Managing the Impact of Employee Turnover on Performance

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Organization Science
Vol. 19, No. 1, January–February 2008, pp. 56–68 issn 1047-7039 eissn 1526-5455 08 1901 0056

informs

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doi 10.1287/orsc.1070.0294 © 2008 INFORMS

Managing the Impact of Employee Turnover on Performance: The Role of Process Conformance INFORMS holds copyright to this article and distributed this copy as a courtesy to the author(s). Additional information, including rights and permission policies, is available at http://journals.informs.org/. Harvard Business School, Boston, Massachusetts 02163 {zton@hbs.edu, rhuckman@hbs.edu}

Zeynep Ton, Robert S. Huckman

e examine the impact of employee turnover on operating performance in settings that require high levels of knowledge exploitation. Using 48 months of turnover data from U.S. stores of a major retail chain, we find that, on average, employee turnover is associated with decreased performance, as measured by profit margin and customer service. The effect of turnover on performance, however, is mitigated by the nature of management at the store level. The particular aspect of management on which we focus is process conformance—the extent to which managers aim to reduce variation in store operations in accordance with a set of prescribed standards for task performance. At high-process-conformance stores, managers use discipline in implementing standardized policies and procedures, whereas at low-process-conformance stores, managers tolerate deviations from these standards. We find that increasing turnover does not have a negative effect on store performance at high-process-conformance stores; at low-process-conformance stores, the negative effect of turnover is pronounced. Our results suggest that, in settings where performance depends on the repetition of known tasks, managers can reduce turnover’s effect by imposing process discipline through standard operating procedures. Key words: employee turnover; process management; knowledge exploitation; retail operations History: Published online in Articles in Advance December 11, 2007.

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1. Introduction

Employee turnover in organizations has received substantial attention from both academics and managers. Much of this attention has been focused on understanding its causes. Implicit in this approach is the assumption that turnover is driven by certain identifiable characteristics of workers, tasks, firms, and markets, and that, by developing policies to address these characteristics, managers might reduce the occurrence of turnover in their respective organizations. As noted by several observers, however, the consequences of turnover have received significantly less attention from researchers (Staw 1980, Mobley 1982, Glebbeek and Bax 2004). This lack of academic attention is particularly surprising given that industry studies have estimated the cost of turning over one employee earning $8 per hour at $3,500 to $25,000.1 In this paper, we address this latter issue through empirical examination of the impact of turnover on operating performance at stores in a large retail chain. We focus our empirical analysis on the retail industry for several reasons. First, retail accounts for a substantial portion of employment in the United States. According to the National Retail Federation, in 2003 retailers in the United States employed more than 23 million people, nearly one out of every five American workers. Second, most retailers operate with very high levels of employee turnover, which makes retailing an important context in which to study this phenomenon. Finally, retail provides a setting in which performance tends to 56

depend on the repetition of known tasks rather than on innovation. The difference between repetition and innovation evokes March’s (1991) distinction between exploitation and exploration. The relevance of this distinction is addressed in the development of our hypotheses later in this paper. Our first objective is to determine the magnitude and direction of turnover’s effect on...
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