Labour Turnover: Meaning and Causes | Accounting

In this article we will discuss about:- 1. Meaning of Labour Turnover 2. Causes of Labour Turnover 3. Measures to Reduce Labour Turnover 4. Measurement of Labour Turnover 5. Costs of Labour Turnover 6. Treatment of Cost of Labour Turnover.

Meaning of Labour Turnover:

Labour turnover is the movement of people into and out of the organization. It is usually convenient to measure it by recording movements out of the firm on the assumption that a leave is eventually replaced by a new employee. The term separation is used to denote an employee who leaves for any reason. Labour turnover is the rate of change in the number of employees of a concern during a definite period.

Labour turnover studies are helpful in manpower planning. Just as the high reading on a clinical thermometer is a sign to the physician that something is seriously wrong with the human organism, so is a high index of labour turnover rate a warning to management that something is wrong with the health of the organization.

A high turnover rate may mean poor personnel policies, poor supervisory practices or poor company policies. Too lower a rate of turnover can also be a danger signal.

Causes of Labour Turnover:

High labour turnover may be traced to the following causes which may be broadly classified under avoidable and unavoidable causes:

Avoidable Causes:

(a) Dissatisfaction with wages and rewards:

Low pay and allowances and no opportunity to move to a higher paying job.

(b) Dissatisfaction with working conditions:

Noise, heat, humidity, unsanitary conditions of employment, dangerous process, poor lighting, night shift working, insufficient tooling etc. cause some workers to leave the organization.

(c) Dissatisfaction with personnel policies:

Autocratic methods of labour administration may prevail. There may be limited promotional policies. Request for transfer may be refused. Company may be too shortsighted to provide for an annual vacation.

(d) Lack of transport facilities, accommodation, medical and other facilities and lack of amenities like recreational centres, schools etc.

(e) Dissatisfaction with working hours, overtime, layoff, strikes, lockouts etc.

(f) Bad relation with co-workers, superiors and unsatisfactory personnel management, union disputes.

(g) Dissatisfaction with the job:

The workers may find the job too hard. Sometimes jobs include too much of constant lifting heavy materials or the manipulation of heavy machinery. The routines in the job may be very fatiguing involving undue strain upon the nerves, eyes and attention.

The above causes should attract the attention of the management most. After examining the exact cause or causes of the increasing turnover, the cost of reducing the labour turnover rate should be compared with anticipatory benefits in order to determine the final remedial measures to be adopted.

Unavoidable Causes:

(a) Personal betterment,

(b) Family circumstances,

(c) Climatic conditions,

(d) Community conditions,

(e) Health conditions,

(f) Marriage (in case of women),

(g) Retirement and death,

(h) Migratory nature of workers,

(i) Dismissal or discharge due to incompetence, inefficiency, insubordination, indifferent attitude towards work, and 

(j) Redundancy due to seasonal changes, shortage of materials and other resources, slack of business, lack of planning and foresight of higher management.

Management can do little control over labour turnover in the above cases.

Measures to Reduce Labour Turnover:

All employers expect to have a certain degree of labour turnover, without it the company would stagnate. The average age of employees would increase (meaning also that a large number of employees might retire simultaneously); and there could be insufficient new blood coming into the organization.

No doubt many companies would be content if their separation rates lay between 10 to 15 per cent, though few rates in the private sector of industry and commerce are as low as this.

If an employing firm wishes to reduce its labour turnover because it considers it as excessive for the area and the industry, it may take the following steps to reduce labour turnover:

Pay Problems:

(a) Increasing pay levels to meet competition.

(b) Improving pay structures to remove inequities.

(c) Altering pay systems to reduce excessive fluctuations.

(d) Introducing procedures for relating rewards more explicitly to effort or performance.

Employees Leaving to Further their Career:

(a) Providing better career opportunities and ensuring that employees are aware of them.

(b) Extending opportunities for training.

(c) Adopting and implementing ‘promotion from within’ policies and introducing more system­atic and equitable promotion procedures.

(d) Deliberately selecting employees who are not likely to want to move much higher than their initial job.

Employees Leaving Due to Conflict:

a. Introducing more effective procedures for consultation, participation and handling griev­ances.

b. Improving communications by such means as briefing groups.

c. Using the conflict resolution and team-building techniques of organization development.

d. Reorganizing work and the arrangement of office or workshops to increase group cohesiveness.

e. Educating and training management in approaches to improving their relationships with employees.

Induction Crisis:

(a) Improving recruitment and selection procedures to ensure that job requirements are specific accurately and that the people who are selected fit the specification.

(b) Ensuring that candidates are given a realistic picture of the job, pay and working conditions.

(c) Developing better induction and initial training programs.

Shortage of Labour:

(a) Improving recruitment, selection and training for the people required.

(b) Introducing better methods of planning and scheduling work to smooth-out peak loads.

Changes in Working Requirements:

(a) Ensuring that selection and promotion procedures match the capacities of individuals to the demands of the work they have to do.

(b) Providing adequate training or adjustment periods when working conditions change.

(c) Adopting payment by result systems to ensure that individuals are not unduly penalized when they are only engaged on short-runs.

Losses of Unstable Recruits:

Taking more care to avoid recruiting unstable individuals by analyzing the characteristics of applicants which are likely to cause instability and using this analysis to screen recruits.

Adequate Statistical Control:

There should be a carefully worked out system of records for keeping the required data. The management should have complete information about separations by shops, departments, occupations, sex, age, race, nationality, length of service and education.

This information will help a critical analysis. It will also be possible to collect statistical evidence to invite managerial attention to the problem. If management is properly convinced about the magnitude of the problem, adequate funds and attention may be provided for the solution of this problem.

Joint Control:

Joint control can be exercised through committee representing management and workers. These committees should cover the review of shop regulations, grievances, etc. The formation of these committees will encourage mutual understanding and general cooperation.

Use of Exist Interviews:

Some companies arrange an exist interview, when an employee calls for his final payment. A better means of getting necessary information may be an interview with employees sometime after they have left. For this purpose, exit questionnaires may be prepared. This step may lead to useful information, which may have profound effect on reducing labour turnover.

Measurement of Labour Turnover:

The following formulae are in common use for measuring labour turnover:

Separation Rate = Number of Separations/Average Number Employed

Replacement Rate Flux Rate = Number of Employees Replaced/Average Number of Employed

Flux Rate = Number Joining plus Number Leaving/Average Number Employed

The average number of employees is usually taken as the simple average of the numbers at the beginning and at the end of the specified period. The turnover rate may be expressed either as a fraction or as a percentage rate may also be determined for each department or separately for various categories of work classified according to trades, grades of skill, age, years of service, sex etc. The separation rate is easy to calculate and is widely in practice.

Costs of Labour Turnover:

Any change in the personnel of an organization entails a financial loss, unless outweighed by certain gains. Labour turnover signifies a heavy investment rather than expense for unproductive effort. It essentially constitutes an outgo, that bears little or no relationship to output.

The cost of labour turnover can be examined under two broad categories:

(i) Preventive costs, and

(ii) Replacement costs.

i. Preventive Costs:

The following costs may be listed under the heading preventive costs:

Personnel Administration:

It is a function concerned with maintaining good relationship between management and workers. This function is responsible for maintaining human relationship within an organization.

Medical Services:

The health of a worker has a marked effect upon productivity. Some enlightened companies arrange for annual physical checkups of all staff and employees within the organization.

Welfare:

This includes the cost of sports facilities, laundry services etc. The provision of these services is made to retain the services of employees.

Pension Schemes:

Certain authors argue whether the cost of pension schemes should be included in the cost of labour turnover. It has been noted that workers tend to remain in the employment of companies operating a pension scheme.

Better Scales, Bonus and Perquisite:

In some organizations the amount paid for above-mentioned reasons is more than the average amount paid in the industry to discourage labour turnover.

ii. Replacement Costs:

Labour turnover is associated with replacements. Replacement necessitates recruitment, training and absorption of new workers. If a worker is replaced, a new worker will have to be trained to substitute the replaced worker. There will also be wastage and loss of production, if worker is new. Replacement cost will include cost of all these elements.

Following costs can be summarized under this heading:

Inefficiency of New Worker:

It is difficult to measure exactly the losses due to inefficiency of new workers.

Some authors hold the view that the extra wages cost can be calculated by the following formula:

Extra Wages = D – (A.B.C.)

where D = Wages paid

A = Output in good pieces

B = Normal standard time allowed per piece

C = Standard base rate of pay

The inefficiency of labour results in extra usage of services available in factory. This means additional overhead cost.

Employment Department:

The cost of recruitment should be included in the cost of labour turnover.

Training and Induction:

In most companies, some form of induction for new worker is undertaken.

This should be included in cost of labour turnover.

Loss of Output due to delay in obtaining new workers:

The experience has revealed that sometime definitely elapses before any replaced worker joins the organization.

During this period, scheduled output is met by:

(a) Carrying a surplus labour force,

(b) Working overtime,

(c) If the scheduled output is not met, then there is direct loss of profit. All these factors add to cost of labour turnover.

Cost of Tool and Machine Breakage:

Tool and machine breakages are more frequent when untrained or new labour is employed. It adds to the cost of labour turnover, but it is practically a difficult exercise to determine relationship between the intake of new labour and the cost of repairs.

Accident Frequency and Severity:

When a new worker joins the factory, the chances of accidents and mishaps increase considerably. This may lead to additional cost of compensation, which finally adds to cost of labour turnover.

Cost of Scrap and Defective Work:

When a new worker joins, the amount of scrap and defective work increases. When the material used is of high value, the cost of scrap and defective work may have serious repercussions upon the overall cost of production. The cost of defective work, which is due to inexperience of new worker, should be taken as the cost of labour turnover.

Loss of Goodwill or Disadvantageous Labour Contracts:

If new worker is not put to the job, it will be difficult to meet the scheduled program. In the hurry to save the goodwill of the company, some disadvantageous labour contracts may have to be entered into. All this adds to the cost of labour turnover.

This cost can be shown as cost per worker employed or replaced or as a fraction of total cost of selling price.

The most common way to express labour turnover cost is as follows:

Total Cost of Labour Turnover Per Employee

Treatment of Cost of Labour Turnover:

In most of the companies, the cost of labour turnover forms part of overhead. When costs are divided into ‘preventive costs’ and ‘ replacement costs’, preventive costs are charged to departments in proportion to labour strength.

Replacement costs may be directly charged to product or it may also be treated like preventive costs. It does not appeal to reason to charge the replacement cost to a particular department, particularly when replacement arises due to shortsighted policy of management.