Employee turnover and business performance-Literature Review

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Literature Review

There are numerous studies centered on employee turnover and business performance. One of the groundbreaking studies on the topic was Pencavel (1972, p. 53). In this study, the researcher envisaged the goals of the organisation in getting to a specified turnover rate taking into consideration that firm management always seeks to a trade-off between preserving the efficiency of operations with high turnover rates that translates to lower wages or a lower turnover rate that translates to high wages. The model was applied in the manufacturing industries across the United States (US) the outcomes indicated that the optimal strategy to adopt by the management was contingent on the type of employee leaving. The study showed that exit of highly qualified employees imposed higher costs to the organisations and generally increased turnover rates had dysfunctional effects on the organisational performance.

According to Glebbeek and Bax (2002, p. 15) employee turnover has significant negative effects on organisational performance.  Turnover is a complex issue for organisations and in some instances, it presents significant challenges to an organisation. A number of factors play a crucial role in determining under what circumstances a specific turnover-firm performance relationship will occur. These set of factors that will likely influence how turnover rates will likely impact the performance of an organisation include who is leaving and who is coming, organisational context, and the norms of that particular industry (Glebbeek and Bax, 2002, p. 15). The negative aspects of employee turnover to an organisation include the costs of recruiting new employees, work disruptions, loss of high performers, loss of employees with high-demand skills, loss of organisational memory, and loss of seasoned mentors which have the capacity to negatively impact the overall organisational competitiveness (Glebbeek and Bax, 2002, p. 16). The general misconception is that employee turnover has uniform negative impacts on an organisation’s performance. Given that most organisations perceive employee turnover to be negative in its entirety and invest so much to retain employees, there is need to ascertain the effect of turnover rates on the performance of organisations.

According to Eriksen (2011, p. 215) turnover rate imposes dysfunctional effects on organisational performance. The cost-based, social capital and human capital theoretical viewpoints are widely used to analyse the supposed effect of turnover rates on performance. The cost-based viewpoint proposes that employee turnover negatively impacts organisational performance due to the consequential direct and indirect costs that arise as the organisation manages the exit of employees. The direct costs that an organisation incurs are separation costs and replacement costs such as training, outstanding salaries, advert, and interviews. The human capital viewpoint proposes that employee turnover negatively impacts the organisational performance for it leads to the relocation of skills acquired by the employees’ overtime and which were valuable to the organisation. The social capital viewpoint also proposes that employee turnover negatively impacts organisational performance due to the disruption of social relationships that had been established among the employees, creating capital and resources for the organisation and it’s difficult to repair or replace these social relationships. There is a significant relationship between turnover rates and organisational efficiency (Ahmed et al., 2016, p. 135).

James (2011, p. 65) investigated the definite effect of employee turnover rates on the performance of organisations within the hotel industry. The focus of the study was how the turnover rates affected various features of organisational performance. The study gathered data from a hotel in England and analysed it using context analysis. Employee turnover rates affect the organisation’s financial performance by lowering the productivity of the staff left behind. Detrimental effects associated with employee turnover are mainly due to the costs of training and replacing catering staff within the industry, which include exit costs, transition costs (such as training, overtime, and reduced productivity), replacement costs, and indirect costs (James, 2011, p. 67). The study results indicated that the detrimental effects of turnover can be properly mitigated by instituting appropriate procedures on staff training, recruiting and allocation and implementing the procedures fully. Employees are bound to exit an organisation at one point in time, therefore, organisations should not entirely focus on striving to retain an employee who produces a product or delivers a service, but put more emphasis on being consistent in the quality and innovativeness of their products or services.

According to Hancock et al., (2013, p. 580), many studies have provided mixed results on the nature of the relationship between turnover rates and organisational performance. Majority of the studies had established that turnover rates impose dysfunctional effects in respect to specific aspects of performance. Employee turnover showed a negative effect on sales performance and productivity. Increasing turnover rates have been shown to lower the quality of customer service and decrease growth. Majority of the studies that have been performed on the subject suggest that any possible functional impacts of employee turnover are overshadowed by the dysfunctional impacts resulting from the exit of employee and hiring of new employees. Despite the majority of the studies indicating dysfunctional effects of employee turnover rates, a number of studies analysed indicated that there are cases in which employee turnover may pose potential benefits to the organisation. The benefits of employee turnover can in some cases lessen or overshadow the costs. There is a functional relationship between the departure of software developers and the possibility of acquiring new skills and expertise that could help software development organisations to be more innovative. Functional effects that could result from employee turnover include lower compensation rates and additional organisational costs because the organisation will lower risk of stagnation and boost innovation, reduce risk of employee homogeneity and “collective thinking”, opportunity to release poor performers and misfits, opportunity to acquire more skilled employees, new employee mean less experience, insurance costs, and vacation and sick-leave pay.

According to Park and Shaw (2013, p. 269) established that the relationship between employee turnover rates and organisational performance was dysfunctional. The researchers hypothesised that there is a negative relationship between turnover rates and performance. The results indicated that any possible benefits of employee turnover are too insignificant compared to the negative effects. As such, any resulting benefits are outweighed by the negative effects.  Turnover rates impose negative effects to the organisations workforce and performance. Although there are suggestions that turnover can have both positive and negative effects, the researchers showed that any particular type of turnover can be detrimental to the overall performance of a firm despite the contextual circumstances at the time. When there are low turnover rates, the reaction to the exit of a highly qualified and experienced employee will most likely involve recruiting a less qualified employee and this will cause a decline in the overall knowledge of the organisation. Under high turnover rates, the researchers argued that the organisation does not incur huge losses of knowledge and skills when replacing an employee and there is a high possibility of the new employee attaining the same level of skills and knowledge possessed by the predecessor faster. As the turnover rates increase, there will be implicit risks to the organisation’s workforce and financial performance. As such, organisations should strive to minimise turnover because lower turnover rates pose lesser risks to the organisation.

According to Rijamampianina (2015, p. 240), businesses generally view employee turnover as imposing negative implications to the performance of an organisation. The study results showed that voluntary employee turnover rate had substantial effects on the financial and organisational performance. The researchers concluded that there is a curvilinear relationship which makes the general assumption by management that a low turnover rate may have beneficial effects for the firm to be wrong (Rijamampianina, 2015, p. 252). As such, organisations should institute retention strategies to mitigate the dysfunctional voluntary employee turnover rates since any changes in turnover rate impacts organisational performance.  Although turnover is mainly dysfunctional to an organisation’s performance, it could impose theorised nonlinear relationship for some form of organisational performance, but with difficulties (Meier, and Hicklin, 2007).

A recent study by Ferreira and Almeida (2015, p. 27) focused its analysis on the linkage between turnover and organisational performance of Brazilian firms within the retail sector specifically dealing in construction materials. The researchers utilised data based on one company that had several comparable outlets and examined if outlets with minimal turnover rates would depict healthier organisational performances with a bias for sales. The study results implied a dysfunctional relationship between employee turnover rates and the organisation’s performance particularly sales, which was in support of the results obtained in earlier studies. A key drawback of this study was the fact that it studied a single company within a particular sector and this is limitation because there may emerge challenges when the study outcomes are being generalised to the whole industry or other companies in general. Given that turnover rates negatively affect organisational performance, firms must institute and implement retention strategies in order to limit this turnover (Abdali, 2011, p. 19)

Lee (2017, p. 275) conducted a study with an aim to determine whether employee turnover could potentially have beneficial effects on an organisation. Majority of the research available on the topic of turnover in organisational management take turnover as a dependent variable and focus of its dysfunctional effects on organisational performance with no issues arising from theoretical or empirical support. This study focused on the type of employee turnover treating it as a situational factor and developed theoretical relationships among various employee turnovers (such as quits, transfers, and involuntary turnover) and organisational performance. The study utilised panel data from U.S. federal agencies between the years 2010 to 2014 (Lee, 2017, p. 276). The study results contested the general assumption that employee turnover imposes dysfunctional effects on organisational performance and established that it could have positive effects for an organisation. The study results further emphasised that the relationship varies depending on the type of turnover involved. Based on the study results, a low-to-moderate rate of employee transfers has the potential to enhance organisational performance based on how the remaining employees perceive organisational performance. Additionally, an involuntary turnover, which entails releasing employees who had poor performance or failed to adhere to employment terms helps to enhance organisational performance.

A study by Brymer and Sirmon (2017) investigated how specific organisations overcome the detrimental effects of employee turnover in a more efficient manner than others by utilising the context-emergent turnover theory (CETT) which focuses on factors that impact the turnover-firm performance relationship. The researchers extended the CETT literature by hypothesising that various human resource bundling approaches are essential circumstantial elements that define the effects originating from an exit. The researchers proposed that bundling of human resources at high degrees before employee exit helps mitigate some of the negative effects of employee turnover. This pre-exit bundling guarantees the organisation that the employee who is left behind have the adequate capacity to deliver on the job demands and are equipped with the essential implicit knowledge of organisational routines that sustain efficiency. The study focused on several of the largest U.S.-based law firms and showed positive results in line with the study hypothesis. The exit of employees when the pre-exit bundling had created enhanced hiring concentration, service concentration and hiring concentration helped mitigate the negative effects of employee turnover.

In brief, majority of the literature available which covers the same area of study as the current study mainly focused on specific sectors and applied a few performance variables. There is a research gap in how employee turnover affects organisational performance when various sectors of the economy are considered together and with all performance variables being applied. Earlier studies have not established the trade-off between the functional and dysfunctional effects of employee turnover on organisational performance at an optimal level. A comprehensive study is necessary to help ascertain how the contextual variations of employee turnover will impact the overall performance of organisations across the various performance variables and help management to adopt new policies and concepts with significant relative efficiency. Additionally, there is limited research on the topic in the context of the UK and, therefore, there is a need for further research targeting organisations in the UK so as to bridge this knowledge gap.

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