A contrarian view of employee turnover

Dr. McDonnell

By Peter J. McDonnell, MD

The importance of minimizing employee turnover is so ingrained these days as to be considered gospel in management circles. Googling the phrase “avoiding excessive employee turnover” reveals 1.76 million URLs, with titles like “How to Reduce Employee Turnover”(The Wall Street Journal Management Guide), “Preventing Employee Turnover” (Deloitte Consulting), and “The True Cost of Employee Turnover” (The Human Resources Social Network).

The hard and soft costs of employee turnover include covering a vacancy with temporary workers or overtime, advertising and recruitment costs, severance pay, training, lost expertise, missed deadlines and disruptions to workflow and decreased productivity or customer service.

Ophthalmologists who run their practices or oversee academic departments can certainly recognize these issues. Many in management assert that the costs of employee turnover are actually much higher than standard measures appreciate, and so it is almost universally accepted that minimizing such turnover is crucial to success.

Which is why the “high-performance culture” of one company, Netflix, is so interesting.

The best of the best

According to Chief Executive Officer (CEO) Reed Hastings, “We endeavor to have only outstanding employees. One outstanding employee gets more done and costs less than two adequate employees.”

To get outstanding employees, Netflix:

• Pays more than anyone else.

• Gives employees unlimited vacation time.

• Gives employees wide latitude in determining how best to meet their expectations for the performance.

• Let employees choose how they will take their compensation (cash, stock options, or a mixture of the two).

In return, the company is demanding when it comes to performance: “Only the highest-performing employees are retained. All others are let go so that their positions can be made available to more-effective replacements.”

Their CEO says, “At most companies, average performers get an average raise. At Netflix, they get a generous severance package.”

The result is that average annual total and involuntary turnover are high, the latter being nearly twice the industry average.

Apparently, most Netflix employees like this system, because annual voluntary turnover is typically lower at Netflix than among its peers. If stock price means anything, the increase over the past 5 years from about $29 to almost $400 per share suggests that the company is doing something right.

Is it practical?

In our medical practices, we have all seen technicians who can perform patient workups thoroughly and accurately in half the time as others. And we have all had employees who are able to accomplish twice as much work as their colleagues, or who consistently achieve much higher levels of patient satisfaction than others performing the same role, or who are so self-driven to do the right thing that they require much less direct supervision.

To me, this raises the question of whether many businesses have too little turnover.

Such a business would presumably be contented with employees who are average or close to average, and give pretty much every worker the same annual 2% wage increase (or whatever the company-wide level).

Is it practical for medical practices to retain only stellar employees and pay them well above other practices, while letting one-fourth to one-fifth of their workforce go every year, to be replaced by new workers who will hopefully prove to be stellar? Would it be consistent with the culture of medical practices to reproduce the Netflix system of “high performance”?

References

Netflix, “Reference guide on our freedom and responsibility culture”. http://www.slideshare.net/reed2001/culture-1798664

Larcker D, Tayan B. A real look at real world corporate governance. 2013. Pp. 135-138.

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