Turnover costs and the wage—fringe mix

Abstract

This paper examines how firms choose their compensation package to influence employee turnover. A firm will attempt to maintain a steady state of trunover consistent with its training and hiring costs. We develop a model of this relationship when the firm's ability to offer a differentiated compensation package. Both the theoretical and empirical findings of our study emphasize the importance of the link between turnover costs and the compensation mix. That is quits are negatively realted to both the share of pensions in the total compensation package and the level of wages. The influence of pensions in attracting stable workers, however, is diminishing. An important implication is that the policies which attempt to standardize worker compensation will hinder the market determination of turnover, and hence, will generate inefficiencies in the labour market.