Corporate culture is a critical variable for organizational performance. It has many dimensions and affects several aspects of performance 1. Culture and Turnover Cost One aspect of organizational performance that is affected by culture is turnover. When people leave an organization, the investment made to recruit, hire, orient and train them is lost. The company must also incur an out of pocket replacement cost. A positive culture can help preserve valuable human capital. A positive (functional) culture should result in retention of human capital and reduced turnover. A negative (dysfunctional) culture can result in increased turnover and the loss of human capital. Since turnover is costly, if turnover is reduced it should result in a benefit to a company and vice versa.2 A reasonable estimate of turnover cost is one year’s compensation (salary plus benefits).3 Since human capital is costly to acquire, a dysfunctional culture can create a hidden cost. The greater the degree of turnover experienced by an organization, the greater the cost of turnover.

1. The Hidden Cost of a Dysfunctional Culture
By Eric Flamholtz
Corporate culture is a critical variable for organizational performance. It has
many dimensions and affects several aspects of performance1.
Culture and Turnover Cost
One aspect of organizational performance that is affected by culture is
turnover. When people leave an organization, the investment made to recruit,
hire, orient and train them is lost. The company must also incur an out of
pocket replacement cost.
A positive culture can help preserve valuable human capital. A positive
(functional) culture should result in retention of human capital and reduced
turnover. A negative (dysfunctional) culture can result in increased turnover
and the loss of human capital.
Since turnover is costly, if turnover is reduced it should result in a benefit to
a company and vice versa.2 A reasonable estimate of turnover cost is one
year’s compensation (salary plus benefits).3
Since human capital is costly to acquire, a dysfunctional culture can create a
hidden cost. The greater the degree of turnover experienced by an
organization, the greater the cost of turnover.
Data from a Recent Culture Management Project
“Culture assessments” are one of the core managerial tools offered by our
firm, Management Systems. Learn more about our Culture Management
Tools offered by Management Systems.
Our culture assessments assist our clients in indicating:
1) The extent to which people employed have embraced the
company’s culture,
2) The extent to which that stated culture is being practiced, and
1
See Eric Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset,
Stanford University Press, 2011.
2
See Eric Flamholtz, Human Resource Accounting, Kluwer Academic Publishers, 1999,
Chapters 2-3.
3
Ibid.

2. 3) The extent to which there are “gaps” between the stated and actual
practiced culture.
Findings
A recent culture study (assessment) conducted for a client resulted in a very
interesting and significant finding concerning the relationship between
culture and turnover4. The culture assessment involved several
organizational units of a rapidly growing company. In this company, growth
is occurring organically and via acquisitions.
What we found was that a perfect relationship exists between “culture” and
“voluntary turnover”5. Specifically:
 When culture become more favorable (scores increase), voluntary
turnover decreases.
 When culture become less favorable (scores decrease), voluntary
turnover increases.
 When culture remains unchanged (scores remain unchanged),
voluntary turnover remains unchanged.
The results are statistically significant.
Implications
What are the implications of this study for management? The key finding is
that culture influences voluntary turnover. When people leave organizations
the investment made to recruit, hire, orient and train them is lost. This is a
hidden cost of a dysfunctional culture. When people remain in an organization,
valuable human capital is preserved.
Culture management can impact voluntary turnover. This means that culture
management can impact the bottom line of profitability. This also implies that
companies ought to learn how to manage their corporate cultures in order to
minimize the hidden costs of turnover and preserve valuable human capital.
Action
4 This was the third assessment of culture (the second reassessment) by this rapidly
growing company.
5
Voluntary turnover occurs when people leave a company of their own volition, and are not
terminated by the organization.

3. For more information about culture management see, Eric Flamholtz and
Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset,
Stanford University Press, 2011. Explore our frameworks and tools for
Culture Management.