The role of employee satisfaction and the costs of turnover

There is substantial academic and business literature demonstrating the importance of employee satisfaction in building loyalty to an organization and, by extension, reducing employee turnover. In this case, turnover is defined as an employee’s voluntary decision to leave an organization, thereby representing an exercise of choice on the part of the employee and reflecting some form of decision process on the part of the employee.

Overall, there are three key reasons why employee retention should be seen as having broader business implications, rather than simply being a concern of HR alone:

1. Turnover is expensive, including both tangible and intangible costs, with estimates of the costs of turnover ranging from 50% - 200% of an employee’s annual salary.
2. Excessive employee turnover is often cited as a key barrier to high quality service.
3. Turnover reduces the productivity of an entire work unit/team, particularly as a result of uncompensated extra workloads, the stress and tension caused by turnover and, as a result, a decline in corporate morale.

The costs of employee turnover can be estimated in a number of ways, depending on whether the calculation includes both direct and indirect costs.  The direct costs of turnover include separation and replacements costs as follows:

Separation costs

• Severance costs
• Unemployment insurance premiums
• Outplacement fees.

Replacement costs

• Advertising costs
• Training costs
• Interviewing time
• Pre-employee assessments
• Relocation costs.

Indirect costs include the harder-to-measure variables such as the loss in organizational knowledge and skills, reduced corporate growth through lower productivity and the negative impact on organizational commitment that frequent turnover can have among the employees who stay at the organization. These indirect costs can often be greater than the direct costs of turnover.

The unfolding model of employee turnover

The traditional theory of how employees make the decision to leave a job focuses on two key variables:

1. The employee’s level of satisfaction/dissatisfaction with their current employment, and
   
2. The perceived desirability and ease of finding new employment. (5)

In fact, this model of turnover is based on the premise that active consideration to leave a job is necessitated by low levels of both job satisfaction and commitment to the organization and this model assumes that turnover decisions follow a rational and fairly deliberate, pre-determined path.

However, in recent years, this simple model has been shown to be less effective at predicting turnover since there is not necessarily an orderly progression from dissatisfaction with a job to a search for alternative employment. There has also been increased recognition that many other factors can influence an employee’s decision to leave. Furthermore, the extent and availability of perceived alternatives for employment have not been shown to be a good predictor of turnover and this model overemphasizes the role of pay as a motivator to leave, at the expense of other intrinsic sources of job satisfaction. (6)

As a substitute for the traditional model of turnover, the “unfolding” model of employee turnover has identified five main “paths” as the most comprehensive means of summarizing why employees leave their jobs. (7)  For three of these paths, a critical event or disruption (“shock”) in the employee’s routine is sufficiently strong that it may lead to turnover, even including abrupt decisions to leave made without the consideration of alternatives and without having the employee experience a slow withdrawal of commitment to the organization. In other words, this model does not assume that there is a linear and continuous relationship between the factors contributing to the decision and the turnover decision itself – rather, the “unfolding” model is more representative of the “threshold” nature of the decision to leave a job.

It is extremely important to recognize, however, that such events or “shocks” can occur either inside or outside of the organization and can be either positive or negative.  The following examples help to illustrate the possible range and variety of disruptions or shocks that employees may experience and that may lead to turnover:

Examples of shocks outside the control of the employer

• Becoming pregnant, being admitted to college, being relocated to another city because of your spouse’s job – these are the types of changes that generally do not prompt employees to reassess their attachment to the organization but can lead directly to a decision to leave, often because the employee already has a pre-existing plan of behaviour in place.

Examples of shocks within the control of the employer

• Getting a new supervisor, being passed over for a promotion, being relocated to another city because of your job – these are the types of changes that can cause employees to re-evaluate their commitment to the organization and then decide to leave, whether deciding quickly or over a longer time period and whether or not they have an alternate job in place.

The five paths of the unfolding model can best be summarized as follows:

Subsequent analysis of this model has found validation in the premise that critical events are predictive of turnover and that an employee’s decision to leave is not necessarily mediated by a “slow burn” in work attitudes/satisfaction or by a deliberative search for alternative employment. (8)

The main reasons for leaving

In traditional internal face-to-face exit interviews, “better pay” and “better job opportunity” are often the main reasons cited for leaving the organization. However, relying on the information gathered in this way can be misleading, since, in this type of interview situation, employees are often reluctant to identify the true causes for their decision to resign and tend to provide more “socially acceptable” reasons for leaving.

This is not to suggest that pay has no influence over an employee’s decision to leave. Rather, this issue emphasizes the need to be sensitive to both “push” and “pull” factors that may have influenced the employee’s decision.

In order to collect the most effective information from departing employees, employers need to recognizes the need to provide departing employees with a forum that makes them comfortable revealing the full range of factors that led to their resignation and encourages them to give an honest critique of the expectations, conditions and requirements of their jobs.  With the use of an exit survey system that effectively canvasses the opinions and attitudes of departing employees, a wide range of operational, organizational and personal variables affecting the decision to leave are likely to be uncovered.  It is this information that is essential to highlighting the areas of perceived deficiency in the organization’s working environment and can then be used to plan effective retention strategies and actions.

When exit interviews are conducted in this way and summarized across a wide range of organizations and job types, the main reasons for leaving can be categorized into five primary “themes”…

Career opportunities, including:

• Perceived opportunity for advancement
• Presence and/or clarity of development plan.

Enjoyment of the work, including:

• How well work utilizes skills
• “Fit” with job
• Work/life balance.

Corporate leadership, including:

• Clarity and strength of vision and mission
• Management style
• Overall perception of leadership
• Level of respect and support received.

Availability of training, including:

• Opportunity to learn new skills/develop new talents
• Corporate commitment to training and development
• Keeping up with latest technology.

Compensation/rewards, including:

• Base/variable pay
• Benefits
• Recognition of contributions
• Communication regarding performance.

Based on this analysis of the reasons for leaving and in conjunction with the unfolding model of turnover, it should be recognized that, in many cases, the organization has at least some influence over the employee’s decision to voluntarily give up a job.  In fact, when all reasons for leaving are categorized in terms of (1) the employer’s impact on the decision to stay or go and (2) the employee’s own level of control over the decision, more than 50% of the reasons for leaving are within the control of both the employer and the employee.  These reasons for leaving include both the longer-term concerns and problems that can lead to a gradual decrease in satisfaction as well as the more immediate work-oriented “shocks” that can prompt previously-satisfied employees to rethink their commitment to the organization and, ultimately, leave their jobs.

From this analysis, it is clear that organizations should seriously consider what strategies and policies are in place to reduce turnover and retain valuable employees. Since a large proportion of turnover appears to be avoidable, it is imperative for organizations to determine how best to intervene and thereby prevent at least some degree of turnover.

The value of exit surveys

A structured system of exit surveys can play an integral role in a well-planned program of employee satisfaction and work climate research.  Some useful principles for planning an exit survey system include being:

• Universal – interviewing all voluntary departures provides a more complete understanding of turnover.
• Standardized – using a core set of consistent questions ensures comparability throughout the organization and across time.
• Comprehensive – including feedback on the work environment in addition to reasons for leaving increases usefulness in determining strategies to reduce turnover.
• Independent – minimizing the discomfort in revealing the true reasons for leaving improves the reliability of the results.
• Available – encouraging centralized access to the findings increases the likelihood of taking action.
• Monitored – setting targets for reduction in turnover through planned strategies helps to ensure that the investment made in exit surveys is put to its maximum use.

Guidelines for determining the exit interview content

As with all questionnaires, it is important to strike the right balance between information needs and survey length when putting together an exit survey instrument. There are six key guidelines that should be kept in mind to help ensure that the end result is a useful and effective survey:

1. Do not focus solely on the employee’s reasons for leaving – although this is extremely important information, it is also critical to include broader measures about the employee’s attitudes and experiences so as to help identify the issues and concerns that may not surface when asking about reasons for leaving.
   
2. Ensure that there is more than one way for employees to express their reasons for leaving – including several open-ended questions for them to include their own comments – so as to get a full perspective on the decision to leave.
   
3. In order to get beyond a focus on the decision itself, incorporate key attitudinal measures such as the employee’s satisfaction with the job itself, an assessment of the organization’s work culture and effectiveness of its various lines of communication, how well the employee’s job responsibilities were defined, perceived opportunities for advancement and the employee’s perspective on the amount of training, feedback and recognition received.
   
4. Recognize that, for maximum effect, any exit survey system needs to be implemented consistently and in such a way as to encourage employees to share their opinions as honestly and candidly as possible.
   
5. Incorporate the ability to examine results not only on the basis of individual results but for the organization as a whole, as well as on the basis of the relevant diagnostics, such as region, department or manager.
   
6. Remember that there is an important distinction to be made between idiosyncratic reasons for leaving, over which the organization has little control, and systemic reasons for leaving, over which the organization can exercise substantial control.

The formation of an effective retention management program

In general, then, the management of turnover will have the greatest organizational benefit when it is targeted at encouraging the retention of valued employees and facilitates the replacement of less effective employees with more effective staff. (9) Although each organization needs to assess the patterns of turnover for its own particular circumstances, there are some general policies to consider that have been shown to improve satisfaction and, in return, reduce the level of turnover that should be part of any formal employee-retention program:

1. Establish and maintain both the practice and the impression of fair treatment of all employees, so as to help foster a positive, consistent and reassuring work environment.
   
2. Ensure that senior management and immediate supervisors demonstrate their own sense of commitment to the organization.
   
3. Emphasize the need for a close match between the personality/work style of prospective employees with the organization’s culture as well as providing prospective employees with realistic job previews – there is evidence to suggest that newcomers to an organization who leave within the first few years may have a different commitment propensity at the time they join the organization than do those employees who stay. (10)  A more thorough assessment of an employees’ past experience and reasons for leaving their last job may help identify employees who are more likely to feel a stronger sense of organizational commitment in the long run.
   
4. Properly incorporate new employees into the organization and manage their expectations and initial experiences with the organization – in fact, a large financial services firm found that it could effectively reduce turnover among new hires by deliberately improving the process of socializing new employees into the corporate culture, particularly through the use of mentoring.
   
5. Communicate realistic and attainable expectations of performance to all employees, so as to avoid the potential for “shock” and the development of dissatisfaction.
   
6. Give positive and constructive feedback on a regular basis, including through both formal job performance reviews and informal channels of communication with employees, as well as ensuring that viable reward and recognition programs are used to motivate all employees.
   
7. Offer clear-cut opportunities for job enhancement, advancement and career development.