Efficiency As A Mediator in Turnover-Organizational Performance Relations

Human Relations
DOI: 10.1177/0018726707080078
Volume 60(6): 827–849
Copyright © 2007
The Tavistock Institute ®
SAGE Publications
Los Angeles, London,
New Delhi, Singapore
http://hum.sagepub.com
Efficiency as a mediator in
turnover–organizational performance
relations
Paula Morrow and James McElroy
A B S T R AC T This study adds to scientific understanding of how employee turnover

affects organizational performance in a multi-unit commercial bank
setting operating in the United States. Theoretically, expected relation-
ships among turnover, efficiency and performance are outlined.
Empirically, two indicators of organizational efficiency are examined
and one, cost-per-loan efficiency, is found to fully mediate relations
between voluntary employee turnover and two organizational
performance outcomes, profitability and customer satisfaction, in both
synchronous and longitudinal analyses These results replicate recent
findings in disparate industries, suggesting that efficiency may explain
why higher levels of turnover are typically associated with lower levels
of organizational performance. The need to distinguish among
conceptualizations of efficiency is discussed, along with the need to
consider temporal effects associated with turnover and efficiency.
K E Y WO R D S banking industry efficiency organizational performance
turnover
Employee turnover is one of the most frequently studied phenomena among

organizational scholars because of its practical importance to employees and
employers alike. Scholars have categorized forms of turnover (Abelson,
1987; Cotton & Tuttle, 1986), its antecedents (Griffeth et al., 2000; Steel &
Ovalle, 1984), and have tracked the myriad of costs associated with turnover
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828 Human Relations 60(6)
(Sagie et al., 2002). However, far less attention has been spent on the conse-
quences of turnover on organizational performance, at the organizational or
subunit level. One reason is the lack of a theoretical explanation of how and
why turnover might affect organizational functioning. Drawing upon recent
empirical findings, and both cross-sectional and longitudinal data reported
herein, we attempt to explicate relations between turnover and organ-
izational performance using an efficiency hypothesis that suggests efficiency
as a mediator between voluntary turnover and organizational performance.
Specifically, we test the assertion that when organizations experience
turnover, internal operations become less efficient and more costly, resulting
in a lower level of organizational performance as reflected in profitability and
customer satisfaction.
The impetus for this study is Kacmar et al.’s (2006) finding that
measures of efficiency mediated the relationship between voluntary employee
turnover and organizational performance in the fast food industry. Our study
extends their work in several ways. First, we examine the mediating effects
of efficiency in a context other than the fast food industry. This involves a
different type of employee skill set and different operationalizations of
efficiency. Second, we employ broader measures of organizational perform-
ance that move beyond financial performance. These two extensions test
the generalizability of Kacmar et al.’s findings. In addition, we broaden
their findings by examining both the synchronous and lagged effects of
efficiency on the relationship between voluntary turnover and organizational
performance.
Turnover and organizational performance
Competitive advantage through people has been a recent theme in both

academic and practitioner literatures (O’Reilly & Pfeffer, 2000; Pfeffer &
Veiga, 1998). Recognition of this has given rise to calls for ‘theoretical elab-
oration of the black box area that lies between organizational practices,
strategy implementation, and workforce characteristics on the one hand and
the ultimate financial performance of organizations on the other’ (Shaw et
al., 2005: 53). Efforts are now underway to identify how and why specific
organizational human resource factors affect particular business outcomes.
There is also growing evidence that employee attitudes and behaviors such
as turnover influence business outcomes more than the reverse (e.g. Koys,
2001), although the need for more longitudinal investigation is clearly
expressed (Harter et al., 2002; Schneider et al., 2003). Unfortunately, the
mechanisms by which turnover levels affect organizational productivity and
profitability are not well understood.

Morrow & McElroy Turnover, efficiency and organizational performance 829
Relatively few studies have examined how employee turnover functions

as an independent variable and in particular, its effects on organizational
performance (e.g. Glebbeek & Bax, 2004). Recognizing that individual firms
may have an optimal rate of turnover (Abelson & Baysinger, 1984), there are
a substantial number of studies reporting lower turnover being associated
with desirable financial organizational outcomes (Baron et al., 2001;
Baysinger & Mobley, 1983; Glebbeek & Bax, 2004; Huselid, 1995;
Osterman, 1987).
In addition to financial indicators of organizational functioning, there
is growing recognition in the effectiveness literature that organizations have
multiple stakeholders who may value other measures of organizational
performance (Hall & Tolbert, 2005). These stakeholders can include
employees, customers, clients, other organizations such as suppliers, and
even the public at large (Marcus & Goodman, 1991; Tsui, 1990). Kochan
and Rubenstein (2000) used stakeholder theory to suggest that firms will only
be sustainable to the extent that their leaders encourage responsiveness to
stakeholders. Stakeholder theory has also been contrasted with alternate
perspectives such as management’s fiduciary responsibility to protect the
interests of shareholders (Freeman, 2005; Marens & Wicks, 1999). As a final
example, research has investigated the relationship between stakeholder
management and the financial and social performance of firms (Berman et
al., 1999; Clarkson, 1995). Moreover, the importance of stakeholder in-
terests, such as customer satisfaction, and financial performance has been
asserted by organizational researchers and chief executives alike (Heskett et
al., 1997; Koys, 2001; Peters & Waterman, 1982; Watson, 1963). Accord-
ingly, we include customer satisfaction as a non-financial indicator of
organizational performance. Organizational performance, then, as measured
by financial and customer satisfaction indicators is predicted to be subject to
turnover effects:
Hypothesis 1. Voluntary turnover is negatively related to organ-

izational performance.
Efficiency and turnover–performance relations
While evidence above suggests that turnover is linked to organizational

performance, there is little discussion of how and why this occurs. One recent
explanation is based on an efficiency hypothesis. Dalton and Tudor (1979)
were among the first to recognize that turnover results in disruptions in the
normal operations of an organization. Others have noted the disruptive
effects of turnover, even among lower level employees, on organizational

social and communication structures as well as employee productivity

(Mobley, 1982; Staw, 1980). For example, turnover among experienced
workers has been shown to disrupt the transmission of service values and
norms to new employees, essential for continuity in providing high quality
service (Schlesinger & Heskett, 1991). Phillips (1990), in analyzing the costs
associated with turnover, suggested that five of the nine identified costs to
the organization were related to inefficiencies, while the remaining four were
various processing costs associated with replacing the departing employee.
Finally, Huselid (1995) found a negative relationship between turnover and
worker productivity, due in part to the inefficient nature of replacements.
Cascio (1995) goes as far as to suggest that reduced worker productivity
during the learning period is the highest individual cost of turnover.
This literature suggests that as turnover becomes more prevalent in an
organization, organizational operations and worker productivity become less
efficient. Organizational performance, therefore, is not only adversely affected
by the direct replacement costs associated with turnover, but also through
turnover’s negative effect on organizational processes. This leads us to predict:
Hypothesis 2. Voluntary turnover will be negatively related to organ-

izational efficiency.
While we have provided a rationale for linking organizational turnover and

organizational efficiency, there is still the question of whether efficiency
mediates the relationship between organizational turnover and performance.
Shaw et al. (2005) shed some light on how turnover affects organizational
level outcomes by examining the role of workforce performance. Workforce
performance included out-of-service violations, revenue per employee and
accident rate, all of which could be viewed as measures of workforce
efficiency. Using trucking organizations, they found one measure of work-
force performance, out-of-service violations (i.e. when trucks and their
drivers are rendered ineligible to continue operation because of driver
mistakes as opposed to mechanical problems), mediated the relationship
between voluntary turnover and firm financial performance, operationalized
as financial operating ratio (but not return on equity). However, workforce
performance as measured by revenue per employee and accident rate did not
demonstrate mediating effects.
More recently, Kacmar et al. (2006) advanced an efficiency hypothesis
by arguing that efficiency serves as a mediator in the relationship between
voluntary employee turnover and organizational performance. They assert
that it is knowledge transfer among employees that is at the heart of the
relationship between turnover and performance. Based on Grant’s (1996)

knowledge-based theory of organizations, they propose that turnover

stimulates a need for knowledge transfer, either of an explicit or tacit nature,
while vacancies persist and as new employees are integrated into the organ-
ization. Thus, the need for knowledge transfer caused by turnover creates
inefficiencies as existing employees temporarily assume job duties of departed
employees, train replacements, and as new employees learn the system. It is
these inefficiencies that affect the organization’s ability to meet customer
needs and affect perceptions of service quality and ultimately sales and profit-
ability. Using a sample of fast food restaurants, they found that efficiency
(operationalized as customer wait time), mediated the relationships between
turnover (at employee and management levels) and both sales and profit-
ability. Their findings suggest that the assumed-but-undemonstrated link
between lower turnover and heightened organizational performance is a by-
product of improved efficiency associated with employee stability.
In addition to the inefficiencies created by employee instability and
subsequent knowledge transfer, we also assert that inefficiency may emanate
from employee instability and ‘opportunities lost’. Nearly all voluntary
turnover entails some vacancy period and subsequent staff shortages may
cause organizations to turn away business (e.g. customers), and thereby
decrease revenues (Griffeth & Hom, 2001). Based on prior research and this
assertion, we hypothesize:
Hypothesis 3. Organizational efficiency will mediate the relationship

between organizational turnover and performance.
A final issue addressed by this study is the effect that time has on this
mediating relationship. Time becomes a relevant consideration in terms of
the duration of effects associated with changes in turnover and efficiency.
Moreover, organizations may act in ways to moderate these connections. The
learning curve literature provides some useful insight on temporal consider-
ations. Cascio (1995) notes, for example, that most of the productivity inef-
ficiencies associated with replacement workers occurs during the first third
of the learning cycle. This suggests that organizations may regain their oper-
ational efficiency fairly quickly, although the learning time varies by job type
(Cascio, 1995). In general, we are suggesting that the passage of time allows
for inefficiencies to be detected and for organizations to engage in corrective
action. This leads us to hypothesize that the more time that passes from the
measurement of turnover, the less the mediating role of turnover on organiz-
ational performance.
Hypothesis 4. The mediating role of efficiency will dissipate over time.

To summarize, the purpose of this study is to test the generalizability of

this efficiency explanation by examining the role of efficiency in mediating the
relationship between voluntary turnover and organizational performance in
the banking industry. We are suggesting that when voluntary turnover occurs,
which is typically unanticipated, internal activities suffer. Staffing shortages
and reliance on inexperienced and/or temporary personnel can be expected to
slow down loan processing activities and, consequently, adversely affect
organizational performance. Specifically, we examine whether efficiency, as
measured by cost per loan efficiency and by loan generation efficiency,
mediates relations between voluntary turnover and profitability and between
voluntary turnover and customer satisfaction in a multi-unit commercial bank
setting. This research looks solely at the relationship between voluntary
turnover and organizational performance and not the effects of involuntary
and reduction-in-force turnover on organizational performance issues. In-
voluntary and reduction-in-force turnover are more anticipatory in nature,
allowing organizations to plan for replacements and/or redistribution of
employee activities. Consequently, there are far fewer inefficiencies associated
with these forms of turnover.
Methods
Sample and data collection

Data were collected from 31 of 35 regional subunits (i.e. mortgage banks)
of a national financial services company operating in the United States. Four
of the company’s subunits were omitted because they were not totally inde-
pendent subunits, as they were part of a joint venture with another company.
Each subunit sold home mortgages in a traditional one-on-one sales setting.
Approximately half of the personnel in each subunit consisted of
commissioned sales representatives, while the remainder was mortgage
processors and administrative staff. All measures used in the study were regu-
larly collected by the subunits as part of the parent company’s on-going
monitoring processes. We were granted access to these data through
company records.
Measures
Control variables
Bank performance often reflects local economic conditions and the level
of competition for banking services, which differ dramatically across

geographic regions (Koch & MacDonald, 2003). In an attempt to prevent

any subunit outliers from unduly influencing results, several variables were
used as control variables. First, while the mortgage company used in this
study operates in all 50 states, it provides banking services in only seven of
the 31 subunits included in this study. Consequently, the presence (coded
as 1) or absence of banking services (coded as 0) was used as a control
variable given that banking services will increase name recognition, referral
business and some economies of scale. Second, given research showing a
relationship between organizational size and turnover (Anderson & Meyer,
1993) and the fact that larger bank units offer greater potential for econ-
omies of scale, bank unit size also served as a control variable. Size was
measured by the number of employees as of January of the year in question,
with bank units ranging from 34 to 315 employees and an average size of
165.06. Finally, an effort was made to control for economic opportunities
by including a series of dummy variables corresponding to geographical
regions used by the bank to adjust for locational differences. Given the
connection between unemployment rate and voluntary turnover (Carsten &
Spector, 1987), seven geographic regions established by the company were
used to adjust for general economic conditions in the geographic regions in
which the subunits operated, for example, between southern California and
New England states.
Voluntary turnover
Each subunit maintained careful turnover records and departures were

categorized as involuntary (those dismissed for failing to meet company
standards), reduction-in-force (those dismissed for economic or redundancy
reasons), and voluntary (those who left the company on their own volition).
Voluntary turnover was selected for examination as it was the most common
form of turnover, is less anticipated and therefore not under organizational
control, and was regarded as the most dysfunctional form of turnover from
the organization’s perspective. Specifically, voluntary turnover was calculated
using the bank’s approach of taking the number of employees in each subunit
that left their bank on their own initiative and dividing that number by the
average number of employees within each subunit over the year (i.e. the
subunit’s turnover rate). Two years of voluntary turnover were collected. In
the study year, annual turnover rates ranged from 13 to 66 percent across
the subunits, with an average voluntary turnover rate for the company as a
whole of 33.77 percent. Turnover for the company as a whole in the prior
year was similar at 34.40 percent but with subunit turnover rates ranging
from 10 to 61 percent.

Efficiency measures
Banking research typically regards efficiency as some level of output

produced by a given set of inputs but also acknowledges there is little con-
sensus regarding the best measures of institutional efficiency (Berger &
Humphrey, 1997; Fernandez et al., 2005). In recent years the banking
industry has sought to develop indicators of their ability to be more efficient
through their management of non-interest expense such as overhead
expenses and personnel costs (Koch & MacDonald, 2003). The choice of
what efficiency measure to use is typically based on ease of use and the
reasonableness of the assumptions underlying the measure (Berger &
Humphrey, 1997). Two such measures of bank unit efficiency representative
of this trend, collected by the parent company, were used in this study.
One efficiency measure used by the bank was cost per loan, calculated
as the total expenses per subunit minus commission and bonuses (i.e. input),
divided by the number of loans per month (i.e. output). These data were
annualized over the course of the year, yielding an average cost per loan for
the company as a whole of US$1384, with a range across the subunits of
US$802 to US$2338. A second measure of efficiency was loan generation.
Loan generation efficiency is measured by the ratio of the total amount of
loans funded per subunit per month (i.e. output) divided by the number of
sales employees (i.e. input). Thus loan generation efficiency measures the
sales volume generated in each subunit per month by the average sales person
and ranged from US$414,160 to US$978,930, with a mean of US$628,410.
This measure reflects potential inefficiency attributable to lost opportunity
costs.
Organizational subunit performance
Banking experts clearly distinguish between efficiency metrics and perform-

ance outcomes (e.g. Holliday, 2000). Organizational subunit performance
was measured using both internal and external indicators, profitability and
customer satisfaction, respectively. Subunit profitability was defined in terms
of basis points, a commonly used performance measure within the mortgage
industry. A basis point is defined as 0.01 percent of the loan amount. To
calculate basis points, each subunit records the total revenue accrued less all
expenses incurred and divides it by the amount of loans funded by a given
subunit. For the year in question, all but two subunits reported positive
profitability figures. The basis point range for the subunits ranged from –57
to 92, with an average of 48.16.
Company records also contained an external measure of organizational
subunit performance, customer satisfaction. The company routinely surveys

all customers who obtain a loan from the company using a single-item
measure. Customers rate the company’s overall loan processing performance
on a 1–5 scale (1 = poor, 5 = outstanding) and their responses are tabulated
by subunit. The company considers all scores of ‘4’ or ‘5’ to represent satis-
fied customers and the number of satisfied customers is then divided by the
number of returned surveys to generate an index of customer satisfaction per
subunit. The response rate of returned questionnaires was 38 percent,
somewhat low but not atypical (McKie, 1992; Uller, 1989). The customer
satisfaction index across the subunits ranged from 84.58 to 94.85, with a
mean of 91.81, indicating a fairly high level of satisfaction given a maximum
score of 100. While such a measure does create a restriction in range for
research purposes, the company used this information as a practical means
of comparing one subunit to another.
Analysis
The procedures recommended by Baron and Kenny (1986) were used to test
the mediating effect of efficiency on the relationship between voluntary
turnover and organizational performance. These procedures involve a three-
step process. First, the mediator (efficiency) is regressed on the independent
variable (voluntary turnover), as spelled out in Hypothesis 2. Second, the
dependent variable (organizational performance) is regressed on the inde-
pendent variable (voluntary turnover) as posited in Hypothesis 1. Third,
the dependent variable (organizational performance) is regressed simul-
taneously on the independent (voluntary turnover) and mediator (efficiency)
variables. Mediation, Hypothesis 3, is present if the following conditions
hold true: the independent variable affects the mediator in the first equation;
the independent variable affects the dependent variable in the second
equation and the mediator affects the dependent variable in the third
equation. The effect of the independent variable on the dependent variable
must be less in the third equation than in the second. Full mediation occurs
if the independent variable has no significant effect when the mediator is in
the equation and partial mediation occurs if the effect of the independent
variable is smaller but significant when the mediator is in the equation. This
mediating analysis is conducted using both cross-sectional and longitudinal
data to test Hypothesis 4.
Results
Descriptive statistics for the variables used in the study are reported in
Table 1. While the standard deviations in some variables such as size and the

836
Table 1 Descriptive statistics and correlationsc

Human Relations 60(6)
Mean SD 1 2 3 4 5 6 7
1. Bank statusa .23 .43

2. Sizeb 165.06 65.02 .33
3. Voluntary turnover 33.77 12.84 –.13 –.39
4. Cost per loan eff. 1383.77 382.68 –.28 –.48 .50
5. Loan generation eff. 628.41 155.20 .33 .44 –.53 –.60
6. Profitability 48.16 28.60 .18 .41 –.61 –.57 .65
7. Loan customer satisfaction 91.81 2.48 .07 .55 –.64 –.72 .52 .59
8. Prior year vol. turnover 34.40 13.80 –.15 –.41 .61 .58 –.49 –.56 –.46
a No bank state = 0, bank state = 1.

b Number of employees.
c Correlations > ± .36 are statistically significant at p ≤ .05 (two-tailed). Correlations > ± .45 are statistically significant at p ≤ .01 (two-tailed).

efficiency measures were large, these ranges were not unexpected. As already
indicated, bank performance varies considerably depending on local
economic conditions and geographic regions. The two measures of organ-
izational performance, profitability and loan customer satisfaction demon-
strated a correlation of .59, suggesting that each measure reflects a unique
but non-redundant aspect of organizational performance. Similarly, the two
measures of voluntary turnover for each year were positively related (r = .61),
providing some evidence of convergence for the measures of turnover.
Table 2 shows the results of a cross-sectional analysis using cost per
loan as a measure of efficiency. That is, the measure of voluntary turnover
used in this analysis occurred in the same year as the mediating and de-
pendent variables. As shown in the table, Hypothesis 1 was supported in
that voluntary turnover was negatively related to bank unit profitability
(β = –.62, p <. 01) and to customer satisfaction (β = –.61, p <. 01). Similarly,
Hypothesis 2 was supported with voluntary turnover (β = .57, p <. 01) being
positively related to cost per loan.
In the third and final step in testing for mediation, cost per loan was
negatively related to bank unit profitability (β = –.49, p <. 01) and lessened
the effects of voluntary turnover when entered into the equation simul-
taneously. This finding supports Hypothesis 3. Specifically, Table 2 shows
that in the case of profitability, the addition of cost per loan efficiency in the
model reduces the effect of turnover from a statistically significant one
(β = –.62, p <. 01) to a statistically insignificant relationship (β = –.34, NS).
Identical results were found using customer satisfaction. That is, cost per
loan efficiency also demonstrated a negative relationship to customer satis-
faction (β = –.58, p <. 01). When cost per loan is added to the model, the
relationship between turnover and customer satisfaction is reduced (from
β = –.61 to β = –.28, NS). These results demonstrate that efficiency as
measured by cost per loan fully mediates the relationship between voluntary
turnover and both subunit profitability and customer satisfaction.
Table 3 repeats the cross-sectional analyses using loan generation as a
measure of efficiency. Voluntary turnover was again negatively related to
bank unit profitability (β = –.58, p <. 01) and to customer satisfaction (β =
–.71, p <. 01), supporting Hypothesis 1 and was negatively related to loan
generation efficiency (β = –.61, p <. 01), supporting Hypothesis 2.
Hypothesis 3, which asserted a mediating effect for loan generation
efficiency on the relationship between voluntary turnover and organizational
performance was not supported for either measure of performance. This was
due to the fact that loan generation efficiency failed to meet a third condition
for testing mediation; that of demonstrating a significant relationship to
either subunit profitability β = .29, NS) or customer satisfaction (β = .16, NS).

838
Table 2 Results of hierarchical regression analyses testing mediation effects of cost-per-loan efficiency on the linkage between voluntary
turnover and organizational performance
Predictor Cost per loan efficiency (a) Profitability (b) Customer satisfaction
Step 1: Controls Step 1 Step 2 Step 1 Step 2 Step 3 Step 1 Step 2 Step 3
Bank statusa .07 .10 .02 –.02 .03 –.53 –.57 –.51
Subunit sizeb –.37 –.19 .51* .31 .22 .59** .40* .29*
Region 1 .06 .10 –.35 –.39* –.35* .01 –.03 .03

Region 2 –.15 –.35 –.16 .07 –.11 .24 .46 .26
Region 3 .31 .26 –.14 –.09 .04 –.03 .03 .18
Region 4 –.16 –.13 –.28 –.31 –.38 .40 .36 .29
Region 5 –.11 –.25 –.54* –.39* –.51** –.21 –.06 –.20
Region 6 –.11 –.23 –.19 –.06 –.17 .19 .32 .19
Step 2:
Voluntary turnover .57** – –.62** –.34 – –.61** –.28
Step 3:
Cost per loan eff. –.49* –.58**
Change in F 1.78 11.62** 1.74 14.94** 7.21* 2.12 16.11** 13.91**
Change in R2 .39 .24 .39 .26 .10 .44 .25 .13
F 1.78 3.63** 1.74 4.18** 5.59** 2.12 4.98** 8.63**
Adjusted R2 .17 .44 .16 .49 .61 .23 .54 .72

aNo bank state = 0, bank state = 1.
bNumber of employees.
* p ≤ .05.
** p ≤ .01.
Table 3 Results of hierarchical regression analyses testing mediation effects of loan generation efficiency on the linkage between voluntary
turnover and organizational performance
Predictor Loan generation efficiency (a) Profitability (b) Customer satisfaction
Bank statusa .40 .37 .01 –.02 –.13 –.55 –.58 –.64
Subunit sizeb .31 .11 .53* .34* .31 .59** .36* .34*
Region 1 –.03 –.07 –.37 –.40* –.38* .02 –.03 –.01
Region 2 .02 .24 –.16 .05 –.02 .25 .50* .47
Region 3 –.33 –.23 –.26 –.17 –.10 .05 .15 .19
Region 4 –.48 –.51 –.28 –.32 –.17 .41 .37 .46
Region 5 –.26 –.10 –.57* –.41* –.38* –.22 –.04 –.02
Region 6 –.14 –.02 –.19 –.07 –.07 .20 .35* .35*
Step 2:
Voluntary turnover –.61** – –.58** –.41 – –.71** –.61**
Step 3:
Loan generation eff. .29 .16
Change in F 2.27 15.50** 2.15 12.86** 1.52 1.91 24.62** .60
Change in R2 .46 .23** .45 .22 .03 .42 .32 .01
F 2.27 5.13** 2.15 4.41** 4.23** 1.91 6.34** 5.65**
Adjusted R2 .26 .56 .24 .51 .53 .20 .62 .62

* p ≤ .05.
** p ≤ .01.
Morrow & McElroy Turnover, efficiency and organizational performance
839
Taken in total, these findings provide strong support for efficiency as

a mediator of the relationship between voluntary turnover and organiz-
ational performance when cost per loan is used as the measure of efficiency
but not when loan generation efficiency is used. But, the question remains as
to the temporal nature of these effects (i.e. Hypothesis 4). To test this, we
repeated the above analyses using voluntary turnover data from the previous
year. This allowed us to examine whether efficiency mediates the relation-
ship between voluntary turnover and company performance over time.
These results are shown in Tables 4 and 5. Replicating the above
analyses using the previous year voluntary turnover rates showed that
efficiency, as measured by cost per loan, persisted in exhibiting mediating
effects even when turnover is measured one year prior to performance. Stated
differently, as reported in Table 4, cost per loan continued to mediate the
relationship between voluntary turnover and each measure of performance
(profitability and customer satisfaction). Table 5 reports the mediating
analysis of efficiency when efficiency is operationalized in terms of loan gener-
ation. In this case, efficiency fully mediated the relationship between prior year
turnover and organizational performance when performance was measured
financially, but it had no mediating effect on customer satisfaction. These
results provide no support for Hypothesis 4; rather, these results support a
longitudinal mediating effect for efficiency on the turnover–performance
relationship in three of the four tests.
Discussion
In this study, efficiency, when measured in terms of cost per loan, fully
mediated the relationship between voluntary turnover and organizational
performance. This was true regardless of whether organizational perform-
ance was measured in financial (profitability) or reputational terms (customer
satisfaction). The mediating effects of efficiency were felt both immediately
(as shown in the cross-sectional analysis) and longitudinally. However, when
efficiency was measured using loan generation efficiency, efficiency showed
no immediate mediating effects, but did mediate the relationship between
voluntary turnover and organizational financial performance longitudinally.
The results of this study support Kacmar et al.’s (2006) thesis that
turnover creates inefficiencies that, in turn, affect organizational perform-
ance. We replicate and extend their research in three ways. First, Kacmar
et al. used fast food restaurants as their sample; organizations plagued by
very high levels of turnover. Comparatively speaking, the bank subunits used
in this study would be considered low turnover organizations. Second,

Table 4 Results of hierarchical regression analyses testing mediation effects of cost-per-loan efficiency on the linkage between prior year
voluntary turnover and organizational performance
Predictor Cost per loan efficiency (a) Profitability (b) Customer satisfaction
Bank statusa .07 .09 .01 –.01 .05 –.55 –.56 –.49
Subunit sizeb –.37 –.17 .53** .39 .27 .59** .42* .29
Region 1 .06 –.08 –.37 –.27 –.32 .02 .14 .08
Region 2 –.15 –.34 –.16 –.03 –.26 .25 .41 .16
Region 3 .30 .12 –.26 –.13 –.05 –.05 .20 .29*
Region 4 –.17 –.24 –.28 –.23 –.40 .41 .47 .30
Region 5 –.11 –.18 –.56* –.51* –.63*** –.22 –.16 –.29*
Region 6 –.11 –.31 –.19 –.05 –.26 .20 .37 .14
Step 2:
Prior year voluntary turnover .53** – –.38* –.02 – –.45* –.06
Step 3:
Cost per loan eff. –.68*** –.74***
Change in F 1.52 8.63** 2.15 4.34* 16.08*** 1.91 6.22* 23.42***
Change in R2 .37 .19 .45 .10 .21 .42 .14 .24
F 1.52 2.80* 2.15 2.69* 5.86*** 1.91 2.81* 7.71***
Adjusted R2 .13 .36 .24 .35 .63 .20 .36 .70


* p ≤ .05.
** p ≤ .01.
*** p ≤ .001.
Morrow & McElroy Turnover, efficiency and organizational performance
841
842
Table 5 Results of hierarchical regression analyses testing mediation effects of loan generation efficiency on the linkage between prior year
voluntary turnover and organizational performance
Predictor Loan generation efficiency (a) Profitability (b) Customer satisfaction
Bank statusa .40 .37 .01 –.01 –.20 –.55 –.56 –.74
Subunit sizeb .31 .09 .53** .39 .34 .59** .42* .37*
Region 1 –.03 .12 –.37 –.27 –.33 .02 .14 .08

Region 2 .02 .22 –.16 –.03 –.14 .25 .41 .31
Region 3 –.33 –.14 –.26 –.13 –.06 .05 .20 .26
Region 4 –.48 –.40 –.28 –.23 –.03 .41 .47 .66
Region 5 –.26 –.18 –.57* –.51* –.42* –.22 –.16 –.07
Region 6 –.14 .07 –.19 –.05 –.09 .20 .37 .34
Step 2:
Prior year voluntary turnover –.56** – –.38* –.09 – –.45* –.19
Step 3:
Loan generation eff. .52* .47
Change in F 2.27 13.17** 2.15 4.34* 4.45* 1.91 6.22* 3.63

Change in R2 .46 .21** .45 .10* .09* .42 .14* .07
F 2.27 4.56** 2.15 2.69* 3.29* 1.91 2.81** 3.22*
Adjusted R2 .26 .53 .24 .35 .44 .20 .36 .43

* p ≤ .05.
** p ≤ .01.
Kacmar et al.’s study was longitudinal in nature, while ours was both cross-
sectional and longitudinal. Their study looked at the effects of turnover in
the first half of the year on performance for the following year. Our data
look at the relationships between total year’s turnover and performance
within the same year and between the prior year’s turnover and performance.
Thus, our results add to their findings by showing that the efficiency hypoth-
esis has both immediate effects and is generalizable across industries and job
types. Third, the efficiency measures in the two studies differed materially.
Specifically, while our findings support Kacmar et al.’s efficiency hypothesis
and generalize their results to the banking industry, our results also indicate
that the role of efficiency depends on how one operationalizes it.
In our study we used cost per loan and loan generation as measures of
efficiency. Cost per loan proved to be a very strong, immediate, and enduring
efficiency measure in terms of its mediating effects on the turnover – perform-
ance relationship. Loan generation demonstrated no immediate mediating
effects but did mediate the turnover – performance relationship over time,
but only in terms of financial profitability. Kacmar et al. (2006) used two
measures of efficiency in their study: customer wait time and food waste.
Wait time proved to be a viable measure of efficiency in moderating relations
between both managerial and crew turnover and performance while food
waste did not. Shaw et al. (2005) examined three measures of efficiency with
only driver out-of-service violations providing support for efficiency as a
mediator.
One explanation for the different effects that these diverse measures
of efficiency had on the turnover – organizational performance relationship
in these studies is that some measures of efficiency are better than others in
mediating the relationship between turnover and performance. In looking
at the limited research in this area, the more fruitful measures of efficiency
appear to be those that involve minimization of costs and/or human process-
ing errors. For example, wait time is a measure of how quickly an order is
processed (Kacmar et al., 2006), driver out-of-service violations (Shaw
et al., 2005) is a measure of driver mistakes that cause a vehicle to be side-
lined, and cost per loan (our study) is a measure of how cheaply loans are
processed. When conceptualized and measured in this manner, the efficiency
argument has merit. However, when one conceptualizes efficiency by using
measures that are more associated with product demand such as food waste
(Kacmar et al., 2006), forces outside of the organization such as accident
rates (Shaw et al., 2005), or the more ephemeral ‘opportunities lost’ concept
such as revenue per employee (Shaw et al., 2005) and loan generation
(our study), the efficiency hypothesis fails to garner much support. An
alternative explanation for the discrepancy in our findings (but not those of

Kacmar et al. and Shaw et al.) is that the loan generation measure of
efficiency is mis-specified. While the bank uses it as a measure of efficiency,
that is, loans generated by the average salesperson in each subunit, it may
actually be closer to a measure of productivity. In light of these explanations,
this line of research points to the need to be more precise in how one captures
organizational efficiencies.
Future research could test these contentions by directly comparing the
mediating effects of these various conceptualizations/measures of efficiency
(e.g. cost/process versus demand/environment measures). The measures
which received support seem to reflect narrow, technical conceptualizations
of efficiency by focusing on traditional conversions of inputs to outputs. The
role of turnover may be more apparent when the breadth of the efficiency
construct is narrower. The second set of measures, those that are more
demand-based or tied to environmental factors, might more aptly be termed
indicators of ‘undeveloped efficiency’. Their operationalization is broader in
conceptual scope, and likely to be affected by more antecedents and take
longer to manifest. For example, food waste is more probable when compet-
ing restaurants offer discounts, accidents are more common in more densely
populated regions, and loan generation may be affected by interest rates.
In addition, future studies should carefully consider the role of organiz-
ational characteristics in assessing how efficiency may mediate turnover–
organizational performance relations. These characteristics may also shed
light on the temporal effects associated with turnover, efficiency and perform-
ance. For example, how do certain organizational characteristics (e.g. size,
formalization, adaptiveness) work to correct or exacerbate the role of
efficiency in this relationship? Firms that are highly formalized rely on
explicit knowledge transfer (i.e. things are written down) while firms that are
low in formalization rely more on tacit knowledge transfer. One would
expect then that the effects of voluntary turnover on highly formalized
organizations may be less enduring than those on less formalized organiz-
ations in that tacit knowledge takes longer to assimilate. Moreover, the
nature of work between organizations should be considered. Clearly, it takes
longer to become proficient in the mortgage business than to master fast food
preparation. Consequently, one could expect the nature of work to affect the
temporal effects of inefficiencies caused by turnover.
The results of this study must be viewed in light of its limitations.
Organizational level research is difficult and often results in relatively small
sample sizes, as was the case in this study. Moreover, the small sample size
precluded the use of the Sobel test for determining whether a significant
reduction has occurred in the independent variable when the mediator is in
the equation and thus whether statistically significant mediation had

occurred (Kenny, 2006; Preacher & Leonardelli, 2005). A higher response

rate to the customer satisfaction survey would also have been desirable.
Second, it was unfortunate that we did not have enough data to dupli-
cate the entire analysis performed in this study on data from a year earlier
in order to replicate the cross-sectional effects found in this study. Similarly,
it would be interesting to know whether efficiency mediated the voluntary
turnover–organization performance relationship in the Kacmar et al. (2006)
study in a cross-sectional manner as occurred in our study. This is particu-
larly true of their food waste measure of efficiency. While wait time proved
to mediate the relationship between both crew and managerial voluntary
turnover and performance, food waste as a measure of efficiency did not. It
would be interesting to know if there would have been a mediating effect for
food waste on crew turnover had all variables been measured cross-
sectionally, as turnover might affect a crew’s ability to prepare food properly
in the short term but not over time. Moreover, it would have been interest-
ing had we had the data to longitudinally test the link between efficiency and
organizational performance. That is, while we were able to examine the
mediating effect for efficiency over time, due to a lag between the turnover
experienced subsequent efficiency problems, we were unable to test the
mediating effect for efficiency over time using the lag between experienced
efficiency and its effects on performance. Consequently, we know that
voluntary turnover causes efficiencies which affect performance and the
efficiencies caused are somewhat enduring. But, we were not able to test
whether these subunits were able to overcome these inefficiencies such that
over time the relationship between the inefficiencies and organizational
performance dissipates.
Third, the banking organization in this study separated voluntary
turnover from other types of turnover making us confident that the nature
of the turnover studied was both unanticipated and organizationally dys-
functional. However, there is the possibility that some underperforming
employees left voluntarily prior to being terminated. In addition, more
specific information regarding the unemployment rates associated with each
specific subunit would have been helpful.
Conclusion
The results of this research, combined with those of Kacmar et al. (2006)
and Shaw et al. (2005), serve to explain why turnover adversely affects
organizational performance. Put plainly, it appears that unexpected turnover
creates staffing shortages and/or the use of less experienced employees which

manifests itself in terms of inefficiency. For Kacmar et al., the manifestation

was in the form of longer customer wait times while in the Shaw et al. investi-
gation, inefficiency was reflected in underutilization of equipment caused by
out-of-service violations. In the present study, the manifestation was
primarily in terms of higher costs per loan. Observation of similar results in
such disparate settings raises the strong possibility that we have uncovered
at least one element in the ‘black box’ surrounding turnover–performance
relations.
In conclusion, we recommend that future research on the relationship
between voluntary turnover and organizational performance based on the
efficiency explanation focus on two fundamental issues. First, the issue of how
different manifestations of efficiency affect the relationship between organ-
izational turnover and performance needs to be resolved. Development of a
taxonomy of efficiency concepts would be highly instrumental in this regard.
We have suggested narrow cost-based and demand/environment-based
conceptualizations of efficiency might be a reasonable starting point. Second,
researchers need to adopt a macro focus and examine the role of organ-
izational characteristics. More broadly, we encourage others to explore how
organizations might more effectively address inefficiencies generated by
turnover. These might include organizational production strategies known as
leveling plans which seek to maintain a constant employee base (e.g. Buxey,
2003) and organizational human resource plans which seek to anticipate
turnover and maintain a reserve of appropriately trained and experienced
replacement employees. Such organizational factors may serve to buffer
organizational outcomes from the inefficiencies associated with voluntary
(i.e. unanticipated) organizational turnover, or allow them to overcome any
adverse side-effects associated with turnover more quickly. Including macro-
level variables like these may hold addition keys for unlocking the ‘how and
why’ behind the turnover–organizational performance relationship.
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Paula Morrow is a University Professor and the Max S. Wortman, Jr

Professor of Management at Iowa State University. Her research focuses
on understanding employee attitudes and behaviors, especially work
commitment, employee loyalty and turnover. She is the author of The
theory and measurement of work commitment, serves on several editorial
review boards, and has published over 60 management-related publi-
cations. Her work has appeared in such journals as the Academy of
Management Review, Academy of Management Journal, Journal of Applied
Psychology, Human Resource Management and the Journal of Vocational
Behavior. At present she is working on projects seeking to understand the
organizational behavior of contract employees and technology as a form
of object language.
[E-mail: pmorrow@iastate.edu]
James McElroy is a University Professor and the Bill and Liz Goodwin
Faculty Fellow in the Department of Management at Iowa State
University. Dr McElroy has published over 60 refereed articles in a variety
of journals including the Academy of Management Journal, Academy of
Management Review, Journal of Management, Journal of Applied Psychology,
Journal of Marketing, Journal of Vocational Behavior, Journal of Organizational
Behavior, Organizational Behavior and Human Performance, Computers in
Human Behavior and MIS Quarterly. He serves on the editorial review
boards of the Journal of Vocational Behavior, Journal of Labor Research and
Journal of Managerial Issues. In addition to turnover, his current research
deals with personality and computer use, self-handicapping behavior, and
technology as a form of object language.
[E-mail: jmcelroy@iastate.edu]

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Human Relations

A B S T R AC T This study adds to scientific understanding of how employee turnover

K E Y WO R D S banking industry efficiency organizational performance

Employee turnover is one of the most frequently studied phenomena among

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Turnover and organizational performance

Competitive advantage through people has been a recent theme in both

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Relatively few studies have examined how employee turnover functions

Hypothesis 1. Voluntary turnover is negatively related to organ-

Efficiency and turnover–performance relations

While evidence above suggests that turnover is linked to organizational

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social and communication structures as well as employee productivity

Hypothesis 2. Voluntary turnover will be negatively related to organ-

While we have provided a rationale for linking organizational turnover and

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knowledge-based theory of organizations, they propose that turnover

Hypothesis 3. Organizational efficiency will mediate the relationship

Hypothesis 4. The mediating role of efficiency will dissipate over time.

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To summarize, the purpose of this study is to test the generalizability of

Sample and data collection

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geographic regions (Koch & MacDonald, 2003). In an attempt to prevent

Each subunit maintained careful turnover records and departures were

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Banking research typically regards efficiency as some level of output

Organizational subunit performance

Banking experts clearly distinguish between efficiency metrics and perform-

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Table 1 Descriptive statistics and correlationsc

1. Bank statusa .23 .43

a No bank state = 0, bank state = 1.

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Region 1 .06 .10 –.35 –.39* –.35* .01 –.03 .03

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Predictor Loan generation efficiency (a) Profitability (b) Customer satisfaction

aNo bank state = 0, bank state = 1.

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Taken in total, these findings provide strong support for efficiency as

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aNo bank state = 0, bank state = 1.

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Predictor Loan generation efficiency (a) Profitability (b) Customer satisfaction

Region 1 –.03 .12 –.37 –.27 –.33 .02 .14 .08

Change in F 2.27 13.17** 2.15 4.34* 4.45* 1.91 6.22* 3.63

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occurred (Kenny, 2006; Preacher & Leonardelli, 2005). A higher response

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manifests itself in terms of inefficiency. For Kacmar et al., the manifestation

Abelson, M.A. Examination of avoidable and unavoidable turnover. Journal of Applied

Downloaded from hum.sagepub.com at PENNSYLVANIA STATE UNIV on September 15, 2016

Downloaded from hum.sagepub.com at PENNSYLVANIA STATE UNIV on September 15, 2016