Introduction
Employee turnover has been of both academic and corporate interest due to its evident cost association to business. Extensive research has been done to measure the true cost of measurement of employee turnover. Employee turnover is expensive from the view of the organisation. Voluntary quits which represent an exodus of human capital investment from organisations and the subsequent replacement process entail manifold costs to the organisations.
Researchers have devoted a great deal of time to the study of employee turnover, with much of this work focusing on determining its causes (Rosse and Noel). In particular, research has examined antecedent variables such as personal characteristics, satisfaction with overall job and job facets, aspects of the job including scope, workgroup cohesion, chances for promotion, and attractive job alternatives ( (Hinkin and Tracy; Lin, Huang and Lee). Overall, this research has provided the field of personnel psychology with a clearer understanding of the causes for employee turnover.
Body
Hospitality industry and employee turnover have been widely studied due to the high rate of attrition in the sector. This paper focuses on studying a model developed by Timothy R. Hinkin and J. Bruce Tracy to calculate the cost of turnover in hospitality industry (Hinkin and Tracy). The paper will evaluate the model thus developed vis-à-vis other research and theories developed in this area.
Attrition is a necessary evil and is desirable which is the belief of many academicians’ (Hinkin and Tracy). But when the turnover rate becomes excessive it is a sign organizations need to ponder on. Employee turnover (the article considers only voluntary turnover may be defined as an employee’s voluntary desire to terminate employment relationship with an employee (Shaw, Delery and Gupta). the study of turnover costs have various measures to calculate the cost of turnover. First, the paper discusses the approach as described by Hinkin and Trace and then we review the studies which are similar to the approach the authors have taken and the studies which are unlike the approach under consideration.
Hinkin and Tracy developed software to calculate the cost of turnover. They separated the cost of turnover in terms of separation, recruitment, selection, hiring and loss of productivity cost (Hinkin and Tracy). The components which are included in the calculation of separated costs which may be defined as the costs associated when the employee leaves, like the cost of exit interviewer, employee exit interview, paperwork processing, and severance pay.
The cost associated with recruiting and attracting was calculated as advertising, search and agency fees, internal referral fees, managerial pre-employment administrative functions, applicant travel, recruiter travel, HR employment and a few other miscellaneous costs. The selection costs were calculated from the costs associated with the HR interview, managerial interview, applicant travel, background and reference check, medical exams, HR administrative functions, and managerial administrative functions.
Hiring costs include costs associated with HR administrations, orientation, induction, formal training, security, etc. And last is the loss of productivity cost which includes components like vacancy cost, pre-departure productivity loss, learning curve, errors and waste, supervisory disruption, etc. This is in the same line of cost estimation by early researchers who had measured cost in terms of separation (e.g. exit interviews), replacement cost (e.g. advertising and selection cost), new hire training (Greenberg) and general administration (Dess and Shaw; Dalton and & Todor) costs.
Hinkin and Tracey (2000) estimate turnover costs exceeding $12,000 per hospitality employee. Like Hinkin and Tracy, other researchers found that the negative consequences of turnover include an increase in recruiting, hiring, assimilation, training, and closing paperwork; and the disruption of communication, productivity, and satisfaction among employees who stay (Dess and Shaw; Dalton and & Todor).
Typically, exit interviews are conducted by staff from the organization’s human resources department. In calculating the costs associated with the exit interview, some researchers (Hinkin and Tracy) have suggested the exit interview is a combination of two categories: costs, based on time, associated with the interviewee and costs, based on time, associated with the interviewer(s). The costs associated with the interviewee are based on the number of hours the departing employee spends at the exit interview (Cascio).
The number of hours is then multiplied by the interviewee’s hourly pay rate to determine the cost. The costs associated with the interviewer(s) are obtained using the same approach. Specifically, the costs associated with the interviewer(s) include the time spent preparing the interview, performing the interview, and evaluating the interview results (Cascio; Hinkin and Tracy). Advocates of exit interviews often encourage more than one interviewer to be present which adds to costs as does the time to review notes or transcribe the interview.
Their research findings showed that the difference in the total cost of attrition in the four hotels they studied was largely due to the difference in the salary in these hotels. They segregated the costs into hard and soft costs. The former consisted of all costs for which there were direct monetary components associated. The latter is the soft cost which comprises of the hidden costs of lost efficiency. Their study reveals that the hidden cost associated with employee turnover constitutes almost 50 to 69 percent of the total cost of employee separation. These findings are similar to other research in the area.
Gustafson (2002) argues that turnover includes other costs, such as lost productivity, lost sales, and management’s time, estimating the turnover costs of an hourly employee to be $3,000 to $10,000 each. This clearly demonstrates that turnover affects the profitability of the organization and if it’s not managed properly it would have the negative effect on the profit. Research estimates indicate that hiring and training a replacement worker for a lost employee costs approximately 50 percent of the worker’s annual salary (Johnson, Griffeth and Griffin) – but the costs do not stop there.
Each time an employee leaves the firm, we presume that productivity drops due to the learning curve involved in understanding the job and the organization. Furthermore, the loss of intellectual capital adds to this cost, since not only do organizations lose the human capital and relational capital of the departing employee, but also competitors are potentially gaining these assets (Stovel and Bontis).
Therefore, if employee turnover is not managed properly it would affect the organization adversely in terms of personnel costs and in the long run it would affect its liquidity position. However, voluntary turnover incurs significant costs, both in terms of direct costs (replacement, recruitment and selection, temporary staff, management time), and also (and perhaps more significantly) in terms of indirect costs (morale, pressure on remaining staff, costs of learning, product/service quality, organisational memory) and the loss of social capital (Dess and Shaw).
The cost estimations by Hinkin and Tracy are especially the replacement cost does not include elements for example, search of the external labour market for a possible substitute, selection between competing substitutes, induction of the chosen substitute, and formal and informal training of the substitute until he or she attains performance levels equivalent to the individual who quit (Sutherland).
Addition to these replacement costs, output would be affected to some extend or output would be maintained at the cost of overtime payment. The reason so much attention has been paid to the issue of turnover is because turnover has some significant effects on organisations (Denvir and McMahon). Many researchers argue that high turnover rates might have negative effects on the profitability of organisations if not managed properly (Hogan).
Hinkin and Tracey (2000) indicated advertising expense are oftentimes more costly for high-skill jobs or management positions and for organizations where the local pool of eligible employees lack the necessary skills and background to fill organizational positions.
Other elements such as the costs associated with appointing a new hire, are often non-existent in entry-level positions but are common practice when replacing managers and directors. In contrast, interviews and reference checks are common practices in most agencies and the costs associated with these procedures can be determined. This has been supported by the findings of Cascio (2000) who delineated replacement costs into seven elements. Taken together, these elements represent the costs an agency accrues when finding a replacement employee. Furthermore, certain elements are prone to high variance due to the nature of the job.
Hinkin and Tracy concentrate on hidden costs and estimate that they comprise more than 50 percent of the cost estimated. Philips (1990) calculated hidden cost, which he termed as invisible costs are the result of incoming employees, co-workers closely associated with incoming employees, co-workers closely associated with departing employees and positions being filled while vacant. And all these affect the profitability of the organisation.
On the other hand, turnover affects on customer service and satisfaction (Heskett, Jones and Loveman). But a study of the calculation elements of these hidden costs reveals that some of the elements are overlapping in a few estimates like the applicant travel cost and HR administrative cost. These have been estimated twice.
Hinkin and Tracy defined hidden costs as the costs which are often created by two or more cost objectives, making it difficult to clearly identify the source. The indirect costs of turnover are often difficult to accurately determine and have been defined in the research as a loss or reduction of productivity as well as overtime work and compensation to the remaining employees (Hinkin and Tracy). The difficulty in determining these costs, Hinkin and Tracey (2000) found that most managers they interviewed believed indirect costs of turnover to be high and an important component of turnover.
Furthermore, Hinkin and Tracey’s findings from research using four hotels in Miami and New York identified loss of productivity to be one of the largest costs of turnover, ranging from $3,395 to $7,144 per employee. Support for quantifying the indirect costs of turnover is also made by Tziner and Birati (1996) who advocated for a costing model that seeks to capture the whole picture, in terms of negative and positive consequences, of turnover. When a worker whose performance was poor leaves an organization voluntarily, it provides a chance for the organization to hire a better-level of performer who can enhance the productivity (functional turnover).
In contrast to functional turnover, dysfunctional turnover occurs when a good worker leaves the organization and as a result, the turnover creates a negative impact on the organization. In proposing a turnover framework, Tziner and Birati (1996) identified direct and indirect costs associated with dysfunctional turnover. The potential loss includes loss of productivity and overtime compensation, or wages paid to temporary workers who need to cover the work of the voluntarily departed employee.
Although quantifying the loss of productivity is difficult to do relying often on estimates, Tziner and Birati (1996) advocated for the inclusion in turnover costing models due to the potential magnitude. These factors as highlighted by Tziner and Birati have been overlooked by the estimates of Hinkin and Tracy.
Hinkin and Tracey’s (2000) rationale and method for identifying and measuring turnover costs has been regularly accepted and adopted for research of this type (Cascio). According to the findings of Hinkin and Tracy asserts that according to their estimations, most of the hotel companies underestimate the cost of turnover. Further their research shows that the cost is substantial even at the entry-level turnover. The findings of the research show that the cost of turnover varies directly with the level and complexity of the position of the employee (Hinkin and Tracy).
Their research findings clearly indicated that the reasons behind the employee attrition were primarily poor supervision, poor work environment and poor compensation. These reasons have been outlined in studies trying to ascertain the reason of turnover. This has been supported in the study of Guerrier and Deery (1998) and that of Lin et al. ( (2007). Their study showed that the working environment in many sectors of tourism is such that labour turnover is higher than in other sectors of the economy. The additional costs that accompany high levels turnover, namely there are relations between employee retention and profitability.
Moreover, Hinkin & Tracey (2000) indicated the staff in most full-service hotels comprises a large number of people, and turnover is frequently high. Most importantly, the costs are substantial even in entry-level positions for relatively simple jobs. Therefore, to narrow the gap between schooling and industry that can abate staff un-agreeableness and then to decrease turnover rate (Lin, Huang and Lee).
Hinkin and Tracy also showed that turnover affects service quality. This finding has been supported by other studies done on the various service industries. Low employee turnover was found to be high customer satisfaction and thus high level of service quality. Research shows high customer satisfaction leads to high quality of service and low turnover thus high customer satisfaction (Heskett, Jones and Loveman).
According to the estimates of Hinkin and Tracy, the cost of turnover was estimated to be around 30 percent of the annual salary of the organization. But other research shows that their estimate was low. Estimates of the dollar cost of turn-over vary but all are high in absolute amounts. Conventional wisdom places the cost of losing a managerial employee at about 150% to 200% of annual salary (Gustafson). Therefore, if a firm loses a person earning $50,000 they can expect to be “out of pocket” by $75,000 to $100,000 before the new person is in place and functioning.
The reason for the variation in estimates is probably due to the difficulty of calculation. Turnover costs are spread out among the various accounts on an income statement. For example, they might be seen in increases in unemployment insurance, advertising, medical examination costs, and higher overtime for existing employees and interview expenses. The cost might also include a loss in revenue due to deteriorated service or product quality. Since the costs are not “flagged” on the income statement, they tend to be overlooked. Attention is attracted only when the problem becomes so large as to threaten the business.
Conclusion
An estimation that the study overlooks is the estimation of turnover that organizations make and the cost of hiring the extra number of employees as reserve to counter this attrition. For instance, in a restaurant chain employing 10,000 people and incurring a 140% turnover (Maynard) would expect to hire and train 14,000 new people every year. At a “lowball” estimate of $500 per person, that firm would be incurring $7 million in costs that would otherwise fall to the bottom line. A more realistic but still conservative estimate of about $750 per person would send the annual cost to over $10 million. This area of the cost incurred by organizations due to a high turnover rate has been overlooked by Hinkin and Tracy.
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