"Employee turnover refers simply to the movement of employees out of an organization" (Bohlander & Snell, 2009). It is simply the permanent withdrawal of employees from an organization. It refers to "the process in which employee leave an organization and have to be replaced" (Mathis & Jackson, 2008). Employee turnover is cited as one of the reasons behind why the productivity rates of U.S. employees are less compared to their foreign competitors. In addition, labor supply also depends on employee turnover. If everything else remains constant, ceteris paribus, and an organization experiences high employee turnover, its supply of labor will go down which means the organization will have to bear additional direct and indirect costs (Bohlander & Snell, 2009).
Employee turnover rate:
The U.S. Department of Labor has suggested the following method to calculate the labor turnover rate (Mathis & Jackson, 2008; Bohlander & Snell, 2009):
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Separation in the above formula refers to the number of departures from the organization.
Let's assume that the separations during a month are 50 and the total number of employees at mid month is 1000; then, the employee turnover rate would be:
The employee turnover rate can be calculated using another way. Under this method, separations are divided into two categories: avoidable separations (S) and unavoidable separations (US). The unavoidable separations are those which cannot be avoided like due to pregnancy, death, marriage, etc. The unavoidable separations are separated from avoidable separations to calculate the turnover rate. The formula is given below:
S in the above formula refers to the number of avoidable separations.
US in the above formula refers to the number of unavoidable separations.
M in the above formula refers to the number of employees at mid month.
Continuing with the above example, the total number of separations was 50 and if 10 were unavoidable (Bohlander & Snell, 2009), then the employee turnover rate would be:
The calculation of employee turnover rate takes place on regular basis. It is often compared with other organizations' turnover rate. This comparison is useful especially in situations of abnormally high turnover; the comparison can reveal whether the abnormally high turnover rate is prevalent in the industry or some problem lies within the organization in question. The data on comparison of turnover rates can be acquired from the Bureau of National Affairs Quarterly Report on Job Absence and Turnover (Bohlander & Snell, 2009).
When analyzing employee turnover rate, the quantitative statistic is not the only thing important. The quality of employees departing from the organization is of equal importance. If the employees departing from an organization are underperformers, then the turnover is beneficial for the organization. In contrast to it, if high performers depart from the organization, then the turnover is detrimental for the organization (Bohlander & Snell, 2009).
Costs of Turnover:
When an employee leaves an organization, he/she needs to be replaced. The process of replacing an employee is costly and time-consuming. The costs of employee turnover can be divided into three categories:
Separation costs consists of "HR staff and supervisor time and salaries to prevent separations, exit interview time, unemployment expenses, legal fees for separations challenged, accrued vacation, continued benefits, etc" (Mathis & Jackson, 2008).
Replacement costs consists of "recruiting and advertising expenses, search fees, HR interviewer and staff time and salaries, employee referral fees, relocation and moving costs, supervisor and managerial time and salaries, employment testing costs, reference checking fees, pre-employment medical expenses, etc" (Mathis & Jackson, 2008).
Training costs consists of "paid orientation time, training staff time and salaries, costs of training materials, supervisors' and managers' time and salaries, co-worker "coaching" time and salaries, etc" (Mathis & Jackson).
In addition, some hidden costs are also present which "includes costs not obvious but that affect lost productivity, decreased customer service, other unexpected employee turnover, missed project deadlines, etc" (Mathis & Jackson, 2008).
Rynes and Boudreau (1986) estimated that average recruiting cost of a college graduate was $2,000. Taylor and Bergmann (1987) showed that the cost of recruitment equaled one-third of the new hire's salary. Edward (1986) showed that the cost of recruiting electrical, mechanical and software engineers can be more than $5,000. The estimate provided by Taylor and Bergmann (1987) are also validated by the U.S. Department of Labor; if we take the wage rate of $8 per hour, then the cost of recruitment for a lower level employee equals $5,540; and the cost of replacing professional and managerial employees is as high as 2 or 2.5 times the annual salary of new hires (Mathis & Jackson, 2008).
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Mercer (2000) demonstrated the costs of turnover for one computer programmer. The demonstration given in his book Turning Your Human Resources Department into a Profit Center TM is reproduced below:
Costs Associated with the Turnover of One Computer Programmer
Turnover costs = Separation costs + Replacement costs + Training costs
Exit interview = cost for salary and benefits of both interviewer and departing employee during the exit interview = $30 + $30 = $60
Administrative and record-keeping action = $30
Separation costs = $60 + $30 = $90
Advertising for job opening = $2,500
Preemployment administrative functions and record-keeping actions = $100
Selection interview = $250
Employment tests = $40
Meetings to discuss candidates (salary and benefits of managers while participating in meetings) = $250
Replacement costs = $2,500 + $100 + $250 + $40 + $250 = $3,140
Booklets, manuals, and reports = $50
Education = $240/day for new employee's salary and benefits Ã- 10 days of workshops, seminars, or courses = $2,400
One-to-one coaching = ($240/day per new employee + $240/day per staff coach or job expert) Ã- 20 days of one-to-one coaching = $9,600
Salary and benefits of new employee until he or she gets "up to par" = $240/day for salary and benefits Ã- 20 days = $4,800
Training costs = $50 + $2,400 + $9,600 + $4,800 = $16,850
Total turnover costs = $90 + $3,140 + $16,850 = $20,080 (Mercer, 2000).
Besides the monetary costs of turnover, organizations also face loss of knowledge, experience and skills. Gerencher (1999) reported that 79% of the surveyed managers believed that the most negative impact of turnover on an organization is the loss high performer's experience and knowledge. Similarly, constant employee turnover affects quality and efficiency (Hess & Goetz, 2008).
Total Rewards and Employee Turnover:
Human resources (HR) is a very important element of an organization. It performs a wide range of functions, from basic transactions to strategic decisions. Organizations have realized that HR, if utilized, can be a source of competitive advantage. Dr. John Sullivan, the HR guru, has continually attributed the success of an organization to its employees' productivity. He, therefore, argues that the ultimate goal of human resource management (HRM) is to maximize the productivity of workforce (Sullivan, 2005).
HR professionals now understand that all the facets of an organization and HRM need to be aligned to achieve organizational goals. Total rewards are central to attracting, retaining, motivating, and maximizing productivity of employees. In order to be successful, a total reward strategy has to align the organizational strategy, workforce strategy, and HR strategy. The total rewards should bring employees in line with the organizational objectives.
Research has shown that cash is not the prime motivating factors for employees. Moreover, research has also shown that the satisfaction level of an employee is unlikely to improve once he/she has reached a comfortable level of living (Robbins & Judge, 2007). Employees need a blend of extrinsic and intrinsic rewards that recognize their contributions and compensate them for the value they have added to the organization while working to achieve the set goals (Lloyd, 2007).
Total rewards not only satisfy employees, instead they also save costs for the organization. Total rewards do not mean that more rewards are given. It means that the needs of an organization and its employees are fully understood, and rewards are allocated accordingly. The use of total rewards strategically add more value to a reward, for the given cost of that reward, and links the performance of employees to organizational objectives.
Total rewards help an organization increase profits and revenues because the recognition and rewarding of employees increase productivity of employees and help the organization save turnover costs (Deeprose, 2007). An increase in employee performance directly affects the operating ratios, return on assets, and return on equity (Gostick & Elton, 2007). Besides direct costs, total rewards can help an organization save indirect costs that result from lost customers and sales, and reduced employee efficiency as new employees are familiarized with the organization.
The purpose of total rewards distribution should be to motivate employees to perform in ways that can help the organization achieve its strategic objectives. It is therefore pertinent to study the underlying motivational theories. The understanding of why rewards are effective and how they can be used to meet organizational needs as well as employees' needs will help HR managers devise a successful total rewards system.
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Expectancy theory was developed by Victor Vroom in 1964. Vroom's theory maintains that "people are motivated by the expectation of the reward they will receive when they succeed and that each individual calculates the level of effort required to receive a particular reward to determine whether the reward is worth the effort that is required to attain it" (Bogardus, 2009). The important components of this theory which relates to total rewards are: performance-reward relationship and reward-personal growth relationship. The performance-reward relationship refers to the extent to which an employee believes that a certain level of performance will lead to a desired outcome (Robbins & Judge, 2007). The reward-personal growth relationship refers to the extent to which the reward distributed by the organization suffices the personal needs and goals of the employees (Robbins & Judge, 2007). Thus, according to this theory, there must be a strong link between performance & reward and rewards & expectations of employees to get the best out of employees.
Reinforcement theory was developed by B.F. Skinner. Reinforcement theory argues that "behavior is a function of its consequences" (Griffin & Moorhead, 2009). This theory suggests that behavior which leads to positive outcomes is likely to be repeated; and behavior which leads to negative outcomes is unlikely to be repeated (Griffin & Moorhead, 2009). Thus, according to this theory, a reward system is of pivotal importance in creating the desired behavior.
Goal-Setting Theory was developed by Edwin Locke. It takes a cognitive approach as opposed to reinforcement theory which takes a behavioral approach. This theory suggests that "specific, difficult goals, accompanied by feedback on performance, lead to higher performance by focusing individuals' attention, increasing effort, and strengthening persistence toward task accomplishment" (Cooper & Locke, 2000). This suggests that establishment of goals and providence of feedback to employees in line with the organizational goals is important. Management by objective programs has its foundations in this theory. Despite being somewhat contradictory in some aspects, both the Expectancy Theory and the Goal-Setting Theory provide detailed and valuable insight on developing an effective total reward system which caters the needs of both the company and the employees.
Self-Efficacy Theory was developed by Albert Bandura. This theory suggests that the belief of individuals about their ability to perform a task is the determinant of motivation or de-motivation (Robbins & Judge, 2007). Bandura introduced four ways through which one's self-efficacy can be increased:
Enactive mastery - relevant job experience
Verbal persuasion is the area where total rewards can contribute. The recognition on behalf of employer - expression of gratitude towards employee - can convince the employees that they are performing well and can complete a specific job (Robbins & Judge, 2007).
Herzberg's Two-Factory Theory:
Herzberg's Two-Factor Theory "relates intrinsic factors to job satisfaction, while associating extrinsic factors with dissatisfaction" (Robbins, Judge& Sanghi, 2007). This theory suggests that motivation through recognition and work which is personally fulfilling let alone is not sufficient; rather, these intrinsic factors should coincide with extrinsic rewards - economic needs of employees must be met.
McClelland's Need-Based Theory:
David McClelland suggested that people have three types of needs:
The need for achievement
The need for affiliation
The need of power
Employees at all levels of organizational hierarchy have need for affiliation, though the degree varies; front-line managers and middle managers have a high need for achievement; and upper-level managers have a high need for power (Robbins & Judge, 2007).
The above discussed motivational theories explain how employees can be motivated using total rewards, and these theories should be taken into account when devising a strategic total rewards system. These theories explain that neither intrinsic nor extrinsic rewards let alone are sufficient - they both are of equal importance, and a combination of intrinsic and extrinsic rewards should be used. Lastly, they also explain that key determinants of performance are satisfaction and morale.
Steven Kerr (1957) is one of the first writers to talk about strategic total rewards; in his article titled "On the folly of rewarding A, while hoping for B", Kerr highlights the importance of performance-reward link. Kerr argues that organizations tend to reward wrong behavior because they are obsessed with the objective criteria. He states that at times the behaviors rewarded are the ones which the rewarded wants to discourage, while the behaviors he wants to reward are not rewarded at all. He further points out the visible behaviors, hypocrisy, and the fact that emphasis is on equity whereas it should be on efficiency (Kerr, 1957).
When designing a total rewards system, the knowledge of behaviors that are rewarded is of paramount importance. The reward system will fail if wrong behaviors are rewarded, and behaviors that should be rewarded go unrewarded. Thus the reward system put in place should encourage and reward only desired behaviors, while discouraging undesired behaviors.
Weizmann and Weizmann (2005) maintain that aligning of organizational goals with employees' goals should be done by saying what is meant, doing what is said, and rewarding what was done. They call it the virtuous circle. When the virtuous circle is active in the organization, it helps the organization and the employees to keep their focus on the strategic goals by means of communication, action, and feedback.
There are five strategic elements of a total rewards system:
WorldatWork convened a team of leading professionals in HR to create a model of total rewards that incorporates its context, components, and role of total rewards in an integrated business strategy:
The five elements of total rewards represent the tool kit from which an organization can choose what to offer. A successful total rewards strategy will results in a satisfied, engaged and productive workforce. The satisfied, engaged and productive workforce will then produce desired business results through their performance.
Compensation is often the first thing that employees mention when they are asked to name a reward. An organization's compensation package is the most visible strategic element, and thus should be designed in a way that enables the organization to achieve its goals and strategies whilst bringing it in line with the HR strategy (Koss, 2008). The compensation package needs to be designed in a way which influences the employees and motivates them to take such personal decisions which are in line with the needs of the organization they are serving. It is also one of the key motivating factors for people to join an organization and stay with it.
How much should an organization pay its employees is a very important question. There are several factors that must be taken into account when designing the compensation package. The leading factor to take into account is that an organization's compensation policy must be in alignment with its strategic goals and HR initiatives. The compensation package of an organization should also relate to the market. There are four different approaches that an organization can follow to relate its pay structure to the market:
Lag the market
Meet the market
Lead the market
Opt for a mixed strategy
The costs associated with lag the market approach are often less. Any organization can gain a competitive advantage if it provides its employees with an alluring benefits package. The other option for an organization is to utilize the compensation savings for some other purpose. However, if an organization opts for this approach, retaining employees with special skills and competencies becomes increasingly difficult. In addition, it might lead to a situation where an organization trains employees who eventually leave the organization and start working for a competitor because of the dissatisfaction (Koss, 2008).
The most common compensation strategy is to meet the market. This strategy provides the employer with the option to adjust variable pay rates. When a company follows this strategy, the cost pressures are balanced out with the need to attract and retain valuable human capital. An organization opting for this strategy may not be able to retain high performers, but it provides a pay structure that is comparable to that of the competitors (Koss, 2008).
If an organization decides to lead the market - pay more than the market average - it is presuming that high performers are attracted by higher pay (Koss, 2008). This assumption has never been proven, though lead the market strategy makes it easy for an organization to retain employees in the long-run, and which makes the organization a preferred employer by choice Koss, 2008). An organization must evaluate itself financially before opting for lead the market strategy. If an organization is not financially sound, it shouldn't opt for lead the market strategy. Furthermore, an organization shouldn't establish the feasibility for present only, but for the foreseeable future as well. An organization cannot set itself free from its pay rate obligation during difficult financial times.
A lot of organizations now-a-days realize that "one-size-fits-all" strategy is not likely to work in all situations. As a result, there is increased use of varied compensation strategies. It is suggested that when designing the pay strategy, the advice of company's financial expert(s) should be taken to ensure that the pay strategy is sustainable.
An organization must evaluate the strenghts and weakness of its current compensation system before implementing a new compensation system. The factors that need to be studied before the implementation of a new compensation system are: average length of employee service; the ability of organization to attract talent when required; the best employees are hired by which organization; where the best employees of the organization after they depart; promotion policies; employee morale; competition; and niche and labor market availability (Koss, 2008). The evaluation of the aforementioned factors will allow the organization to incorporate the strengths of the previous system in their new compensation system and work on the weaknesses of the previous system.
The distribution of benefits in a traditional HR department was limited to healthcare and pension. HR department contracted with healthcare providers and developed pension plans for employees. The design of a benefits program to prop strategic HR program must perform two functions:
It should attract strong employee candidates
It should fulfill the current needs of the employees
In order to perform the aforementioned functions, the benefits program offered by an organization should set the organization apart from its competition.
The needs and wants of each employee are different. Strategic HR professionals understand this and it has to be taken into consideration when designing the benefits package. The benefits package should be flexible and allow the organization to personalize it to fulfill the needs and wants of each employee. This will in turn increase the commitment of employees towards the organization.
Wellness programs are very popular with organizations. Wellness programs are used by organizations to reduce healthcare costs, decrease absenteeism, and increase feelings of wellbeing (Gurchiek, 2009). Currently, the participation rate of employees enrolled in wellness programs is 50 percent (Gurchiek, 2009). This statistic suggests that organizations need to focus on marketing wellness programs and incorporate incentives to encourage employee participation.
The work environment and the pride one feels in being associated with a particular association are two factors that contribute towards retaining, engaging, and satisfying employees. These are termed as "soft benefits" as they cater the employee needs related to the person-organization fit. The relevance and significance of such benefits is dependent on the organization's branding, selection, and the prevalent culture there. Additionally, job design can also be used as an intrinsic reward. In order to use job design as an intrinsic reward, three things need to be identified:
The degree to which work is challenging and meaningful
The degree to which work allows for autonomy
The degree to which an employee identifies with his or her job
All of the aforementioned factors contribute towards the pride an employee takes in his/her job. The organizational culture also contributes towards satisfaction of employees as it makes the work more meaningful and intrinsically rewarding.
Ronald Leopold, MetLife's Vice President for Institutional Business, said that employee retention depends on job satisfaction; and job satisfaction depends to a very large degree on benefits satisfaction. It makes clear that it is has always been important that the value of the employee benefits is clearly communicated to them (Miller, 2007) so that they understand the worth of the recognition they are getting for their efforts. It is important to make employees understand and realize the value of benefits offered to them. One way to make empoyees realize the value is to distribute compensation statement - a statement showing the value of compensation package offered by the organization. Another way to make employes realize the value is to cost information of the benefits offered to them.
Employees have a personal life too and organizations have started to offer flexible work schedules so that they can fulfill the commitments in their personal lives. Besides flexible work week, compressed work week, additional vacation and paid time-off, and telecommuting options can be used to help an employee maintain a work-life balance. Each of these strategies can help an organization provide autonomy to its employees, and increase job satisfaction level which will lead to high performance (Robbins & Judge, 2007).
The providence of various options that help an employee maintain a work-life balance contributes toward the development of a brand and an organizational culture whose pivot is employees. This brand and organizational culture can help the organization recruit high performing employees.
The change in employment relationship has made work an extension of employee's personal life. This reason emphasizes that organizations need to align the values of their employees with their values, a significant facet of work-life balance.
Performance and Recognition
Both in formal and informal way, strategic recognition is an essential contributor to employee satisfaction and engagement (Gebauer & Lowman, 2008). The Jackson Organization interviewed 200,000 managers and employees across the globe, and found out that lack of appreciation from the employer was the reason cited by 79 percent of the employees who voluntarily left the organization (Gostick & Elton, 2007).
Effectively recognizing employees help organizations retain them, and improve business results. It also helps organizations train managers in four key areas of leadership: goal setting, communication, trust, and accountability (Gostick & Elton, 2007). The Jackson research further states that engaged employees are more responsible; think outside the box; have a desire to contribute towards organization's success; and are emotionally attached to the organization, its vision and its mission (Gostick & Elton, 2007). Thus increasing employee engagement eventually helps a company's bottom line. Employee engagement reduces turnover, and increases productivity which results in better customer service and improved profitability (Gostick & Elton, 2007).
In order to design an effective recognition program, there must be a continuous work on measurement, assessment, design, training, and execution of a plan (Gostick & Elton, 2007). The O.C. Tanner Company developed a Recoggnition Effectiveness Model according to which such recognition can enforce the desired desired culture as well as organizational values and objectives which has the elements of being inclusive, meaningful, and based on performance; this also plays role in achieving the business results and enhancing their accomplishment by using a foundation in goal setting, communication, accountability, and trust (Gostick & Elton, 2007). In addition, employee recognition has to be "timely, specific, sincere, individual, personal, and proportional" (Harvey, 2000).
One form of recognition is the appreciation coming from peers. The appreciation that comes from colleagues matters a lot because collegaues have a better idea of employees' day-to-day responsibilities, his/her achievements and the amount of effort he/she puts in. A manager is not always fully aware of employees' daily responsibilities (Lloyd, 2007). When an organization recognizes its employees, they feel appreciated and valued. Organizations can use employee recognition to reinforce the desired behaviors.
Development and Career Opportunities
The new employment relationship has led to new expections by employees. Employees now express their desire to learn and grow; they want growth and development opportunities. Organizations should include development and career opportunities in their total rewards programs.
Tuition reimbursment programs are a good way of encouraging employees to continue learning, however mixed opinions exist about the benefits of those programs to the organizations. Some people argue that the development opportunities organizations provide to their employees should benefit them at the end of the day (Heneman, 2007). Other argue that the development opportunities, irrespective of whether they help the organization or the employee alone, help the organization in attracting, satisfying, retaining, engaging, and retaining employees (Gebauer & Lowman, 2008). Organizations can use job enrichment as an effective strategic reward to provide learning opportunities to its employees. A manager can help in improving the performance and quality of work by increasing confidence in an employee which is made possible by acknowledging the role and contribution of employees and his diverse abilities (Lloyd, 2007).
With the advent of globalization and technological advancements, employees have become increasingly sophisticated, thus putting more pressure on the organizations to design effective reward systems that cater not only to the employee needs but are also aligned with the organizational goals and objectives. The different theoretical frameworks, and an analysis of the total reward system, show the relationship between reward systems and employee retention. In any case, if the strategic reward system is designed in such a way that it effectively takes care of the employee needs by having proper reward elements, effectively communicates those rewards to the employees so that they develop proper understanding, and candid evaluations to give away those incentives, then employees do consider the organization to be the right one for them and they actively work harder to pursue long career at the company.