3.6.2 - Measuring human resource performance

Labour turnover

Labour turnover measures the proportion of employees leaving a business during a stated period.

Average workforce and leavers

A retailer begins the year with 90 employees, ends with 110 and records 18 departures. Use the mean of the opening and closing workforce.

1. Calculate the denominator:

1. Divide leavers by average workforce:

1. This is annual labour turnover, rather than a 20-person recruitment figure. If a more detailed average is supplied, use it instead of reconstructing endpoints.

Growing employment alongside turnover

A transport operator grows from 240 to 260 employees, with 35 leavers during the year.

1. Calculate average employment:

1. Calculate turnover:

1. Net growth of 20 employees does not replace the 35 departures in the numerator. Without other workforce changes, recruitment would be 55 to replace leavers and achieve that growth.

The numerator is people leaving, not people recruited or the net change in staff numbers. A growing business can recruit more than it loses and still have high labour turnover. Nor does “turnover” mean sales revenue here; the term has a different meaning in the employee-cost ratio.

High turnover can create recruitment, induction and training costs and reduce continuity for customers. It may reveal poor management, pay or working conditions. However, seasonal contracts, retirement or a planned restructuring can also produce departures. Some turnover brings new skills and may be useful when a business needs to change.

Compare the same period and workforce definition. Annual and monthly percentages are not automatically comparable, and a hospitality business with seasonal staff may have a different normal pattern from a specialist engineering firm. Investigate who leaves and why before choosing a remedy.

Labour productivity and labour cost per unit

Labour productivity compares output with labour input, while labour cost per unit compares employee cost with output.

Output per worker and labour cost per unit

A workshop makes 12,000 components monthly with 20 production employees and £36,000 labour cost.

1. Productivity:

1. Labour cost per component:

1. These denominators differ: output per worker measures productivity, while money per component measures labour cost.

Hours supplied and usable output

A laundry handles 4,800 items weekly using 8 employees, each working 30 hours. Weekly labour cost is £3,360.

1. Hours supplied:

1. Productivity per hour:

1. Labour cost per item:

Comparing productivity with another laundry requires comparable hours and item difficulty; output that needs washing again should not be mistaken for additional useful output.

If better training raises output to 15,000 with the same workforce and labour cost, productivity rises to 750 components per employee and labour cost falls to £2.40 per component. This illustrates how higher output per employee can reduce unit labour cost. It does not establish that total cost falls: the training itself or extra materials may add costs.

Higher measured productivity may reflect better equipment, easier products, longer hours or greater employee effort. It should not automatically be credited to motivation. Comparing output per employee between firms is misleading if working hours or product complexity differ.

Quality also matters. Producing more defective components may raise a crude output count while increasing waste and complaints. A meaningful measure should specify whether it counts all production or acceptable output and be interpreted alongside relevant quality information.