Finding a Method to Measure Fluctuation Cost in Monetary Terms

Abstract

The constant increase in employee turnover is a frustrating and important issue to be tackled by an organization of any size. Employee turnover whether high or low is detrimental to the company. Hence it becomes important for the company to study the method of calculating and reducing the turnover cost. The cost of employee turnover may vary depending on the size, nature, and location of any business. The turnover costs may include the costs due to an employee leaving the position, new employees recruitment costs, training costs, lost productivity costs, new hiring costs and costs of sales lost. It is necessary that the company takes into account all these elements in calculating the employee turnover costs to take any efforts on reducing the employee turnover. The stress that the employee turnover places on any company is great and hence the study of the employee turnover costs is considered important. This paper presents a model to measure the employee turnover cost in McDonalds.

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Introduction

The effect of employee turnover costs on the financial performance of any business has received significant attention from different people like senior leaders of various organizations, Human Resources executives, and industrial psychologists. Employee turnover costs have proved to be one of the most expensive and seemingly uncontrollable that challenges the HR professionals in all organizations irrespective of the nature and size. It has to be recognized that the costs of time and lost productivity and sales due to employee turnover is just real as any other cash expenses incurred by the company like paying the advertising costs or engaging temporary staff in the place of employees left the company.

It is to be noted that training new employees, developing new job descriptions, conducting exit interviews for those who leave the company, or establishing more intensive search and screening for new employees – all add costs to the company. Calculating and knowing in advance the costs to be incurred in losing an employee and then replacing them will enable the company to decide how much the company can spend to retain an employee. It also helps the company to analyze whether the investment in keeping an employee helps to improve the profitability of the company.

Smith and Watkins have identified three major classifications of employee turnover costs – separation costs, replacement costs and training costs.

However, there are other costs like costs of the difference in the performance level of the persons leaving the company and those who join new.

There are both tangible and intangible costs associated with employee turnover. Tangible costs like recruitment costs are real and quantifiable. But there are some intangible costs that are also real and often higher than the tangible costs. Examples of intangible costs include:

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  • The costs associated with the enhanced workloads, the existing employees have to assume due to vacancies caused by the employees leaving
  • The costs due to less productivity because of the tension and the stress
  • Costs associated with the declining morale of the existing employees
  • Costs of reduced productivity due to loss of synergies of work group

These intangible costs are though difficult to calculate but not impossible for any business. It is important these intangible costs are also taken into account in making any decision in connection with the employee turnover. (William H. Pinkovitz et al)

With this background this study makes a detailed report on the costs of employee turnover and other associated issues.

Research Objectives

Based on a study and review of the available literature this study aims to achieve the following objectives among others:

  1. To make an in-depth analysis of the issue of employee turnover, the causes and costs of the employee turnover
  2. To study and suggest a method of calculating the cost of employee turnover in the multinational food chain McDonald’s

Structure of the Dissertation

With a view to present a comprehensive report on the costs of employee turnover this dissertation is divided into the different chapters. Chapter 1 introduces the concept of the cost of employee turnover to the readers. It also states the objectives of the research in brief. Chapter 2 presents a detailed review of the available literature on the costs of employee turnover and other associated issues including the effect of emotional intelligence on the organizational productivity. Chapter 3 presents the method of calculating the employee turnover cost in McDonald’s. Chapter 4 makes a summary of the issues covered by the study followed by few recommendations.

Literature Review

The scope of this chapter is to provide a detailed review of the available literature on the costs of employee turnover. The chapter also discusses the causes of employee turnover and the ways in which the employee turnover can be reduced.

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Introduction

Results of many studies and surveys report that the foremost issue being faced by today’s business organizations is finding good talents and retaining them. War for Talent is the order of the day and smaller as well as large business houses adopt different strategies to attract talents, hire them, and retain such talents for a longer period. Despite the efforts of the organizations the employee turnover is on the increase and it is not left without costs. There are a number of costs associated with the employee turnover and this chapter deals with a detailed report on the costs of employee turnover.

Causes of Turnover

On the basis of a study conducted by Cascio (2000) in the health care industry, the cost of appointing 288 new employees in a hospital with a capacity of 200 beds employing around 1200 people with an employee turnover rate of 2 percent had been calculated at $ 2,888,295.52 when every costs associated with the replacement is taken into account under the study. (Sigma) For causing this kind of turnover costs, various studies have identified different reasons for the employee turnover, although no consensus has been achieved on the precise reason for the cause of employee turnover in any organization. Some of the major reasons that have been identified to cause turnover are as follows:

Economic Situation

Depending upon the buoyancy of the job market in an economy there tend to be turnover decisions on the part of the employees, where there are several alternative jobs available in the market. The ability of a person to find an alternative job, lucrative than the current job, is one of the major reasons for the employee turnover.

Organizational Performance

When an organization is passing through a tough business situation its performance may warrant the layoff of some of its employees. This may also result in employee turnover. In those situations, the existing employees may also think it is wise to look for alternative employment in financially sound companies.

Organizational Culture

Organizational culture has an important role to play in any organization on the turnover decision of its employees. There is no adequate literature on the organizational culture. However, factors like employee reward systems in practice, ability, and strength of leaders of the organization, and the ability of the organization as a whole to inculcate commitment on the part of the workers and to develop a sense of shared objectives among them, will influence the job satisfaction of the employees as well as the turnover decisions and the rate thereof.

Job Characteristics

It may so happen that some of the jobs may prove to be attractive than others. There are different aspects like repetitiveness of the job, challenges involved, potential dangers, perceived importance, and the capability of the job to create a sense of accomplishment among the employees that determine the characteristics of a job. Depending on these factors the employees determine their turnover intentions. In addition the status of the job also is a contributing factor for the turnover decision.

Unrealistic Expectations of the Applicants

While applying for a job and at the time of receiving the offer, the applicants might have had some imagination about the scope and nature of the job which may be quite unrealistic. When these unrealistic expectations are not met in reality, the employee becomes disillusioned and decides to leave the job.

Demographic Factors

The demographic and biographical characters of the employees often act as a contributing fact for the employees to cause employee turnover. Empirical studies have proved that such features have a definite say on the turnover decisions of the employees in specific circumstances. The lifestyle factors like smoking habits or past employment history are some of the factors that determine the nature of the employee to stick to any particular job. In view of the fairness and legality these and other similar factors need consideration.

Individual Employee’s Character and Personality

Apart from the above general factors that influence the employee turnover decisions, there are certain other personal factors that also make the employees decide on their continuing with an employment. These may be either personal factors or trait-based factors. Factors like changes in family circumstances, the attitude of the employee to learn new skill or additional qualification or any job offer that has come to the employee without his soliciting are some of the personal factors that have an impact on the employee turnover intentions. Apart from these personal factors trait based factors like the expectations about the job and some counterproductive factors like loafing, frequent absenteeism, stealing habits, abuse of the job being handled and intentional sabotage of employer’s equipment and production. It is possible for the organizations to measure these factors and use them to screen employees while selecting them to determine their attitude towards switching the jobs. (Sigma)

It is difficult to classify the above factors as to which of them can be considered as controllable and which are uncontrollable by the organizations concerned. In any case it is vitally important that the firm identifies the potential causes for employee turnover and control them so that the cost of employee turnover can be reduced to the minimum. (Sigma)

Understanding Employee Turnover

Before the organization can measure the employee turnover and assess the cost of such turnover, it is important that the company understands the nature of employee turnover as to whether most of them is avoidable or unavoidable.

Avoidable and Unavoidable Employee Turnover

The literature on employee turnover points out making a distinction between avoidable and unavoidable employee turnover from the point of view of the organizations would facilitate the organizations to understand the causes of voluntary turnover. (Dalton et al cited in Abelson, 1987) Avoidable causes cover the employees quitting their employment to look for better alternatives with higher pay and working conditions or better career growth. Unavoidable causes on which the organizations do not have any control may include an employee leaving the city due to relocation by a spouse or other family circumstances.

When an organization is able to identify that most of its voluntary turnover is unavoidable the organization may decide to tackle the turnover effects after the event has occurred instead of spending time and efforts on providing the preventive measures and actions. On the contrary if the organization is able to identify that most of the turnover is avoidable that gives the organization much scope for planning any intervention to avoid such turnover. However it is also important to assess whether the large unavoidable turnover is the result of some underlying problems within the organization itself.

Internal and External Factors

Another area which needs the attention of the organization in connection with understanding the employee turnover within an organization is to ascertain whether such turnover is caused by internal or external factors. The prevalent labor market condition is one important external factor that an organization has to consider while deciding on the labor turnover issues. Sometimes the impact of the existing labor market condition may point out that any human resource strategies that are being employed by the organization may not help to improve the employee turnover within the organization. However studying such market conditions may enable the organization to analyze to what extent the external factors have influence over the turnover. Despite the fact that a tight labor market situation may have its effect on the ability of the employer to have a better retention of its employees, it is crucially important that the organization analyses the other internal factors that contribute to the labor turnover in the organization. (IDS, 2000)

Measuring the Employee Turnover

According to the research studies conducted on the issue, an organization has to consider both the qualitative and quantitative information to have a proper perspective of the internal factors that cause the labor turnover (IDS, 2004). In order to have an accurate understanding of the reasons for the employee turnover the company has to gather qualitative information and analyze them as to why the employees have left the employment of the organization. The Chartered Institute of Personnel and Development of UK (CIPD) advises that it is necessary for any organization to have a better understanding of the employee turnover rates within the organization and also the impact of such turnover on the effectiveness of the organization (CIPD, 2004). The accurate measuring of the employee turnover and understanding the level of such turnover along different positions, locations of employment and different kinds of employees would help the organizations to form effective retention strategies. A proper understanding of the nature of the turnover issue within an organization enables the organization to decide the retention strategies it has to follow. For instance in some cases the organization may have to adopt specific strategies with respect to particular groups of employees or it may have to formulate strategies on an overall basis to control the turnover.

Wastage Rates

Organizations normally make use of a crude wastage rate for measuring the employee turnover. This rate is calculated as the percentage of the people leaving the organization during a particular period, expressed as a percentage to the average total number of employees the organization had during the same period. The average number of employees is calculated by adding the number of employees at the beginning and at the end of the period, and dividing the total by two (IDS, 2004).

Crude Wastage Rate

This method offers the advantage that there is only a limited risk that the different departments of the organization may provide the turnover data which is inconsistent. However this measure has a major limitation that it considers all the people leaving the company whether they left the employment voluntarily or involuntarily. This measure becomes ineffective, as it does not differentiate between the people who left the employment because of their dissatisfaction with the employment and with those who had to leave the employment for reasons like ill-health or retirement. This makes the people leaving the organization as a homogeneous group (Morrell et al. 2004). Moreover the calculation of employee replacement figures based on crude wastage rate that includes the number of employees who need not be replaced may be misleading and would present meaningless results (IDS, 2004). Another drawback with the crude wastage rate is that it does not distinguish between turnover which are functional and dysfunction (CIPD, 2004).

Resignation Rates

As an improvement over the crude wastage rate, the measurement of employee turnover may be based on the number of people who left the organization voluntarily by resigning from their jobs. This takes into account only the people who have resigned their jobs, excluding the employees who have left the employment due to other reasons like retirement from the jobs, dismissal, or redundancy or even redeployment of some of the employees to other parts of the organization. However, calculation of the turnover rates based only on voluntary employee turnover rates has its own shortcoming because this rate does not provide any help to the organization to decide the number of people to be replaced to cover those who left their employment due to reasons like retirement or voluntary transfers to other departments within the organization. An improvement in resignation rate may be attempted by recording the turnover rates separately for voluntary and involuntary turnover. (IDS, 2004)

It is possible to apply the wastage rates for different groups of employees or different business units within an organization, to record the differences in the turnover rates within the various divisions of the organization. It the turnover is calculated as an overall figure there is likely to be significant differences in the turnover rates of different groups or divisions within the organization. (IDS, 2004) For instance, the turnover rate in one division of the organization may be high and this turnover rate may also be the result of smaller rates of different divisions spread equally across the organization. The organization may have necessarily to deal with these two situations differently. The analysis and examination of the turnover rate in the individual departments will enable the management to understand the shortcomings of any particular line manager with respect to a specific department where the turnover rate is high or to monitor the turnover intentions of a particular group of employees who possess scarce skills and knowledge. Similarly wastage rates applied to the employees leaving within a particular length of time say one year may throw light on the inefficiencies in recruitment, selection, or recruitment processes.

Vacancy Rate

Another approach to measure the employee turnover is to take into account the number of vacancies that the organization needs to fill up. The vacancy rate is based on the number of positions in an organization that needs to be filled up actively expressed as a percentage of the total number of employees of the organization.

Stability Index

The stability index brings out the ability of the organization to retain the employees who have more experience with the company. Stability index may present the figure for the whole organization or for any particular department or group of employees. It is usually calculated as the number of employees with a particular length of service; say one year as a percentage of the number of employees who joined the organization a year ago. It is possible for the organization to adopt any other measure like basing the index on a longer period of service or any other criteria. Any increase in the stability index will denote that the company has improved its ability to retain experienced employees. Normally a wastage rate should be in line with the stability index. In case if both the stability index and the wastage rate are higher, it would mean that the company has issues emanating from small number of high turnover jobs (IDS, 2004).

Cohort Analysis

Cohort analysis functions as an effective tool to enable the organization to monitor and control the turnover costs due to increased outlay of the company on recruitment, induction, and employee training. This technique basically measures the employee turnover of employees on service related patterns. The employee leaving rates are calculated on the basis of the employees who constitute a homogeneous group like employees joined at the same time. The resulting leaving rates can be presented in  the form of a wastage or survival curve.

Wastage and Survival Curves

In the wastage curve the number of people leaving the employment is plotted against the actual period of their service at the time of their leaving the employment. The pattern of the curve shows a higher level for the people who recently joined the company and the curve decreases as the length of service increases. The survival curve on the other hand presents an analysis of the number of people who stay longest with the company and thus provide a measure for the retention instead of turnover.

Exit Interviews and Surveys

The qualitative information on the labor turnover may be gathered by conducting exit interviews and surveys with the people who are leaving the employment. However it must be taken into account that the reasons being cited by the people in the exit interviews are usually false or may be partially true (CIPD, 2004). The exit interviews are being used extensively for gathering the reasons for employees leaving, despite the fact that such interviews are unreliable especially when the person conducing the exit interview has to give the reference for the person leaving in his/her next employment. In order to make the exit interviews effective it is better to conduct them shortly after the employee hands over the notice of his/her intention to leave. Similarly the interview should be conducted by someone who was not the immediate supervisor of the person leaving or who does not have the authority to provide any future reference for the departing employee. It is important to maintain confidentiality and to explain the purpose of the interview to the employee concerned.

There are some other alternative methods that may be helpful like, using the survey method. Under this method a questionnaire is constructed consisting of questions about the intentions and purpose of leaving the employment by the employees. The survey is conducted on the basis of the questionnaire sent to the employee on a confidential basis after six months of departure of the employee.

Costs of Employee Turnover

Only when the cost of employee turnover in an organization is quantified it is possible to assess the extent and impact of the turnover to the fullest extent in an organization. As the complexity to approach the issue of costing the employee turnover increases, the accuracy of the estimate of the turnover cost increases. In any complex approach to costing the turnover the costs associated with the lost productivity of the employees is taken into account. The low productivity is caused by the work of the newly recruited employees for the first few weeks of employment and also due to the poor output of those employees who have resigned and are serving the notice period. The effect on the morale of the existing employees of the higher labor turnover may also have a significant impact on the productivity.

One of the frameworks for estimating the employee turnover cost is provided by Tziner and Birati (1996). The work of Tziner and Birati is based on the earlier work of Cascio model of separation costs, replacement costs and training costs. While Smith and Watkins (1978) identifies these basic costs involved in the employee turnover, Cascio added another element of costs which takes into account the difference in the performance between the employee leaving the service and the employee who has been appointed as replacement.

Separation Costs

The separation costs normally include the following costs among other things:

  • The cost of conducting the exit interviews with the persons leaving
  • The cost of administrative functions with respect to the handling of the termination of the service of the departing employee
  • The amount to be paid on separation or severance pay and
  • The enhancement in the amount of unemployment compensation

Replacement Costs

The replacement costs include the costs to be incurred in connection with:

  • attracting new talents through advertisements
  • conducting aptitude tests and interviews
  • reimbursing the cost of travel and out of pocket expenses of the candidates called for interviews/testing
  • administering the pre-employment requirements
  • medical examinations of prospective employees and
  • collecting and disseminating information to go through the process of selection, recruitment and training

Training Costs

The training costs would include the cost of formal and informal training to be conducted for those who join the company new. The performance differential denotes the difference in the productivity of those employees who leave the organization and those who join in their places. (Cascio, 1991)

Tziner and Birati Framework

The Tizner and Birati framework of assessing the costs of employee turnover include:

  • Direct Costs incurred in the process of replacing the employees who left the employment. These costs may relate to the recruitment, hiring, training, and familiarizing new employees and would normally include the cost of extra efforts being taken by the supervisors and the co-workers to accommodate the deficiencies in the new employees during their starting of the employment.
  • Indirect costs and losses arising to the organization due to interruptions and stoppage in production, sales and delivery to the customers in time of the ordered goods or services
  • The financial value of the estimated effect on the performance of the existing employees as a result of the drop in their morale caused by the dysfunctional turnover

In general the following are the costs that occur to any organization due to employee turnover at any degree.

Costs due to the Leaving of an Employee

It would yield surprising results when the costs associated with the labor turnover are analyzed, as such costs would be considerably higher. It has long been recognized by the organizations that there are high costs associated with the employees leaving the organizations. It is important for the organizations to recognize that the costs of employee turnover will have a serious impact on the profitability of the organization and sometimes it may even affect the very survival of the organization (William G Bliss). There are a number of different costs that are to be incurred by an organization in connection with the employee turnover.

Any organization has to necessarily consider the following costs while any employee is leaving the organization.

  1. The costs resulting from another person holding the position till it remains vacant. Such costs may include the cost of a temporary employee handling the position or an existing employee handling the job of the vacant position in addition to his/her own jobs. It may sometimes result in payment of overtime wages which also should be taken into account.
  2. The costs of lost productivity arising out of the vacant position are to be reckoned as the cost of employee turnover even if the job of the vacant position is handled by another existing employee. A reasonable percentage of lost productivity can be estimated for calculating the costs of turnover.
  3. The costs incurred in conducting the exit interviews which include the cost of the time of the person conducting the exit interview, the time of the employee leaving the employment, the administrative costs to be incurred for stopping the processing of payroll. other benefit deductions and enrolments, notification to the government authorities if necessary and the cost of various forms to be filled in for processing the resignation of an employee
  4. The costs of the time of the manager who has to calculate the quantum of remaining work to be completed by the departing employee and also to cover the work until a suitable replacement is found to carry out the work. There will also be some cost involved in the time being sent by the manager to ascertain the causes for the employee leaving the service, though it may not be an exit interview on its own.
  5. The costs the organization has incurred in training the employee which include the costs of internal and external training provided to the employee, other external programs and academic qualification or training provided to the employee. This will also include the cost of licenses and certifications the employee would have obtained at the cost of the organization to perform his/her job effectively while he/she was working for the organization.
  6. The cost of the impact on the productivity of the department because of the employee leaving the services – the costs of the person who will take up the job of the person leaving and the effect on the work of the person so taking up the work of the departing employee. The costs may also relate to the delays in delivery of the departmental output and cost of time involved in the remaining employees discussing the effect of the person leaving and the work load that creates.
  7. The cost of severance benefits and other continuation benefits wherever the employee who is leaving is entitled to such benefits.
  8. The cost of the lost knowledge, skill, expertise, and experience the employee is taking along with him which he might have acquired at the cost of the organization, while he was working.
  9. The impact of the cost of unemployment insurance premiums, the cost of time spent for unemployment hearing when there is one or the amount payable to a third party or consulting agency to handle the unemployment claim of the person leaving the services.
  10. The cost of losing the customers that the departing employee is likely to take along with him or the costs to be incurred by the organization for retaining such customers when the person leaving is a sales person or a customer service executive.

Costs of Recruitment

The costs of recruitment include the following elements:

  1. The cost of advertising the existing vacancies will have to be taken into account while arriving at the cost of labor turnover. This cost will vary depending on the nature of the advertisement whether it is a classified or a more enlarged display. The cost of recruiting agencies, employee referral costs and the costs for posting the vacancies in the internet are some of the other costs that need to be considered.
  2. The costs of the time involved of the executive in the organization to assess and understand the requirements of the positions remaining vacant, to develop and implement a suitable strategy for sourcing the right candidate, to review the background and suitability of the prospective candidates for the vacancies, to prepare the assessments of the candidates, to conduct the necessary reference checks on the prospective candidates, to make an offer of employment to the shortlisted candidates and to send regret notes to the unsuccessful candidates are included here.
  3. The cost of the assistant to the internal recruitment executive who has to spend more time in the initial reviewing of the resumes, arranging for the interviews of the candidates by scheduling the dates and time for interviews and also making any travel arrangements for those candidates who have to travel from other cities to attend the interviews.
  4. The costs of the supervisors, managers and other people in the hiring department to review and arrive at the requirements of the positions to be filled up, to review the background of the candidates, to conduct the interviews and discuss each one’s assessment with others in the same level as well as with the superiors in the next level, and shortlist and select the people finally eligible for appointment.
  5. The administrative cost including the cost of handling, processing and responding to the each resume resumed.
  6. The cost of the time of the recruitment executive within the organization to conduct interviews within the organization who are eligible for selection to the positions remaining vacant. The cost of those people within the organization who will be away from their jobs for attending the interviews
  7. The agency costs for conducting drug screening and background checks concerning the education and criminal background especially when this checking is entrusted to an outside agency. These costs might have to be incurred for 2 or 3 short listed candidates for each vacant position.
  8. The cost of conducting various aptitude and other pre-employment tests to assess the candidates’ skills, abilities, aptitude, attitude, traits, and behavior are to be considered.

Costs of Training

The costs of training generally cover the following:

  1. The cost of the salary of the new employee getting the orientation and the cost of the executive who takes care of the orientation will primarily be included in this cost. It is necessary to consider the cost of orientation materials.
  2. The cost of departmental training which will actually put the employee into taking up the job for which he/she is appointed will have to be calculated as the cost of employee turnover. This cost will depend on the nature of the position for which the new employee is appointed, as the time needed to understand and take up the job will vary accordingly.
  3. The cost of the person who actually conducts the training is also to be considered and included
  4. The cost of various training materials including the cost of company product brochures, product manuals, computer, and other audio-visual equipments that may be necessary for imparting the training will be counted for calculating the labor turnover costs.
  5. The cost of time of the supervisor spent in assigning, explaining and reviewing the works assignments and assessing the output from the assigned work. This is the cost of lost productivity of the supervisor’s work.

Cost of Lost Productivity

The cost of lost productivity includes

  1. On completion of the required training the new employee may not be able to perform in his full capacity and ability during the first few weeks. Hence there is going to be a loss of some amount of productivity which needs to be included in the cost of labor turnover. This cost can be calculated as a percentage of the costs to the company on the employee with progressive advancement in the performance level every two weeks.
  2. The cost of the time of the departmental supervisors, manager, and other coworkers to bring the new employee’s level of working up to the required speed are to be considered in arriving at the cost of employee turnover.
  3. The cost of the mistakes that the new employee may commit during the initial period of working is another factor that needs consideration.
  4. The cost of lost productivity of the department due to an experienced employee or a senior employee leaving and due to his absence the cost of lack of guidance and advise to the other members need to be taken into account for calculating the employee turnover costs.
  5. The cost of completion of any critical project which may suffer due to the leaving of an employee who is the key participant of the project work will also add up the cost of employee turnover.
  6. The cost of reduced productivity of a manager or director who looses a key staff member, such as an assistant, who handled a great deal of routine, administrative tasks that the manager will now have to handle may also escalate the cost of labor turnover.

Costs of New Hiring

The costs to be incurred in connection with the new hiring to include:

  1. The cost of bringing in the new employee and make him on board has to be calculated in arriving at the cost of the employee turnover. This cost may include the costs to include the new employee into the payroll of the organization, providing computer and necessary software including the creation of security passwords and ID cards, business cards, making internal and external announcements regarding the induction of the new employee into the organization, provision of telephone connections and office extensions, making the email and credit card accounts operational and buying or leasing other necessary communication equipments like cell phones, pagers and also the provision of a car other vehicle as may be appropriate to the position.
  2. The manager and other supervisors have to spend considerable time on the development of trust and confidence in the work of the new employee and the cost of time that will be spent by the managers will be included in the cost of employee turnover.

Reduction of Employee Turnover

In view of the high costs involved in the employee turnover which may have the effect of reducing even the profitability of the organization, it becomes important for the organizations to take serious steps to control the employee turnover in all respects. There are certain key steps that an organization may take in monitoring and controlling the labor turnover. These steps are:

Employing an effective Hiring System

The foremost step that any organization has to adopt is to devise an effective system of hiring that will ensure that the organization can identify and select those people who are qualified as well as found to be effective in performing their jobs. It is necessary to ascertain and satisfy that such persons selected will fit into the organizational culture. McDonald is using a ‘Hiring to Win’ Program which helps in the selection of managers and crew for their restaurants. Results of various studies have proved that a consistent use of this ‘hiring to win’ program for the selection and recruitment of managers have resulted in a 13 percent reduction in the employee turnover in the first year which can be monetized at a saving of $ 3,500 in the first year.

Providing an Effective Orientation

It is crucially important for the company that it employs effective orientation methods to new employees. as such orientation has the effect of reducing the employee turnover by 25 to 50 percent and a gross reduction of 50 percent in the employee turnover intentions. Effectiveness of orientation of the employees goes beyond the filling out of the joining reports and handing over the company employees’ manual of policies and procedures. The effectiveness of orientation should result in increase in the pride of the employee towards working for an organization, building a long-term commitment towards the organization, increasing the confidence level of the new employee, increasing the understanding and pride in the products and services the organization offers, improving the preparedness of the workers to interact effectively with the customer and above all enhancement in the productivity.

Providing Effective Training to the Employees

It is true that the employees and managers who are not given the adequate training to perform their duties are sure to terminate their service and leave the job at the earliest available opportunity. Similarly if the managers are not provided with the necessary training they are very likely to deal with their subordinates in such ways the subordinates will perceive as giving a negative thrust to the performance. This may also result in the subordinates deserting the employment and search for alternative employments.

Improving the Internal Environment

It is not just enough if the organization brings in employees with adequate knowledge and skill and provides them an effective orientation and training. It is also equally important that the organization maintains an internal environment which is conducive for the employees to offer their best performance. McDonalds have recommended the adoption of ‘8 Proven People Practices’ that will help an organization to motivate the employees and make them stay with the company for longer duration of time. These principles are:

  • Attracting, hiring, promoting and retaining employees who possess exceptional qualities and are highly customer focused
  • Providing a well structured and detailed motivating orientation and effective training to the employees at all levels.
  • Ensuring that the pay rises are provided to the employees at the appointed periods
  • Positioning the managers and subordinates in a proper setting to provide the best service to the customers
  • Ensuring that there is effective communication between the managers and the subordinates
  • Providing the subordinates regular breaks and properly scheduling the work of the subordinates so that they handle the workload effectively
  • Providing the necessary equipments and atmosphere to carry out a quality work and
  • Providing a working environment which is safe and comfortable for the workers

Competencies of Emotional Intelligence

Emotional intelligence can be defined as the ability of a person to understand and manage his/her own emotions and behaviors and also that of others surrounding him/her. Emotional intelligence is the quality of a person to help others to cope up with their frustrations and thus control their emotions. It also helps them to get along with others well. Emotional intelligence is the basic vital for the personal and professional success of any person. A person’s talent is leveraged by his/her emotional intelligence (Australian Business Training).

Emotional intelligence can be regarded as the new model for the competencies of any person to be SMART. The competencies of being SMART can be denoted by possessing the following characteristics:

Self Awareness

Self awareness signifies emotional literacy which can be defined as the ability of a person to understand and recognize an emotion as it is being experienced. Self awareness is the understanding of the linkage between thinking and feeling and the effect of such thinking and feeling on every choice and decision being made by anyone. It also provides the guidance as to the extent to which one may allow the emotions to affect one’s actions. Acting appropriately to a given situation depends on arriving at the right balance between reason and emotions.

Mastering Negative Emotions

Another element of the competency of emotional intelligence is one’s capability to practice a self control and manage the negative emotions. Mastering of negative emotions can be achieved by one taking the responsibility for one’s own emotions and responses. It is possible to evolve different strategies to control and master negative emotions like fear, anger, and sadness. It is necessary to have a tight control over the negative emotions to meet the challenges of life. “The ability to control impulses and delay gratification in the pursuit of our goals is a core competency in success”

Attitude of Optimism

Optimism is at the root of encouraging one’s ability to stay motivated. It is the attitude of a person to perceive the problems as temporary and depersonalize them. It also gives the ability to a person to consider the problems as one off events that are easily solvable. The attitude of optimism enables one to be resilient and also gives him/her the capacity to bounce back from problems and stay focused on solving issues. Optimism can be considered as the most influential and powerful factor in identifying the people who are achievers.

Reading the Emotions of others

For establishing a strong working relationship it is important that one has the ability to assess a situation and recognize the underlying issues to establish emotional connection with others involved in the issue. Reading the emotions of others helps one to establish a strong working relationship by empathizing with others.

Building up Teams

Organizational results are enhanced with the ability of the individuals working for the organization to build teams and work with the other team members. The ability to build a team work is at the root of combining the other competencies so that one is able to influence the thinking, feeling, and behaviors of others. Team workers have always proved to be exceptional performers. It is important that the organizations hire managers and employees who can work on teams to achieve common goals.

It has been proved that emotional intelligence can be improved with well structured development programs, coaching, and feedback. The implementation of Emotional Intelligence programs which are customized to meet the employee needs is sure to enhance the effectiveness and outcomes of executive performance, improved sales and customer service, team building and change management practices (Australian Business Training).

Emotional Intelligence and Organizational Productivity

A number of research studies have proved that emotional intelligence has resulted in exceptional individual as well as organizational performance and productivity. The following are some of the achievements as reported by various studies which prove the effectiveness of emotional intelligence:

  • Partners in a consultancy firm who had high levels of emotional intelligence than their other partners have managed to deliver 139 percent more profit from their accounts.
  • Sales people who got their training in emotional intelligence could achieve an improvement in their sales performance as high as 87percent in the first year itself which delivered a return on investment of about 2000 percent.
  • Production supervisors who were trained in emotional intelligence were able to enhance the production by 17 percent
  • Training Programs which are based on emotional intelligence are able to produce 8 times the return on investment of non-emotional intelligence based programs.

Conclusion

Thus this chapter identified the factors that cause employee turnover, ways in which the employee turnover can be measured, costs associated with the employee turnover and the role of emotional intelligence in the organizational productivity.

Measuring the Costs of Employee Turnover in McDonald’s

Under this chapter the method of calculating the cost of employee turnover in McDonald’s is discussed.

Introduction

While calculating the cost of employee turnover it is assumed that the term ‘employee turnover’ refers to both voluntary and involuntary termination of service. Especially for a restaurant like McDonald’s both direct and indirect costs of employee turnover prove to be expensive. The direct costs include the cost of uniforms and cost of training provided to the departing staff etc. The indirect costs include the loss of productivity of the restaurant and the reduction in the unit profitability.

Calculation of Cost of Employee Turnover

It is usual for the restaurants to establish some basic standards of turnover against which the actual turnover is calculated. The turnover figures for any given period are compared with the established standards and the reasons for actual turnover are analyzed to enable the company to take corrective action wherever necessary. There are two recognized methods of calculating the turnover in the restaurants. They are:

  • Monthly and annualized Crew Labor Turnover and
  • 0-90 Day Turnover

By calculating these rates it is possible for the restaurants to have a proper perspective on the employee turnover as this tells the restaurants how soon they loose the employees hired by them. On a periodic review of these rates the owner or manager of any restaurant can possibly assess the trend of the employee turnover, analyze the reasons for any negative trend, and take corrective action where required.

In the case of any restaurant like McDonald’s 0-90 Day Turnover figure is very important as any employee turnover within the 90 day period proves to be very expensive for the restaurant. In case an employee leaves within 90 days of employment, the restaurant is bound to loose heavily because of the cost incurred by it in hiring and training the employee. The restaurant would have invested heavily on the hiring and training and the employee has not stayed long enough for the restaurant to recoup the cost of training the employee if he/she leaves the employment within 90 days. In addition there is the cost of the time spent by the trainers and managers on the employees. The managers and other people training the new employees would have spent considerable time diverting their attention from their regular work. The impact of 0-90 day turnover is significant in the case of restaurant because it has the effect of creating a cycle in which

  1. the managers and trainers may get permanently involved in training new employees very often and spend a larger proportion of their times in training new employees which may affect the sales of the restaurant and
  2. the restaurant may not have the chance of reaping the benefits of the training provided to the new employees.

Hence the 0-90 day turnover figures need to be watched carefully by the restaurants to avoid unnecessary loss to the organization by increased employee turnover.

  1. Monthly Crew Labor Turnover Percent

Monthly Crew Labor Turnover Percentage is calculated by using the following formula:

No of crew terms in current month/No of month end active crew x 100

  1. Annualized Crew Labor Turnover Percent

The annualized crew labor turnover is calculated in two parts:

  • Part 1: (No of crew terms in current month/ No of month end active crew)/No of months so far in the year = YTD turnover
  • Part 2: YTD turnover from Part 1 above x 12 x 100 gives the annualized crew labor turnover percentage
  1. Crew 0-90 Day Turnover Percent is given by:
  • Part 1: The number of crew hired in the last 12 months is to be ascertained (TTM)
  • Part 2: Of the TTM number calculated in part 1, the number of workers that have terminated their employment both voluntarily and involuntarily during the last 90 days is to be ascertained.
  • Part 3: Number TTM arrived in part 1/Number of terminations as in part 2 gives the 0-90 days Turnover.

The above formulas can be used to calculate the Swing and management turnover by substituting the relevant information.

The direct cost of turnover in McDonald’s restaurant has been estimated to be $ 788.68

Cost of Employee Turnover in McDonald’s for 2006

The McDonald’s people’s report for the year 2006 has reported that the average annual crew turnover in the restaurants is 157.17 percent. The report further states that there was an average of 41.34 crew pre restaurant. This implies that the labor turnover for the year 2006 was about 65 crew labor in each of the restaurant. In addition there has been one manager on an average has been turned over by each of the restaurant. Calculating the direct cost of turnover on the basis of the estimated crew turnover cost of $ 788.68 and the manager turnover cost of $ 22,808.10 the direct turnover cost of each US McDonald’s restaurant in 2006 was estimated at $ 74,072.30 calculated as below:

  1. 65 crew labor turnover $ 788.68 x 65 = $ 51,264.20 plus
  2. 1 manager turnover $ 22,808.10 x 1 = $ 22,808.10 gives the total turnover cost of $ 74,072.30

Conclusion

This chapter gave an overview of how the cost of employee turnover is being calculated in McDonald’s which method is also helpful for similar restaurants running with number of crew labor.

Conclusion and Recommendations

In the present day competitive environment companies invest huge sums of money and time to become an ‘employer of choice’ so that they can hire excellent talent available and retain them for a longer period of time to improve the competitive strength of the company. However it is important to ascertain that whether the company is able to make the best use of such money spent. This is possible by calculating the number of people the company is able to retain. It is considered important to consider the rate of employee turnover also in view of the fact that such turnover costs the company heavily in terms of direct and indirect costs involved while the employees leave the company. “In this age of increasing demands on productivity, employees leaving the company and taking their know-how with them is a price that no company can afford.” (Kathryn Jackson)

Where the organization observes a general turnover problem, it would be advisable for the company to take a holistic approach aimed at focusing fully on reducing the employee turnover by taking measures like, providing full support to the newly recruited people for few weeks initially, providing clear career growth environment within the organization, considering the issues relating to work-life balance, compensating the employees in line with the market, creating a pleasant working environment and engaging in more and direct communication with the employees.

As observed by the study there are different costs associated with the employee turnover and it is for the organization to take into account all these costs. However despite detailing the list of the costs of turnover, it is like an iceberg floating in water and most part of the costs is submerged inside hidden away from sight. As the employee turnover rate goes up it has its impact on the employee morale to bring it down and the employees who depart put the pressure on the remaining employees to take the work load of the employees leaving. At the same time as the turnover rate increases there is a deterioration of the customer service levels.

In order that the organization can reduce the employee turnover and avoid the associated costs some of the following recommendations may prove effective:

  1. It is better to have an optimal workforce comprising of employees with right temperament, interest, and skill so that they commit themselves to the growth of the organization. It is necessary that the organization hires only such kind of people.
  2. It is also equally important that the company becomes an employer of choice by adopting the principles of compensating competitively, providing a comfortable working environment, providing opportunities to learn and grow and make the working experience of the employees with the organization a pleasure.
  3. The organization should recognize the work-life balance requirements of the employees as the modern day employees value their personal life more important than the monetary compensation they get from their employment.

References

Abelson M. A. (1987), ‘Examination of avoidable and unavoidable turnover’ Journal of Applied Psychology, vol. 72(3), pp. 382-386.

Australian Business Training ‘Emotional Intelligence’. Web.

Cascio Wayne, (1991) ‘Costing Human Resources’ PWS-Kent.

Chartered Institute of Personnel and Development (2004), Fact sheet on employee turnover and retention.

IDS (2000), Improving staff retention, IDS Studies No. 692, 2000.

IDS (2004), Improving staff retention, IDS HR Studies No. 765, 2004.

Kathryn Jackson ‘Overturn the High Cost of Employee Turnover’. Web.

Morrell K.M., Loan-Clarke J. & Wilkinson J (2004), ‘Organisational change and employee turnover’, Personnel Review, vol. 33(2), pp.161-173.

Sigma ‘Overview of Employee Turnover Research’. Web.

Smith H.L and Watkins W.E (1978) ‘Managing Manpower Transport Costs’ Personnel Administrator Vol. 23 Issue 4.

Tziner A. & Birati B. (1996), ‘Assessing employee turnover costs: A revised approach’ Human Resource Management Review, vol. 6(2), pp.113-122.

William G Bliss ‘Cost of Employee Turnover’. Web.

William Pinkovitz, Joseph Moskal and Gary Green ‘How Much Does Your Employee Turnover Cost’ Center for Community and Economic Development. Web.

Finding a Method to Measure Fluctuation Cost in Monetary Terms
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