Employee Turnover And Company Profitability: A Study On 30 ASX Listed Companies

Research Aim

The primary goal of every business firm is to make a profit (Aitken, Frino, McCorry, & Swan, 2018). The executives or top administrators of any company must therefore continuously find ways of optimizing business functions to minimize cost while maximizing profit (Cao, Hwang, Li, & Zomaya, 2013). For maximum productivity, the workforce must be motivated and skillful in doing all the necessary business activities to ensure that all the business functions run smoothly. Incompetent employees can drag the company down (Clark, 1973). That is why most of the best companies have a rigorous and challenging hiring process. They spend millions of resources trying to get the best employees to join their workforce. These companies also have very well structured and developed a culture to ensure that all employees remain as motivated as possible. Before entering this company, one needs to sign a contract that bid him/her work for the company for a given number of years (Driscoll, Mason, Chan, Jacob, & Pirrone, 2013). The main reason for all this is to ensure there are low employee’s turnover rates. There was, therefore, the need to investigate the connection of employee’s turnover and profitability.

 The primary goal of this research was to investigate the effects of changing employees on the profitability of the company (H, Jiang, & Lam, 2013). The study focused on identifying whether there exists any connection between high rates of employee’s turnover and productivity of 30 ASX listed companies (Driscoll, Mason, Chan, Jacob, & Pirrone, 2013). The research went ahead and proved whether the link is significant and gave some recommendations which should be followed to ensure that the company productivity is not negatively affected by employees’ turnovers (Cao, Hwang, Li, & Zomaya, 2013). 

This research aimed to establish whether there is any relationship between employee retention/ turnover to the productivity of a company 

Every company desire to make a profit. There hardly is any business whose primary objective is not to make a profit, and even those companies known as nonprofit companies would quickly run out of business if they do not have a continuous and reliable source of income. Gain enables a company to increases its production capacity, employs more employees, start exploring new business ventures, pay tax hence support the economic growth of a country, help the society by starting nonprofit social welfare activities and other very significant activities (Myr, Grechanovsky, & Kazarinov, 2008) (H, Jiang, & Lam, 2013). It is thus the desire of every business administrators and decision makers to ensure that any cost is effectively minimized and profitable operations maximized for the business to continue increasing in profitability.

Literature Review

Some of the areas that have been undergoing continuous evolution as a result to the incorporation of innovations brought about by the numerous scientific researches with the goal of making a business firm more competitive and profitable are, the employment and recruitment sections. In recent time, the recruitment process has been made to be more challenging and rigorous for companies to choose the right workers. The recruitment process has grown to involve much broader scrutinization of applicants in areas that were deemed irrelevant in the past. This improvement has come about mainly due to the advancement in technology, the increase in market competition and the need for continuous innovation in workplaces (Aitken, Frino, McCorry, & Swan, 2018). These three attributes make a firm require more competent individuals.

Apart from the recruitment process being rigorous as a result of the companies needing more competent employees, it has also been made to be more challenging to get individuals who will quickly adapt to the culture of the environment without straining hence staying for a longer time (Aitken, Frino, McCorry, & Swan, 2018). While it costs money to higher incompetent workers as a result of the disruption of the flow of business, it cost more money to start the recruitment process again as a result of the high quitting rate of employees (Breen, Buultjens, & Hing, 2005).  Therefore, it is always the aim of recruiters to recruit not only the individuals with the capacity to deliver but also those with the ability to adapt to the culture of the organization so that they can stay in the company for long. This is the reason why most recruitment agencies have included the texting of applicant’s traits and culture (Ditlev-Simonsen, 2011).

When employees pass the recruitment process, they are more often than not taken a through a significant number of seminars and training to help orient them with the organization’s culture, the way of doing things and the firm’s expectations (Grogger & Hanson, 95(1), 42-57.). They are trained on how they would use the organizations technologies, tools and how the organization handles its clients (Breen, Buultjens, & Hing, 2005). All these exercises, training and seminars use the company’s resources. It is therefore costly for the company to lose its trained employees and start the whole recruitment and qualifying new applicants again. Every business must try to evade any cost incurring expenses to maximize profit. One of the ways of doing this is ensuring that the company can have enough and well trained and experiences workers at any given time (Cao, Hwang, Li, & Zomaya, 2013). These skilled and experienced employees have the skills and the ability to train new incoming employees.  

According to Kumar & Pansari, (2016) the aspect of profitability cannot be taken for granted by any company willing to remain competitive and relevant in the market. It is a matter. Every company significantly delves into the elements of profitability and the factors that affect it. Employee retention is one of the factors which affects profitability significantly (Aitken, Frino, McCorry, & Swan, 2018). Labor is one of the four major factors of production.  This is the reason why good employees are seen as an asset of a given company. In addition to this, it is usually a challenge to find a replacement due to the vast improvement of technology in the current world, where ways of doing things continuously change with new technologies (Aitken, Frino, McCorry, & Swan, 2018). Productivity is also a function of how the employees are motivated and willing to carry out business activities without any supervisor. It is being highlighted in the paper, that the overall productivity of company is dependent upon the employee engagement and the commitment of the employees towards enhancing the company’s performance regarding productivity which therefore raises the profitability.

According to Kundu & Gahlawat, (2016) the profitability of the company is also a function of the ability of a firm to maximize all the possible competitive advantage in the market through raising the efficiency of its deployed products and services into the market (Breen, Buultjens, & Hing, 2005). Notably, the paper highlights that, to execute the objectives of enhancing efficiency it is essential that the employees of the company work based on their optimal ability and obedience towards the company rather than forced compliance. This explains why the recent recruitment process requires that all applications be taken through culture and a personality test to determine whether they will easily fit the company’s environment without being forced or continuous follow up (Clark, 1973). Finding another employee with the ability to meet the culture of the organization suitably is thus very expensive (Deery & Jago, 2015).

According to Prentice, (2016) employee retention has some direct implication on the profitability of any organization (Deery & Jago, 2015).  For instance, some clients are easily bond to the employees of companies depending on how the employee deals with them. This means that in case of any absence of the employee, the firm and customer relationship would be profoundly affected. Most business goes by the old statement which state that customer is always the king. It takes a lot of time for new employees to understand the firm’s clients. It is worth to remember that every customer requires a unique way of being dealt with. In addition to this, in case the employee whom the clients have always been used to go to another company there is still an open risk of the company losing the clients who might follow the employee to his new place of work (Deery & Jago, 2015). This is one of the strategies that have been employed by most television and radio stations in the world. When a favorite presenter goes to another station, he/she usually take a lot of funs with him/her from the old station to the new station (Deery & Jago, 2015).  

According to Simons et al., (2017) the amount of profit loss due to theft or shrinkage gets reduced if employee retention gets increased. Notably, it was found that nearly 27% drop in the depreciation of profit as compared to the business unit took place when there was a 25% list of employee retention a tremendous amount of money (Clark, 1973) (Grogger & Hanson, 95(1), 42-57.). Employee turnover has a twofold impact on profitability. Replacing an employee can cost one and half times of the salary while once an employee has been returned the new employee consumes a period to adjust with the organizational rules and to become productive. Profitability depends not only on the sales of the goods and services that a new employee can generate more significantly on the amount of revenue concerning per unit of a cost that is being incurred by the organization for retaining that employee. The paper by Simons, state that, although it looks cheaper to employ new employees, it does cost the company a lot of money and time for the new employs to adapt to the organization’s culture.

According to Brian Westfall employee turnover is merely the rate at which employees join or leave a company. Brain argues that turnover in itself is not a challenge and hardly does it have any negative impact on a company’s profitability (Deery & Jago, 2015) . It, however, shows that a company has some internal weakness that are making employees not willing to stay in it for long. Low turnover rates are interpreted by many consultants experts as a sign that the management is doing enough in ensuring that it higher the right individuals who have the right combination of skills, culture, and expertise, the company is paying its employees and has flexible work schedules thus increasing employees level of motivation, employees are engaged in critical decision-making matters hence they feel to be part of the company, well recognized and respected (H, Jiang, & Lam, 2013). He linked a low turnover rate to a positive work environment where every employee has the freedom and morale to exploit him/her potentials to the maximum.

He, however, did not link low turnover to have significant effects on productivity of profitability of any department in a firm. Indeed, he added that there are instances where low turnover come about due to adverse external economic factors that can disguise management’s performance and the operating results. He, therefore, argues that at the time low turnover is not always preferable since it could be a sign of poor selection of employees, overpayment of employees, complacency and coddled (Wang, 2010).

 According to a research report done by the president of Grote Consulting, Dick Grote, high turnover can help improve talent in an organization. With the high pace of technology changes, employees in a given company who have stayed there for a long time tend to adapt to similar cultures and to get comfortable with the status quo in the company. This is very dangerous to the company as it inhibits innovation (Wan & Chan, 2013). Without innovation, a company can easily be phase out due to the high rates of competition in the current market. New employees, however, are aware of what is going on in other firms and hence can bring new ideas igniting the development of unique talents and innovations. Innovations help a company to remain competitive, stave off complacency, create new incentives to perform and broaden the firm’s perspective. If Dick Grote is anything to go by moderate turnover rates do not negatively impact the profitability of a company (Breen, Buultjens, & Hing, 2005).

This literature review shows that, without careful an unbiased analysis, employees’ turnover or retention ration cannot be reliable in showing the dynamism of any firm’s effectiveness. No one has ever come up with an ideal turnover rate that can be applied universally to all the companies (Athens, 1961). There was there for a need to carry out further research to establish whether there is a link between turnover rate and profitability of a company. 

The research involved the five years data analysis of 30 random companies listed in 30 ASX.  The data analyzed included the employee turnover rate in 5 consecutive years which was related to the amount of profit the company made in the same years. The average employee turnover rate of each company was compared to the average profit made to make a conclusion. The comparison involved use of chart and a tornado diagram to test for the sensitivity of the two data with respect to any change in one of the variables.

The dependent variable was a company’s profitability while the independent variable was employee turnover. Tornado diagram was used to test the sensitivity of the relationship between these two variables.

The sample was selected at random from the top 200 companies in ASX. Since 30 represents 15%, it can act as a representative sample. All the data were downloaded from the internet in the ASX website https://www.asx100list.com

The process of data analysis is executed based on summarizing the operational status and financial performance of the companies undertaken for the research. The collected data is of 2018- 2014. The data was obtained from ASX website (ASX, 2018).

Table 1: List of 30 ASX companies (ASX, 2018)

Number of Companies	AS Listed Companies	2018	2017	2016	2015	2014
		%Profit	%turnover	%profit	%turnover	%profit	%turnover	%profit	%turnover	%profit	%turnover
1	Adelaide Brighton	5.4	1.4	4.3	1.8	2.8	3.3	3.3	2.1	4.5	1.7
2	AGL Energy Ltd	4.5	1.5	3.0	2.3	4.2	1.3	4.5	1.4	3.8	2.2
3	Aristocrat LeisureStrong Buy	3.3	2.3	2.4	3.3	4.0	2.9	2.9	2.0	4.5	1.8
4	Als Ltd	4.5	1.2	4.5	1.3	3.0	1.8	2.7	2.0	4.5	1.2
5	Atlas Arteria Ordinary Stapled Securities	3.3	1.1	4.5	1.0	3.2	4.5	2.3	4.3	2.3	1.9
6	Amcor Ltd	5.0	0.8	3.4	1.5	3.8	1.6	2.5	1.7	5.3	2.3
7	AMP Ltd	3.3	2.0	3.4	1.9	4.0	1.2	4.2	1.0	4.5	0.9
8	Ansell Ltd	4.6	0.9	2.5	4.9	2.3	5.0	2.1	3.0	3.3	2.8
9	ANZ Banking Group Ltd	5.0	0.8	3.4	1.5	3.8	1.6	2.5	1.7	2.3	5.2
10	APA Group Units FP Stapled Securities	3.3	2.0	3.4	1.9	4.0	1.2	4.2	1.0	0.9	4.5
11	Ausnet Services Ltd	4.6	0.9	2.5	4.9	2.3	5.0	2.1	3.0	3.3	2.8
12	ASX Ltd	5.0	0.8	3.4	1.5	3.8	1.6	2.5	1.7	2.3	5.2
13	Alumina LtdStrong Buy	4.5	1.5	3.0	2.3	4.2	1.3	4.5	1.4	3.8	2.2
14	Aurizon Holdings Ltd	2.3	3.4	2.3	3.5	2.6	3.9	5.0	1.7	3.5	4.5
15	Bendigo and Adelaide	4.5	1.9	3.5	2.3	4.0	1.7	5.0	1.7	4.5	1.8
16	BHP Billiton Ltd	5.3	0.8	4.3	2.3	4.5	2.3	5.0	1.8	4.6	2.0
17	Boral LtdStrong Buy	4.5	1.2	4.5	1.3	3.0	1.8	2.7	2.0	4.5	1.2
18	Bank of Queensland	3.3	1.1	4.5	1.0	3.2	4.5	2.3	4.3	2.3	1.9
19	Bluescope Steel Ltd	3.3	2.0	3.4	1.9	4.0	1.2	4.2	1.0	4.5	0.9
20	Brambles Ltd	4.6	0.9	2.5	4.9	2.3	5.0	2.1	3.0	3.3	2.8
21	Carsales.com Ltd	5.0	0.8	3.4	1.5	3.8	1.6	2.5	1.7	2.3	5.2
22	Commonwealth Bank	4.5	1.5	3.0	2.3	4.2	1.3	4.5	1.4	3.8	2.2
23	Coca-Cola Amatil	3.3	2.3	2.4	3.3	4.0	2.9	2.9	2.0	4.5	1.8
24	Challenger Ltd	4.5	1.2	4.5	1.3	3.0	1.8	2.7	2.0	4.5	1.2
25	Charter Hall Group Stapled Securities US Prohibited	4.5	1.9	3.5	2.3	4.0	1.7	5.0	1.7	4.5	1.8
26	Cimic Group Ltd	5.3	0.8	4.3	2.3	4.5	2.3	5.0	1.8	4.6	2.0
27	Coles Group	3.3	2.3	2.4	3.3	4.0	2.9	2.9	2.0	4.5	1.8
28	Computershare Ltd	4.5	1.2	4.5	1.3	3.0	1.8	2.7	2.0	4.5	1.2
29	CSL Ltd	4.5	1.9	3.5	2.3	4.0	1.7	5.0	1.7	4.5	1.8
30	Cochlear Ltd	4.5	1.2	4.5	1.3	3.0	1.8	2.7	2.0	4.5	1.2
Average % rate	4.26	1.45	3.49	2.28	3.55	2.41	3.41	2.00	3.82	2.33	4.26

The data results show that there is a clear connection between employees’ turnover rate and the amount of profit made by most companies such as; Adelaide Brighton, AGL Energy Ltd, Aristocrat Leisure Strong Buy, Als Ltd and Atlas Arteria Ordinary Stapled Securities. The result can be analyzed in chart form for better understanding  

The data indicates that the amount of profit made by each company was high when employee turnover rate was low and low when there was a high employee turnover rate. This confirms the findings in the literature review which strongly argued that the productivity of any company is indirectly proportional to the employees’ turnover rate (Athens, 1961).       

The pie chat show, Adelaide Brighton turnover in relation to the percentage profit in 2018. When the turnover was 1.7% profit was 4.5%  (Leslie, 2017)

The pie chat show, Adelaide Brighton turnover in relation to the percentage profit in 2018. When the turnover was 2.8 % the profit reduced to 3.3% (Leslie, 2017) 

If all the variable were kept constant, the above chart shows how profitability was sensitive to changes in employee turnover rate over the five years. In 2018 the average employee turnover rate was 1.6% and the average profit made was 4.3%. On the other hand, in 2014, the average turnover rate in was as high as 4.4% and the profit was as low as 2.8% (ASX, 2018).. The tornado diagram shows that the dependent variable (Profitability) is highly sensitive to the independent variable (employee turnover) (ASX, 2018). 

The findings confirm what H jiang and Lam (2013) concluded in their magazine (H, Jiang, & Lam, 2013) that profitability is highly linked to the employee turnover rates. Low turnover rate means that the employee is satisfied and motivated hence become more productive (Murphy, 2004). Contrary to the research report done by the president of Grote Consulting, Dick Grote that concluded that high turnover can help improve talent in an organization, the findings of this report found high employee turnover rate to have more negative impacts to an organization than good. In all the 30 companies, the rate of employee turnover was indirectly proportional to the profitability of the firm.

According to a journal article published by Athens in 1961, it is not possible to establish or formulate an equation that can be used to universally relate employee turnover rate to a firm’s productivity (Athens, 1961).The report confirmed the findings since in every company, the sensitivity of the independent variable to the dependent variable differed. There is no linear correlation between the two variables. Athens argued that the cause of this complexity has a lot to do with the vast number of variables that affects profitability of a company. It is had to keep all other factors constant in order to have an ideal test in practices.

The main reason for the high employee turnover rate in some years was as a result of employees lacking motivation thus quitting to other companies (Aitken, Frino, McCorry, & Swan, 2018). As such, it is crucial for every company to ensure they pick the right employees who are passionate enough to fit in the culture of the organization and find it fun (Brodie, 1996).  

Conclusion

In conclusion, the employee’s turnover is linked to the profitability of a given company. A high turnover rate that makes it difficult for new employees to have enough trainers and time to adapt to the culture of the working environment leads to unproductivity in the company. However, moderate employee turnover rates have no significant adverse effects on the number of profits made by a company (Aitken, Frino, McCorry, & Swan, 2018). It is crucial for every organization to establish the best employee turnover rate to benefit from the innovation incitement that comes with new talents while still maintain the normal operation of the company (Aitken, Frino, McCorry, & Swan, 2018).

Although a sample size of 30 randomly picked companies can conclusively show the behaviour of the majority of the companies, it there is a chance of the results not to represent the expression of all the companies. This means that the findings of this research cannot be used to explain the effects of employee turnover rate on all companies’ profitability.

The report focused on companies listed in ASX, which means that they only represent the behaviour of companies in Australia. Since Australia is a single country with a single government that regulates economics factors such as the inflation rate, the findings might not necessarily apply to other countries. 

This section will give by recommending to business executives, recruitment agencies, researchers and the government.

Since the findings established a clear connection between employee turnover rate and a firm’s profitability, it is essential for business management in every company to put in place measures that ensure that employee turnover is minimised as much as possible. One such policy is continuously improving employees’ welfare by increasing the rumination package and providing up to date training on how they should carry out their work.

Recruitment agencies, on the other hand, should focus on improving their recruitment process so that they recruit not only the individuals with the necessary skills but also those with the ability to stay in the firm for a long time. This will be achieved if the agencies interview the firms first to understand their culture first to know the kind of personality that will thrive in them. Business researchers should work hard to try and formulate a model that can be universally applied to determine the optimum turnover rate of a firm. The reason for this is because although the findings confirmed that the turnover rate is indirectly proportional to a company’s profitability, minimum turnover rate is important so as to bring in new talents hence ignite innovation. Further research is recommended focusing in the achievement of this.  

In addition to the government policies having the ability to affect the employee turnover rate, the government is also one of the major sources of employment. The sector is continuously faced with high strikes of employee demanding extra pay, others resigned from there work. The government should also understand the effect of employee turnover rate and work hard to minimize it.

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