Turnover Turmoil

A new study has found only moderate support for the notion that innovative work practices reduce employee turnover or quit rates in Canadian manufacturing industries. Innovative practices include teamwork (e.g. problem-solving teams or self-managed teams), flexible job design (e.g., job rotation and broadened job definitions), profit-sharing or productivity/quality gain-sharing plans, merit pay or skill-based pay, or formal training on teamwork.

The Statistics Canada report found almost no evidence that such innovative work practices reduce employee turnover in the manufacturing sector. Workplaces using innovative work practices were no more successful than others in retaining their employees. The practices have been used by many companies since the early 1970s with the aim of boosting employee productivity and loyalty.

On the other hand, establishments in the services sector that employed a highly skilled workforce and used some innovative work practices, did retain a greater proportion of their employees than others. These establishments included, among others, those operating in telecommunications, finance, insurance, and professional, scientific and technical services. In 1999, those which had teamwork and profit-sharing plans lost about 4% of their employees through resignations. In contrast, those with no innovative work practices lost a much greater proportion of their employees, about 16%.

The study, based on data from the 1999/2000 Workplace and Employee Survey (WES), is the first in-depth attempt to examine which work practices, if any, might be used to reduce employee turnover in Canada. Employees and employers at 3,300 private sector companies were surveyed for the study.

Over the past decade, several studies have attempted to assess whether innovative work practices improve labour productivity, increase profitability and reduce labour turnover. The general assumption was that there exists a set of “high performance” work practices which improve workers’ well-being, increase their productivity and reduce employee turnover.

This issue is of growing importance, given the aging workforce in Canada and in many member nations of the Organization for Economic Co-operation and Development (OECD), and given the resulting need for many businesses to retain key employees.

The study analyzed labour turnover in three sectors: manufacturing, high-skilled services and low-skilled services.

Firms with innovative work practices in the highly skilled service sector generally had lower employee turnover than others. However, a quite different pattern was found in manufacturing.

Programs had negative effect in manufacturing

In manufacturing, establishments which had innovative work practices did not have lower labour turnover than others. For instance, manufacturing plants which combined teamwork and profit sharing lost 14% of their employees, compared with 11% for plants with no innovative work practices.

The study also found some evidence that, in the low-skilled service sector, workplaces that had teamwork and profit-sharing plans retained a greater proportion of their workforce than other establishments. These establishments included, among others, those operating in retail trade, wholesale trade and consumer services. In 1999, those that combined teamwork and profit sharing lost 13% of their workforce. On the other hand, those with no innovative work practices saw 19% of their workforce leave.

However, the gap between these two types of workplaces fell substantially after taking into account the fact that many establishments with teamwork and profit sharing also had a formal policy of sharing information with their employees, which is generally associated with lower turnover.

In the two other sectors, high-skilled services and manufacturing, the presence of information-sharing policies did not affect the relationship between innovative work practices and labour turnover as much.

Factors behind patterns unknown

The reasons for these different patterns across the three sectors are currently unknown. The fact that highly-skilled service industries pay relatively high wages must be ruled out, since the study took this factor into account.

One possible explanation is that innovative work practices might be more successful in reducing labour turnover in firms which employ a highly skilled workforce, have jobs requiring strong conceptual and analytical skills, and de-emphasize repetitive tasks.

In the highly skilled service industries, 31% of employees had a university degree, almost twice as many as the average of 16% for the private sector.

Formal policies of sharing information may reduce a worker’s uncertainty about a firm’s performance or future organizational changes and thus may also help employers retain workers. However, although the study found that workplaces using such policies had much lower labour turnover than others in low-skilled services, this pattern was less pronounced in high-skilled services and even weaker in manufacturing.

Practices rarely combined

Over the past decade, some observers have contended that using only one innovative work practice is not sufficient to reduce employee turnover. It has been generally argued that firms must combine several human resource practices to retain a greater proportion of their workforce.

For instance, it is often assumed that teamwork will induce greater effort among workers only if combined with pay schemes that reward high performance, such as productivity/quality gain sharing plans.

However, the Statistics Canada study shows that few establishments combine innovative work practices on a formal basis. While 25% of workplaces had some form of teamwork in 1999, about one-third had flexible job design. Slightly more than 20% had profit sharing plans for some of their non-managerial employees. However, only 6% combined these three practices.

This finding is important because it suggests that either a minority of businesses find it profitable to formally adopt combinations of these practices, or that several workplaces do so, but perhaps on an informal basis.

The complete research report, Alternative work practices and quit rates: Methodological issues and empirical evidence for Canada (11F0019MIE, No. 199), is available on Statistics Canada’s website at www.statcan.ca.