Employee Turnover

Employee Turnover (also known as 'employee churn') is the rate at which employees leave a company, voluntarily or involuntarily, over a specific period. Think of it as a “leakage” rate for a company's most valuable asset: its people. It's typically calculated as a percentage. For example, if a company with an average of 100 employees sees 15 of them leave in a year, its annual turnover rate is 15%. This metric is a powerful, yet often overlooked, indicator of a company's health, management quality, and underlying culture. While a certain level of turnover is natural and can even be healthy, a consistently high or suddenly spiking rate can be a serious red flag for investors, signaling deep-rooted problems that may not be immediately obvious on a balance sheet. For a value investor, understanding employee turnover is like having a stethoscope to listen to the heartbeat of a business.

At its core, value investing is about buying great companies at a fair price. A “great” company is more than just its financial statements; it’s a living, breathing organization. Employee turnover provides a crucial, non-financial glimpse into the quality of that organization.

High turnover is often a symptom of deeper issues. It can suggest:

• Poor leadership and ineffective management.
• A toxic or high-stress work environment.
• Uncompetitive compensation or lack of growth opportunities.
• Low employee morale and engagement.

Conversely, a company with consistently low turnover often boasts a strong, positive culture where employees feel valued, motivated, and loyal. This is the kind of durable competitive advantage that legendary investors like Warren Buffett seek—a business run by capable and trustworthy managers who have built an organization that people want to be a part of. A happy, stable workforce is a productive workforce, which translates directly to better business performance and long-term value creation.

High employee turnover isn't just a cultural problem; it's a financial drain that can quietly erode a company's profit margin. These costs are often “hidden” because they aren't listed as a single line item in a financial report, but they are very real. Consider the cascade of expenses:

• Recruitment Costs: Money spent on job ads, recruiters' fees, and the time managers spend interviewing candidates.
• Training Costs: The direct cost of onboarding and training a new employee to get them up to speed.
• Lost Productivity: It takes time for a new hire to reach the productivity level of an experienced employee. In the meantime, the team is running at less than full capacity.
• Loss of Knowledge: When a veteran employee walks out the door, they take valuable institutional knowledge with them—the kind of practical wisdom that isn't written down in any manual.
• Service Disruption: In customer-facing roles, high turnover can lead to inconsistent service and unhappy clients, potentially damaging the company's brand and revenue.

Looking at a turnover rate isn't a simple “high is bad, low is good” exercise. Context is everything.

Zero turnover is not the goal. Some level of churn is healthy. It allows a company to:

• Bring in Fresh Talent: New employees can introduce new ideas, skills, and perspectives.
• Remove Underperformers: Parting ways with employees who are not a good fit can improve overall team performance and morale.

The key is to distinguish between regrettable turnover (losing high-performing, valuable employees) and non-regrettable turnover (losing underperformers or those in easily replaced roles). Unfortunately, this level of detail is rarely available to outside investors.

Always analyze turnover within its proper context:

• Industry Benchmarks: A 20% turnover rate might be alarmingly high for a specialized engineering firm but perfectly normal, or even low, for a fast-food chain or retail business. Always compare a company's rate to its industry average.
• Historical Trends: Is the turnover rate stable, declining, or, most importantly, increasing? A sudden spike in turnover over the last year or two is a much more significant warning sign than a historically stable (even if high) rate.

Finding precise turnover data can be tricky, as most companies are not required to disclose it in their standard financial filings. However, you can still piece together a picture by being a bit of a detective:

• Sustainability or CSR Reports: Many companies, especially larger ones, publish annual Corporate Social Responsibility (CSR) reports. These often contain data on employee metrics, including turnover rates.
• Annual Reports: While the exact number may be absent, read the “Management's Discussion and Analysis” section of an annual report carefully. Management might comment on workforce stability, culture, or challenges related to retention.
• Investor Calls: Listen to the Q&A section of a company's quarterly investor call. Sometimes an analyst will ask about employee retention, and the management's response (or evasion) can be very telling.
• Third-Party Sources: Websites like Glassdoor or LinkedIn can provide anecdotal evidence about company culture and why people are leaving. While not a statistical measure, reading through employee reviews can reveal recurring themes and potential problems.