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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