A counterintuitive truth has emerged from my decades of experience in HR leadership across banking, insurance, and consumer electronics: sometimes, high employee retention can be as problematic as high turnover.
This isn’t a popular opinion. Most literature focuses on the costs of losing employees. But in my work with global organizations navigating complex mergers and digital transformations, I’ve observed a phenomenon I call “retention stagnation.”
The Hidden Dangers of Over-Retention
Innovation Plateaus
In evolving industries like fintech and consumer electronics, long-tenured employees can inadvertently create echo chambers. I’ve noticed teams with the lowest turnover are often the slowest to adapt to market changes. This isn’t due to a lack of talent or dedication, but rather a natural human tendency to rely on what’s worked in the past.
Cost Inefficiencies
In my experience with major financial institutions, departments with the highest retention rates were often the most expensive to run. Why? Salary creep and outdated processes that no one questioned. One banking division I analyzed had a retention rate of 95% over five years. While this seemed impressive at first glance, deeper investigation revealed that operational costs in this division were 28% higher than in comparable divisions with more turnover. Long-standing employees had received consistent raises without corresponding increases in productivity, and inefficient processes had become ingrained.
Cultural Calcification
At a leading investment bank, teams with the lowest turnover were, surprisingly, often the most resistant to necessary cultural shifts. Comfort bred complacency. When the organization needed to pivot towards a more client-centric approach, these teams struggled the most to adapt. In one striking instance, a trading desk with an average tenure of 12 years took three times longer to implement new client engagement protocols compared to teams with more diverse tenure profiles.
Skill Obsolescence
In the insurance sector, I saw how retaining employees without continuous reskilling led to widening gaps between workforce capabilities and market demands. As data analytics and AI began to transform underwriting processes, teams with the highest retention rates struggled to integrate these new technologies.
Leadership Bottlenecks
High retention at upper levels can create promotion bottlenecks, leading to the loss of high-potential junior talent. In a consumer goods company, we found that divisions with the lowest executive turnover also had the highest resignation rates among middle managers. Exit interviews revealed a common theme: talented individuals felt their path to advancement was blocked by long-tenured leaders, prompting them to seek opportunities elsewhere.
The Optimal Churn Rate
Through data analysis across multiple organizations, I’ve identified what I call the “Optimal Churn Rate” (OCR). This is the turnover percentage that balances continuity with fresh perspectives.
The OCR varies by industry:
- Banking: Turnover rates typically range from 8% to 12% annually for the banking industry. This aligns with data suggesting that while some roles, particularly officer positions, have lower turnover, non-officer roles can experience rates closer to the higher end of this range.
- Insurance: The insurance industry has seen turnover rates increase slightly in recent years, sitting between 12% to 15% annually. Factors such as the push toward digital transformation and the need for workplace flexibility have contributed to these trends.
- Consumer Electronics: This industry tends to have higher turnover, generally in the range of 15% to 20%, likely due to the fast-paced, competitive nature of the sector, along with the pressure to innovate rapidly.
These rates ensure a steady influx of new ideas while maintaining institutional knowledge. It’s important to note that these are averages, and the ideal rate can vary based on specific organizational contexts.
In practice, achieving the OCR isn’t about actively pushing people out, but rather creating an environment where both staying and leaving are seen as positive career moves.
The Retention Balance Sheet
Leaders need to start thinking about retention like a balance sheet, not just a metric to be maximized. Here’s a framework I developed:
Retention Assets:
- Institutional knowledge
- Client relationships
- Process efficiency
Retention Liabilities:
- Skill stagnation
- Innovation resistance
- Salary inflation
The goal is to maximize assets while minimizing liabilities. This requires a nuanced approach to workforce management, where both retention and turnover are strategically managed.
Case Study: Balancing Act at a Global Bank
At one major financial institution, we implemented a “20-70-10” strategy:
- 20% of roles were designated for new talent injection
- 70% focused on developing and retaining key performers
- 10% identified for potential outplacement or reskilling
The 20% new talent injection was achieved through a combination of new hires and internal rotations. The 70% core received targeted development and retention initiatives. The 10% were provided with career transition support or intensive reskilling opportunities.
This approach led to a 15% increase in product innovation and a 22% improvement in customer satisfaction scores over two years. Importantly, overall employee engagement scores also improved by 18%, demonstrating that a dynamic workforce strategy can benefit both the organization and its employees.
The Dynamic Workforce
As we approach 2025, the most successful organizations won’t be those with the highest retention rates, but those with the most dynamic workforces. This means cultivating an environment where:
- Staying is a choice, not a default
- Leaving isn’t a failure, but a natural part of career growth
- New blood is regularly welcomed and valued
The future belongs to companies that can balance continuity and change, institutional knowledge and fresh perspectives. It’s time to move beyond simplistic retention goals and embrace a more nuanced approach to workforce management.
This shift requires courage from leadership. It’s easier to celebrate high retention numbers than to explain the value of healthy turnover. But in a business landscape where adaptation is key to survival, maintaining a dynamic workforce is a business imperative.
In essence, the goal is not to choose between retention and turnover, but to harness the benefits of both. It’s about creating a workforce ecosystem that’s always learning, adapting, and innovating—a true reflection of the dynamic markets we operate in.
Ready to reassess your retention strategy?
Let’s explore how your organization can find its Optimal Churn Rate and build a more dynamic, innovative workforce. Sign up for our newsletter to receive monthly insights and be the first to access our upcoming book on this new approach to talent management.
