Analysing Human Resource Performance: Productivity and Turnover
Analysing human resource (HR) performance means using quantitative measures to judge how effectively a workforce is being managed. Labour productivity measures output per employee over a period, calculated as total output divided by the number of employees, and shows how efficiently the workforce turns effort into output. Labour turnover measures the rate at which employees leave and are replaced, calculated as the number of staff leaving in a period divided by the average number of staff employed, multiplied by 100, and a high rate can signal poor morale, weak management or uncompetitive pay, as well as being expensive because of the cost of recruiting and training replacements. Labour retention, the opposite of turnover, and absenteeism, the proportion of working time lost to staff being away from work, are related measures used alongside these to build a fuller picture of workforce performance.
Before you start
Make sure you're comfortable with these topics first:
Method
- Learn the exact formulas: labour productivity = total output / number of employees; labour turnover (%) = (number of employees leaving in the period / average number of employees) x 100.
- Interpret a productivity figure by comparing it across time periods or against a competitor or industry benchmark stated in the case, since a single figure in isolation says little about whether performance is good or poor.
- Interpret a labour turnover figure the same way, using a stated industry benchmark where the case provides one, since what counts as 'high' turnover varies significantly between industries (e.g. hospitality typically has much higher turnover than, for example, teaching).
- Link a productivity or turnover result to a plausible underlying HR cause named in the case, e.g. new training raising productivity, or poor management/uncompetitive pay raising turnover, rather than stating the number without an explanation.
- Calculate the likely financial cost of high labour turnover where a case gives a cost-per-leaver figure (recruitment, induction, lost productivity while a replacement is trained), by multiplying it by the number of leavers.
- For an evaluate question, weigh the financial cost of poor HR performance (e.g. the cost of turnover, or lost output from low productivity) against the cost and time needed to fix the underlying cause (e.g. higher pay, better training, improved leadership), to reach a judgement on whether addressing it is worthwhile.
Worked example
A call centre employs an average of 200 staff and produced 480,000 handled calls last year. During the year, 60 employees left and were replaced. The company estimates each leaver costs 1,800 pounds in recruitment and training. Calculate labour productivity, labour turnover, and the total annual cost of labour turnover, then comment on the business's HR performance.
- Calculate labour productivity: total output / number of employees = 480,000 / 200 = 2,400 calls handled per employee per year.
- Calculate labour turnover: (employees leaving / average employees) x 100 = (60 / 200) x 100 = 30%.
- Calculate the total annual cost of turnover: number of leavers x cost per leaver = 60 x 1,800 = 108,000 pounds.
- Interpret the turnover figure: a 30% labour turnover rate is high by most industry benchmarks, meaning almost a third of the workforce had to be replaced within the year.
- Conclude: the 108,000-pound annual cost of replacing staff is a direct, avoidable expense that could instead fund improvements, such as better pay or working conditions, that might reduce turnover and its associated recruitment cost in future years.
Practice questions
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Q1State the formula for labour productivity.Show answer
Answer: Total output divided by the number of employees.
Q2State the formula for labour turnover.Show answer
Answer: (Number of employees leaving in the period / average number of employees employed) x 100.
Q3A factory produces 90,000 units a year with 60 employees. Calculate labour productivity.Show answer
Answer: 90,000 / 60 = 1,500 units per employee per year.
Q4A company has an average of 150 employees, and 24 left during the year. Calculate the labour turnover rate.Show answer
Answer: (24 / 150) x 100 = 16%.
Q5Explain one reason a business with high labour turnover might see falling labour productivity.Show answer
Answer: New starters typically need time to reach full competence, so a business constantly replacing experienced leavers with inexperienced new starters is likely to see average output per employee fall while those new employees are still training.
Q6State one cost, other than direct recruitment fees, that high labour turnover creates for a business.Show answer
Answer: The cost of training new starters, and the lost productivity while they are still learning the role (or accept: increased pressure and overtime on remaining staff).
Q7Give one HR policy a business could introduce to reduce labour turnover.Show answer
Answer: For example, raising pay to be more competitive with the local market, improving working conditions, or introducing clearer career progression.
Q8Define absenteeism.Show answer
Answer: The proportion of scheduled working time that is lost because employees are away from work, for example due to illness.
Exam-style questions
Written in the style of a A Level Business exam paper, with a full mark scheme.
A warehouse business's labour turnover has risen from 12% two years ago to 35% this year, over the same period that a rival warehouse opened nearby offering pay roughly 10% higher. Calculate the labour turnover rate for a warehouse this year with an average of 80 employees, if 28 employees left during the year, and analyse the likely cause of the change.
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Thornfield Logistics has 250 employees and produced 900,000 parcels last year, against 850,000 the year before with 240 employees. Labour turnover was 28% last year, against an industry average the company's HR director quotes as 16%. Each leaver is estimated to cost 2,200 pounds. The HR director proposes a 6% across-the-board pay rise, forecast to cut turnover to 18%, at an annual cost of 480,000 pounds. Evaluate whether Thornfield Logistics should introduce the proposed pay rise.
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