual and his/her employer" (Kickul, 2001, p. 320). Given these shifts in the perception of the employer-employee relationship, analyzing employee turnover assumes new challenges, but there are useful techniques available to managers today that can help; these are discussed further below.

Conclusion

The research showed that employee turnover is an inevitable consequence of doing business, and that its impact on a company is almost always negative. The research also showed, however, that managers have a number of tools at their disposal to help them analyze and moderate these adverse effects, and these same tools can be used to help reinforce and solidify the existing relationships between management and a company's employees. Finally, the literature was abundantly clear that although everyone is different, almost everyone wants their contributions to be recognized and rewarded, and that they will almost always respond in kind if they are treated fairly and with respect.