A Low Turnover Rate Could Mean That You Have Ugly* Employees

Aug 8, 2011

Most executives assume that low employee turnover is an indication of great management. While that could be the case, there are many other reasons for low employee turnover, not all of which are good. For instance, it could indicate that talent competitors find little value in the people that comprise the organization: they simply are not desirable.

from Rates Are Impacted By Employee Desirability

High turnover rates do not always mean that you have bad managers or that you are not a great place to work. Firms with great brands and industry visibility are often the target of recruiters. In fact, it is not unusual for hiring managers to direct recruiters to only target employees from the top five firms in their industry. That being the case, you need to consider the reverse: employees may stay only because they have few options to leave.

Reasons Low Voluntary Turnover Might Be Bad News

Every organization needs to understand “why” recruiters opt for and against targeting the employees of an organization, and why employees stay. Some possible drivers of low turnover include:

  • Poor performers — your employees could be perceived by other firms as being poor performers and therefore undesirable.
  • Weak skills — your employees could be perceived by other firms as being poorly trained, with obsolete skill sets.
  • Unambitious — your employees may lack ambition and drive, so they do not seek external jobs or respond when they are contacted by recruiters.
  • Set in their ways — your employees could be perceived as inflexible and “set in their ways,” so that recruiters assume they couldn’t adapt to working at another firm.
  • Not innovative — other firms could perceive your employees as not being innovative or fast-changing, which is a critical component in a fast-changing and innovative organization.
  • Overly tolerant — your employees may have become overly tolerant of bureaucracy, so they do not get frustrated and leave as a result of slow internal movement and bad management practices.
  • Not global — other firms may perceive that your employees do not have the global experience or perspective required to operate in an international environment.
  • Poor industry image — if your industry has a weak image (i.e. quick service restaurants), many recruiters or hiring managers may never even consider your employees.
  • Weak employer brand — if your firm has a weak or negative employer brand image, it is unlikely that your employees will be targeted.
  • Low employee visibility — if you work in a non-technology field, it’s quite possible that your employees are not been easy to find on the Internet and social media. As a result, only the best recruiters will be able to identify them.
  • A culture of retribution — if your organization proactively punishes individuals that seek outside positions, fear will cause fewer employees to return recruiter inquiries.
  • Location — if your firm is in an isolated geographic location, your employees may have no other choices because there may be few local competitors that could even attempt to poach your employees. If your employees have well-established family roots in the area, they may also be unwilling to relocate.

Reasons Low Involuntary Turnover Might Be a Problem

If your firm has a low involuntary turnover rate, you need to determine if it is an indication of a problem with management. Some of the reasons why a low involuntary turnover rate may be a problem include:

  • Weak performance management — if your performance management process is weak, it will not identify many of your poor performers. It may also be overly tolerant and prolong the releasing of poor performers who cannot improve.
  • Afraid to terminate — your managers or HR professionals may fear the lengthy process for firing or they may simply lack the courage to make tough decisions. This fear might also mean that employees with obsolete skills are kept far too long.
  • Slow to release — senior managers or HR may simply be extremely slow in releasing surplus labor during economic downturns. The slow action will not only reduce your involuntary turnover rate but it will also increase your labor costs unnecessarily.

Other Problems Related to Low Turnover

Regardless of the reasons for low turnover, there are many negative consequences related to low turnover. They include:

  • Limited development opportunities — without frequent position turnover, there will be significantly fewer development and promotional opportunities for employees with high potential. If you have ambitious and desirable employees, this may actually drive them away.
  • Managers can get lazy — when managers don’t have to frequently defend their employees from external recruiters, they can get lazy. This lack of competition may mean that the employees will get less development, training, and coaching because it’s not needed in order to retain them.
  • Rusty hiring — having a low turnover rate means that you will do little or no external hiring. This will likely cause your hiring managers and your recruiting department to stagnate due to a lack of practice and activity.
  • Less external stimulation — having low external hiring causes you to lose out on 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, because current employees feel threatened having to compete with external talent for openings.
  • Allowing bad managers to go undetected — when your turnover rates are low, it may serve to “hide” your bad managers. During low turnover periods, bad managers look the same as the good ones (everyone has relatively low turnover rates). The lesson to be learned is that alternative ways need to be found to identify bad managers when the economy is in the tank.
  • Reduced problem identification — without frequent exit or post-exit interviews from your employees that leave, the organization misses out on valuable opportunities to learn about what may be wrong with the organization.

What Turnover Rate Is “Too Low”

Turnover rates are relative, so it’s hard to say what is “too high” or “too low.” Comparing turnover rates between industries is problematic. Retail turnover can reach 200%, while turnover among tenured university professors is virtually zero. The best way to assess your turnover is to compare your organization’s performance to that of your closest competitors and specifically the top five firms in your industry.

Positive Turnover

If an employee that you are contemplating releasing or firing quits, consider that positive turnover. If a “Homer Simpson type” employee quits your firm and goes to a competitor, it should be considered a “double win.” If you have a great employer brand and a superior recruiting function, turnover rates become less of an issue because can instantly replace the loss of one top performer with another.

Turnover Measures To Consider

Generic turnover measures are silly. You need to examine turnover more closely before you decide if it is bad or good. Prioritize your employees and jobs, so that all turnover is not considered equal. Some measure to consider giving you a better picture include:

  • Performance turnover — use weights to weigh the departure of a top performer much higher than the loss of a low performer.
  • Regrettable turnover — measure the percentage of turnover that represents key individuals, innovators, individuals with critical skills, diverse individuals, individuals in hard-to-fill positions and future leaders for retention that is “regrettable.”
  • Desirable /acceptable turnover — highlight positively the turnover of low performers, those with obsolete skills, recent bad hires, silo-builders, and those with low potential.
  • Preventable turnover — it may also be appropriate to classify whether regrettable or high-performing employee departures were preventable (i.e. retirement or the family relocated) because easily preventable turnover must be considered a bigger problem.
  • Where they went — I also recommend that you look at where an employee goes after they quit. If they go to a powerhouse firm, it is likely an indication that you have some pretty good employees.

Final Thoughts

In my experience, voluntary turnover rates below 4% should be considered a warning sign and involuntary rates below 2% should require further examination. Well-managed firms with excellent management and retention practices frequently maintain low voluntary turnover rates, but also have much greater internal mobility and involuntary turnover rates to keep the development process working and prevent talent stagnation.

* Note the word “ugly” has nothing to do with physical appearance, only relative labor market value to external recruiters!