There’s no optimal staff turnover; hang on to your workers for dear life

Managers spend considerable time, energy, and money managing retention or labour turnover. Hong Kong’s economy is historically strong. In economic environments like ours, employees often have the choice to stay in a job or find other employment.

These economic conditions create challenges for decision makers. Should companies invest more or devise other ways of retaining employees in order to improve company performance? Or should they simply live with high turnover and work to replace leavers in an efficient and effective manner?

One approach to answering these questions is to consider whether science offers any insight, in particular, what does science say about how turnover affects company performance?

Clearly, the answers can be complex and any general conclusion cannot cover all situations. But after studying these issues for more than 20 years, I believe our knowledge about how turnover affects performance is deep and often different to what is commonly believed.

Many years ago at a holiday dinner, a relative asked me what I was studying at university. I informed him that I was investigating whether turnover related to company performance. To my surprise, my relative immediately launched into a long lecture that included his theory of the relationship. I don’t remember all of the details, but I do remember his key example was the image of dead wood clogging the river. Once the logs were cleared, water once again flowed freely. Therefore, my relative argued, some turnover improves company performance, but too much is dysfunctional. As it turns out, these ideas are commonly accepted among researchers and practising managers alike. Known in academia as the optimal or functional turnover view, the idea is that some turnover improves performance because new ideas, opinions, and energy are brought into the group. Too little turnover leads to stagnation and inertia, a sameness day after day that results in low performance. But too much turnover creates chaos and disruptions.

Why is this the case? There are two reasons.

First, when turnover levels are very low for an extended period of time, the stock of knowledge, expertise, or as economists would say, human capital, is quite high. When a few employees quit to take other jobs, they take with them sizeable chunks of wisdom; the new ideas brought in by replacements is not enough to overcome loss of skills and the “organisation’s memory” that disappears with the leavers.

Second, research shows clearly that the company’s communication networks are severely disrupted when just a few people leave. A few years ago, I conducted a large-scale study of turnover in an international restaurant chain. The results showed the greatest disruption was to communication networks, ultimately leading to drastically lower sales per employee, as the first few people quit. The skill loss through turnover is obvious. The loss of value in the network, or social capital, is more difficult to see, but perhaps more pernicious.

So what are organisations to do? The simplest advice is to keep turnover rates as low as possible for the key employee groups in the company. There are a variety of ways to do this. Higher pay levels and more generous benefits can keep people in a job, but can be expensive. When money is tight, there are a variety of other cost-effective ways of reducing turnover as well. Workers respond positively to fair procedures, job security provisions, and having a say in decision making, for example.

It also matters who quits. Assuming some turnover is inevitable, it is important to retain the best, most knowledgeable employees. Practices that keep expectations on employees high (eg pay-for-performance systems and accurate performance appraisals) tend to be effective for retaining better performers and encouraging lower productivity employees to leave.

To conclude, one value of scientific research is that it can confirm or refute our common beliefs or conventional wisdom. In the case of turnover and company performance, the belief that there is an optimal rate of turnover for high performance is a myth. All else being equal, companies perform better when turnover rates are low. Any efforts to reduce turnover rates, especially among high performers, are likely to yield performance-related benefits.

Jason D. Shaw is Yeung Kin Man professor of business administration, chair professor, and Director of Centre for Leadership and Innovation of The Hong Kong Polytechnic University; and Editor-in-Chief, Academy of Management Journal