THE MATCH GAME: HIGHER TURNOVER RATES DON’T HAVE TO MEAN LOWER PROFIT

FAYETTEVILLE, Ark. - Employers and human resource professionals often believe that high voluntary turnover rates always result in declines in productivity and profitability. However, University of Arkansas management researchers John Delery and Nina Gupta have found that this is not necessarily true.

"We found that what matters is the match. A company may choose not to invest in its people, but to obtain profits in other ways," explained Delery, associate professor of management in the Walton College of Business. "That company is not really harmed by high voluntary turnover rates. But if a company chooses to obtain its profits through investment in its people, high voluntary turnover can be devastating."

In the fast food industry, for example, there is typically a high voluntary turnover rate among counter help. But the company t makes a low investment in these employees, choosing instead to make high human capital investments in managerial-level employees, which can enhance profitability.

Delery and Gupta, professor of management, conducted two studies of voluntary turnover along with Jason Shaw of the University of Kentucky. Their findings were presented recently at the 2002 Annual Meeting of the Academy of Management in Denver.

The researchers looked at voluntary turnover among core employees - those who control production processes or the direct delivery of services - in the trucking and concrete pipe manufacturing industries. Previous studies on voluntary turnover and firm performance primarily focused on top management turnover.

Voluntary turnover rates only apply to employees who leave an employer by their own choice. It does not include involuntary terminations, layoffs or other workforce reductions.

"One of the problems with some studies is that they look at all forms of turnover together," explained Gupta. "But all forms of turnover don’t have the same effect. Sometimes firing an employee can have a beneficial impact on productivity. We wanted to see the specific relationship between voluntary turnover and profitability and productivity."

Two studies were conducted. One included 141 concrete pipe manufacturing plants, which represented 71 percent of the entire industry in the United States and Canada. The other included 379 trucking companies. The researchers worked with civil engineers and logistics experts from the Mack Blackwell Transportation Center to design their studies.

"The real strength of our studies is in our data sets," explained Gupta. We amassed an enormous amount of data from many different sources, including both self-report and publicly available data. It is important to be able to analyze the data both from between different industries and from many companies within an industry."

In their studies, the researchers used pay level, benefits level, training, seniority-based pay, seniority-based layoffs, performance appraisals and selective staffing to determine the company’s investment in employees for both industries. In the concrete pipe industry, productivity was measured by labor hours per ton and accident rates, while controlling for facility size, facility age, corporate dependence, unionization and technology.

In the trucking industry, performance was measured by revenue per driver and out of service percentage, which included violations attributable to driver mistakes, but not those beyond the driver’s control. Financial performance was obtained from the Transportation Technical Services Blue Book and included operating ratio and return on equity. The researchers controlled for organizational size and age and unionization.

To increase financial performance, investment in human capital must be tied to low voluntary turnover rates, explained Gupta. "We can’t really generalize about what is better for profit," she added. "Some approaches say that human resource investments promote financial performance. Our study shows that this is not necessarily the case."

One reason for this discrepancy, according to Delery, is that managers and educators have done a poor job in showing the financial value of people. It is said that machines depreciate and people appreciate, but no clear method exists to determine the numbers. "Traditionally, human resources professionals have not been trained in finance," he explained. "They don’t have the expertise in calculating return on investment."

The researchers found that the relationship among the human resources dynamics and performance is not necessarily linear. It may more closely resemble a U-shaped curve, with greater impact in the middle than at either extreme.

"Low human capital investments would always result in low productivity, no matter what the turnover rate. It is difficult to imagine that a low-skill, low- motivation work force could deliver high productivity," Delery said. "On the other hand, good financial results can be achieved by lowering human capital investments and looking to other avenues, such as technology, to yield competitive advantage. High investments in human capital can yield high returns, but only when the human capital is kept in the firm."