The Turnover Myth

    The overall turnover rate for the software company’s 9,300 employees is low by industry standards, but the overall rate masks the sharp truth that appears when the number is segmented. Voluntary turnover at this legendary employer of choice is minimal, but involuntary turnover is quite high.

    Total turnover at SAS for 2004 was 6.34 percent, up from 5.06 percent in 2003. What is remarkable, however, is that two out of three separations at SAS are involuntary, roughly double the common proportion. The involuntary rate jumped from 3.28 percent in 2003 to 4.15 percent in 2004.

    "Involuntary turnover is rising because we are being more aggressive," Chambers says. "We’ve removed the institutional impediments and let managers know that we want to get the right people on the bus. If employees can’t do the job, we cut them loose." Chambers believes that his performance-driven approach to turnover at SAS is clearly reflected in the company’s 15 percent revenue growth for 2004.

    Chambers’ thinking is apparently untouched by the volumes of material produced by self-proclaimed turnover experts and human resources executives who fixate on minimizing turnover in all cases and measure its costs down to the last dime. The single-minded focus on turnover reduction sold well during the "war for talent" in the 1990s and spawned a mini-industry of consultancies, conferences and cost calculators that reinforced the perception of turnover as a money-sucking evil. Turnover reduction became an end in itself, disconnected from business outcomes.

    The current economic environment requires a far different approach, however. Like many workforce trends, turnover rates track employment growth. In this new era of ongoing soft labor markets and unusually low quit rates, the pressing issue at many companies is not whether voluntary turnover is too high, but whether it is too low to provide opportunities for introducing new talent and resetting salaries. And with a heightened fear of wrongful termination lawsuits emanating from the general counsel’s office and increasing managerial reluctance to discharge poor performers, involuntary turnover may be too low to ensure the high-performance workforce needed to meet global competition.

    Achieving optimal turnover means understanding both the financial costs and gains incurred as well as controlling who stays and who goes. Although many workforce management executives are satisfied with simply minimizing turnover and measuring it against broad industry benchmarks, others have mastered turnover as a tool for achieving a maximum return on the investment in human capital.

Aggressive approach
    SAS’ aggressive stance took shape after a massive infusion of new talent during the dot-com crash, when the company snapped up talent by hiring 600 highly qualified employees who had been laid off at other firms. Adding these new people raised the performance bar in some areas. The recent increase in involuntary turnover reflects the terminations of new hires who were not a fit and of existing employees who could not meet the higher standards.

    "We considered a forced ranking and other techniques, but decided to leave it up to the managers to get rid of poor performers," Chambers notes. "But we did remove the institutional shackles that keep managers from acting. The biggest shackle was related to budgets. We typically slow down hiring toward the end of the summer, and managers were afraid they would lose the position if they terminated an employee." Human resources solved the problem by making it clear to managers that the positions would be preserved.

    Chambers was general counsel at SAS before he was appointed to head up human resources in 1999, so he understands the risk of litigation. When terminations are necessary, "human resources has to commit to doing what’s right and help managers deal with it," he says. "I don’t care if we get sued; I care if we win. We give employees with performance problems a chance to correct the problem, and we do that in a way that any third-party fact-finder or agency can understand." In 80 percent of the cases, the low performer corrects the problem, but in the remaining 20 percent, the company acts decisively.

    James Hatch, partner at PricewaterhouseCoopers-Saratoga, believes that most human resources executives make it far too difficult for managers to terminate low performers. He also believes that human resources overestimates the potential for employee lawsuits. "High-performance companies look at the bottom of the deck every year and take out the bottom 2 percent to 5 percent," he says. "Most companies terminate only 1 percent of employees on an annual basis. It’s difficult to deal with performance-related terminations, so companies wait for a downturn and sweep employees with performance problems into the layoffs."

    This practice undercuts the message that the organization is performance-driven. At SAS, Chambers uses turnover to reinforce the company’s performance culture.

The financial threshold
    While low overall turnover rates suit SAS’ purposes, high overall rates generate the greatest financial returns at IndyMac Bank. Overall turnover rates at the Pasadena, California-based bank have averaged nearly 30 percent for the past three years, ranging from highs well above 40 percent for sales and operations staff to the low teens for professionals and management. The bank’s overall rate is five to 10 points above industry benchmarks. According to traditional turnover analysis, IndyMac should be hemorrhaging money. Instead, it outperforms its competitors by substantial margins and reported 23 percent earnings growth in 2004.

    Jeffry Higgins, vice president for performance management, accountability and compensation at IndyMac, can tell you the average turnover rate for a bank teller with a "meets expectations" performance rating, or a programmer with an "above expectations" rating. In fact, he can tell you the turnover rate for every position at every performance level for the bank’s 5,000 employees.

    Most important, he knows the exact point at which the costs of turnover for any position are canceled out by savings that are rarely documented in turnover analyses. With this knowledge, Higgins runs a performance-driven culture with extraordinarily low turnover rates for top performers, high turnover rates for low performers and superb financial results for the company.

    Higgins did not reach this point through a careful reading of turnover studies. His initial research on turnover turned up little of value. "At IndyMac, we searched for wisdom on turnover for three years," he recalls. "After reading the literature, we were not only unsatisfied, but frustrated. Most of the numbers and approaches we have seen don’t hold up under financial scrutiny. There are financial benefits to turnover, but none of them are reflected in any organizational or analytic tool." Financial analysis stands at the core of Higgins’ work; he was a CFO before he signed on at IndyMac.

    Higgins’ quest is to identify the true costs and benefits of turnover and use that data to drive performance management. He is building workforce segmentation tools, beginning with the top seven job categories and then digging deeper to create turnover profiles for 30 job families.

    "Based on three years of company data, we know that there is a break point where the financial benefits of turnover outweigh the costs," he says. "It’s different for each job category and for performance levels within each category, but it can be calculated and documented for any position in the company."

    Optimal turnover rates for any position lie within a range that Higgins describes as green-yellow-red. The green band covers the rates at which turnover is financially beneficial for the firm. Within the yellow band, turnover is cost-neutral and has minimal impact on the organization. This is the broadest band. Beyond this, as turnover climbs to higher levels and into the red band, it begins to significantly hurt the organization.

    Turnover in low-impact, nonexempt positions within operations, for example, generally falls into the green and yellow bands, where high turnover is acceptable. When an employee leaves one of these jobs, other employees pick up the workload for the 30 to 60 days that the average position is open, and the bank pockets the savings--plus additional savings when an annual bonus is not paid out or when a replacement is brought in at a slightly lower salary level.

    But at the opposite end of the spectrum, turnover among high-impact professional and managerial employees can cause a six-month delay in a multimillion-dollar project. "For high performers in key roles, the cost of turnover is larger than any estimate I’ve seen," Higgins says. "It could run into the millions."

    Finding the financial threshold for each position hinges on two factors: the performance level and the compensation level, including how the position is paid relative to market. The performance level is weighted by specific productivity measures that may include sales, volume or projects completed on time and within budget. The bank uses steep performance-based pay differentials to maintain low turnover among its high performers and high turnover among its low performers.

As Unemployment Rises, Turnover Falls Turnover generally rises during economic expansions and falls during recession, in an inverse relationship to the unemployment rate.

Source: Turnover rates from the Bureau of National Affairs Inc.; unemployment rates from the Bureau of Labor Statistics

Workforce Management, June 2005, pp. 34-40 -- Subscribe Now!