The Myth of the Disposable Worker
Some management gurus say high turnover is a good thing. Are they crazy?
By Jeffrey Pfeffer

(Business 2.0) – A couple of years ago, an associate dean at Stanford University's business school complained that I hadn't given enough low grades in a course I teach there called "The Paths to Power." When he asked why the grades in the class were, on average, higher than those awarded by my peers, I replied (only partly in jest), "Maybe I'm a better teacher."

That exchange comes to mind because recently I've been hearing a lot about the benefits of so-called forced ranking in the workplace. Pundits from Jack Welch (in his book Winning) to consultant Dick Grote (author of Forced Ranking) argue in favor of grading employees against one another and kicking out those near the bottom. In fact, as many as a third of Fortune 500 companies apply some version of the technique, according to a study by consultancy Novations Group. Firing is now a badge of honor: In the June issue of Work Force magazine, a VP in human resources at IndyMac, a California-based mortgage bank, argues for the benefits of turnover, which at his company is reportedly as high as 40 percent in areas such as sales and operations.

To my mind, that's ridiculous. Imagine a similar scenario in manufacturing. Say you're running a factory that produces lots of defective widgets and you announce, "I have created a high-performance manufacturing system by throwing imperfect items in the trash." People would think you were nuts. Likewise, unusually high turnover signals that management is unable to make the most of the people it hires.

And like error-prone assembly lines, high employee turnover is costly. First you have to give out severance pay, and then you have to find and hire replacements, invest in their training, and suffer shortfalls in customer service and productivity until the new people get up to speed. Since you are probably going back to the same labor pool to hire again, odds are you'll fire a lot of your replacements too. That's because relative turnover rates tend to stay constant--low-turnover organizations that know how to hire and develop talent keep doing so effectively, while high-turnover organizations continue to churn through bodies.

Surely, you must be thinking, some workers are better than others, and great companies ought to weed out underachievers. I agree with that: I'm not in favor of zero turnover. But how about, instead of focusing on getting rid of bad eggs, hiring better people in the first place? Or, heaven forbid, how about investing in poor performers to help them contribute?

Of course, hiring smarter is tough, but not impossible. Look at Billy Beane, general manager of Major League Baseball's Oakland Athletics, who has achieved consistent success by finding diamonds in the rough. Companies such as Kenexa, Taleo, and Unicru (disclosure: I sit on Unicru's board of directors) perform statistical analysis to identify interview questions that can predict retention, performance, and even employee theft. Southwest Airlines sometimes asks candidates to discuss hypothetical situations so it can spot behaviors that lead to success in its organization. At companies that hire hundreds or thousands of people every year, even small improvements in screening make a big difference. Still, every company hires duds. But unless you give people time and resources to develop, you might not recognize a star. NFL quarterbacks Steve Young, Kurt Warner, and Jake Delhomme all brought their teams to Super Bowls. Yet all three also began their careers sitting on the bench or playing in lesser leagues because professional scouts didn't think they were good enough.

My advice is to look at higher-than-average turnover for what it is: evidence of a problem in hiring, training, and developing talent. Instead of just cycling people through your company, do what world-class manufacturers do: Pick better raw materials and aim for fewer rejects. Universities shouldn't be proud of how many students they flunk, and companies shouldn't boast about how many employees they fire. As quality guru W. Edwards Deming taught us long ago, defects are always a sign of system failure.