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Retention: Can Your Turnover Rate Be Too Low?

by May 5, 2003

During tough economic times, it’s easy to retain workers. Even the top performers are focusing on maintaining their job security, so they aren’t going anywhere. In fact, no one is leaving or even looking. But it’s also easy to get lackadaisical about turnover, because traditionally the topic only comes up when the rate is very high. The purpose of this article is to show you the importance of paying attention to your turnover rate ó even when it is low! Most managers don’t realize it, but there is a downside to having an “artificially” low turnover rate. You might have been taught to think that a low turnover is a good thing, and on the surface, it might seem that way. But while some managers strive for a zero turnover rate, other managers realize that if turnover is too low it can actually cause problems. A turnover of below 5% (or more than 25% below the average) may turn out be a sign of organizational ill-health and stagnation. Enlightened managers view low turnover with some degree of cynicism, and you should too. Here are some reasons why “some” turnover may be desirable. 11 Reasons Why You Might Not Want a Zero Turnover Rate Some of the issues that should be examined if a firm or department has a turnover rate that is significantly below the norm:

  1. Everything is relative. When the unemployment rate climbs, every firm’s turnover rate will automatically decrease. If the unemployment rate is close to double digits, everyone’s turnover rate may approach zero. As a result of this phenomena, smart managers measure “relative” turnover among managers during times of low unemployment rates.
  2. Hidden bad managers. When all turnover rates are low it may serve to “hide” your bad managers. Normally a high turnover rate is an accurate indication of a bad manager. During low turnover periods, the bad managers look the same as the good ones. The lesson learned is that alternative ways need to be found to identify bad managers when the economy is in the tank.
  3. Indication of laziness. During high unemployment periods, everyone has low turnover and managers with low turnover rates often get complacent. In these easy times, even excellent managers may get lazy and slow down their retention efforts. This “laziness” may also have the side effect of lower employee motivation and a decrease in employee productivity. It also may lead to high turnover rates once the economy takes off.
  4. No promotions mean lower ambitions. No turnover means that no one leaves, so unless you are a high-growth firm, there are few or no openings for internal promotions. No promotions can frustrate current employees. Having little hope of a promotion in the immediate future might also lessen their motivation, increase union activity, or even slow down individual employee learning (because there is no “next job” to prepare for).
  5. Delayed retention issues. As we have just seen, low turnover means fewer openings are available for promotions. If other firms are not currently hiring, this leaves few options to employees, so turnover will remain low. As a result, employees are “forced” to stay ó but they may stay as “frustrated” employees. That frustration may linger and even grow over time. When job openings at other firms do occur, you may have an “explosion” of turnover in a relatively short period, due to the tensions that have built up over time.
  6. No turnover means no firings. A low turnover rate probably means that you are not firing anyone. Every team has weak performers; that’s no secret. Failing to “manage” poor performers out of the organization is bad anytime, but it’s really dumb during high unemployment times, when a large number of qualified candidates are available from the outside. A low number of firings could also be an indication of weak managers, a poor HR department, or an inadequate performance measurement system.
  7. Reduced ideas and pressure from external hires. Having a low turnover rate means that unless you are growing rapidly, you are unlikely to have any opportunities for new external hires. This means you lose the many benefits that external hires can bring to an organization, including new ideas, skills your workforce doesn’t have, and competitive intelligence. New hires can also serve as a competition catalyst. That’s because the “threat” current employees feel having to compete with external talent for openings has the result of forcing your current employees to work harder, in order to look as good and to compete with external candidates. New hires add further value when they ask your managers, “Why do we do things this way?” This continuous questioning forces your managers to rethink much of what they do.
  8. Are your employees undesirable? A zero or low turnover rate could mean that your employees are undesirable. Recruiters are always trying to steal away the best employees, even during tough economic times. So if no one steals (or even tries to steal) your employees, it might mean they aren’t worth stealing (government employees, for example, are often stereotyped this way). This is especially true in growth industries where stealing is a way of life.
  9. Image problems. A low turnover rate could mean that your company’s image as a good place to work is weak. Whenever great recruiters fail to target your firm, you’re in trouble. Being omitted from the “poach list” of the ever-vigilant headhunter is an indication of a poor, or even horrible, external image.
  10. The flip side is high churn and transfers. It’s possible to have a zero external turnover rate (people leaving your organization) while simultaneously having a high (20% per year) internal turnover (or transfer) rate. This high internal transfer rate, or “churn,” may be an indication that your employees are “job-jumping” after they have taken all they can get from their current manager. If you have a great firm, they won’t leave it (which is good), but they may move internally more often than you really want. A high internal transfer rate can cost the company a great deal in retraining costs and in lower productivity (until the transferred individual fully learns the new job). If your firm is the only employer in the region, a high churn could mean that these individual have no other job choices. But should another firm arrive, you are in for some significant turnover. Churning employees is not a desirable way to eliminate corporate stagnation, while having the best leave and the mediocre stay can only result in increasing stagnation. Incidentally, if your company has few internal transfers, that could be an indication of “talent hoarding” by managers or a weak internal transfer system.
  11. Recruiting “rust.” Having a low turnover rate means that you will do little or no external hiring. This will likely cause your recruiting department to stagnate due to a lack of practice and activity. No external recruiting for a long period will also likely hurt your best-place-to-work brand and external image as people forget who you are.

Summary of the Potential Problems From Low Turnover Low turnover may be an indicator that your organization is stagnant or in ill-health. It could mean that you have a variety of problems, including:

  • You have poor managers who are afraid to fire poor performers.
  • Your firm has weak employees that only “you” find desirable.
  • You have a weak performance management system.
  • You have a flawed performance measurement system that fails to quantify low performance.
  • Your managers (even good ones) are not doing enough motivating.
  • You may have a lot of frustrated employees that feel “caged” with few choices.
  • You have a weak external image.
  • You have lower-than-optimal employee productivity.

It’s easy to get lazy about turnover because traditionally we only fret over it when it is very high. Since the economy is currently in the tank, it’s often a “non-issue” among today’s managers. I’ve highlighted 11 reasons why, in fact, it should be of constant concern and why a low turnover rate should set-off alarms. If your goal is to have a vital organization, the first step to take when you have a low turnover rate is to re-energize your performance management programs. Next, identify and “fix or fire” your weak managers, so that employees are motivated and challenged even during tough economic times. Also monitor internal churn to see if the level is beneficial or harmful to the organization. The last step is to modify your metrics system so that managers are alerted both when their turnover rate is too high and when it is too low!

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.