Costs of UK labour turnover increase

A survey of labour turnover, published in December 1997, by the Institute of Personnel and Development indicated that the cost of replacing staff has increased significantly in the UK in the last 12 months.

Taking a detailed look at the available data on labour turnover in the UK, the independent employment researchers, Industrial Relations Services, argued in 1997 that the economic recovery in the UK is leading to increasing numbers of resignations and skill shortages, which in turn are leading to substantial resourcing problems for employers ("Benchmarking labour turnover: an update", Employee Development Bulletin 87, IRS, March 1997). At the same time, labour turnover is being adopted by many organisations as a "benchmark" indicator of performance and business efficiency. Furthermore, a survey by the Confederation of British Industry (reported in "Employers can influence labour turnover, say CBI", Employee Development Bulletin 93, IRS, September 1997) argues that management intervention in employee relations can make a large difference to labour turnover rates and improve the performance of the organisation.

On 15 December 1997, the Institute of Personnel and Development (IPD), which represents personnel managers and is one of the UK's largest professional associations, published itsthird annual labour turnover survey [PDF format]. The survey relates to the calendar year 1996 and confirms many of the findings of previous studies but, importantly, highlights the increasing cost to employers of labour turnover. Questionnaires were sent out in May 1997 to over 5,000 personnel specialists and resulted in a final response from well over 700 organisations.

What is labour turnover?

The method used by most UK organisations of measuring their labour turnover is called the "crude wastage method" and it is this which was used by the IPD survey so that organisational comparisons could be made. It is calculated as follows: labour turnover = the number of leavers in a set period ÷ the average number employed in that period; × 100.

This calculation includes those leaving the organisation by the way of voluntary or involuntary severance, redundancy or retirement, but it should be remembered that in general this crude measure by itself takes no account of the characteristics or length of service of the workforce.

Rates of labour turnover

The overall conclusion of the IPD survey was that the costs of labour turnover associated with all occupational groups, with the exception of unskilled workers, had increased over the period of the survey. Part-time workers (22%) were more likely than their full-time counterparts (16%) to leave their jobs over the period, and there were wide variations between industry sectors. The hotel and leisure industry and the publishing industry reported the highest levels of labour turnover while respondents in the chemical industry, local government and the National Health Service reported the lowest levels. In terms of occupational groups, the highest labour turnover rates were to be found among sales staff (23%), while the lowest was to be found among management and administration staff (11%). There was also a relationship with the size of an organisation, with full-time employees in organisations employing fewer than 100 employees being more likely to have high rates of turnover (18.9%), while part-timers in these organisations had the lowest rate of turnover (9.6%).

Costs of labour turnover

While calculating the cost of labour turnover is problematic due to the differing definitions, the IPD survey attempted to overcome the problem by giving respondents a range of types of cost to choose from when estimating the cost of turnover per employee. The costs are likely to involve some of the following factors:

• leaving costs - administration of the leaver;
• replacement costs - recruitment etc;
• transition costs - training etc; and
• indirect costs - loss in customer service/satisfaction.

The survey however, warns that no conclusion can be drawn as to how each variable affects the overall costs.

The survey estimates that it takes 10 weeks on average for an employer to fill a sales vacancy, with the cost of replacing each salesperson that leaves being GBP 3,640. Although managers are much less likely to leave work than any other occupational group, they cost much more to replace. It takes employers an average of 13 weeks to fill a management vacancy, at a cost per person of GBP 5,008.

The table below highlights the cost of labour turnover by occupational group and industrial sector

Source: IPD labour turnover survey, 1997 results.

Reasons for the increased costs of labour turnover

The majority of organisations (63%) had made redundancies over the year and internal reorganisation was the most common reason given by employers (50%). Yet, at the same time, many employers were experiencing difficulties in recruiting particular occupational groups such as professionals, managers, sales and craftworkers. These dual factors may lead to rising costs, but increased labour turnover may also be a strong indication of rising employee dissatisfaction with their conditions of employment. The survey highlighted that, of those leaving their jobs during the year, a quarter had a length of service of less than six months - but more interesting was the fact that nearly a third of those leaving had over five years' service.

Commentary

Labour turnover is costing UK employees many thousands of GBP, but is a much more complicated phenomenon than just the number of employees leaving or joining an organisation. Employers are experiencing skill shortages while at the same time making redundancies. They are also probably experiencing a growth in employee dissatisfaction as the recovery has taken hold and the possibility of finding other jobs has increased for some workers. Yet this growing mismatch within individual organisations is probably more symptomatic of the relatively low priority given to personnel issues. (MW Gilman, IRRU)