CHAPTER 1

1.1 INTRODUCTION

Employee turnover intention has become a major challenge for the organization. This is

because, when employee leaving the organization, they need to think about the replacement

and how it will affect the organization performance. This chapter consists of background

studies, problem statement, research questions, summary of research hypothesis, significance

of the study and conclusions.

Niat untuk berhenti kerja merupakan satu cabaran besar dalam sesebuah organisasi. Hal ini kerana, apabila pekerja meninggalkan organisasi mereka perlu fikir tentang menggantikan pekerja dan bagaimana hal memberi kesan kepada prestasi organisasi. Bab ini membincangkan tentang latar belakang kajian, penyataan masalah, objektif kajian, skop kajian, limitasi kajian, kepentingan kajian, definisi istilah, dan kesimpulan.

1

1.2 BACKGROUND OF STUDIES

The Malaysian economy has been one of the best performers in the developing world over

the past 25 years (Lall, 1995, p. 759) until the onset of the 1997 currency crisis. Malaysia

grew at an average rate of 7.8% in the 1970s and by 8.8% during the period 1987–1996. This

rapid economic growth has resulted from considerable changes in the structure of the

economy. Manufacturing, which contributed only 16.4% of the GDP of a predominantly

agricultural and primary goods producing country in 1975, accounted for 34.2% of the

economy’s 1996 output. This was partly due to the significant amount of foreign direct

investment (FDI) that went into the manufacturing sector since the amendment of the

Investment Act in 1986.

The manufacturing industry has been an important sector in the Malaysian economy for the

past three decades. Sales value of manufactured products rebounded by 9% to RM379.5

billion, compared with RM352.4 billion last year, due to higher output of domestic-oriented

industries, particularly transport equipment as well as food and beverages 34%

2

(News Straits Times, 2014). Manufacturing can be defined as the production of goods or

items by using machines, equipment and labor force. Manufacturing industry in Malaysia is

the fastest growing sector and the dominant force in Malaysia growth experience.

Manufacturing industry can be divided into several sectors. Table 1 below shows the

manufacturing industries in Malaysia. The composition of the Malaysian manufacturing

sector has experienced some significant changes, as shown in Table 1. It can be seen that the

food, beverage, and tobacco as well as the textiles, clothing, and footwear industries have

experienced falling shares in value added, whereas that of machinery, metal products,

electrical machinery, and transport equipment have increased their shares. Other

manufactured products with a moderate increase in shares include optical and scientific

equipment, toys, and sporting goods and other manufactures over the 1978–1996 period.

Besides that, manufacturing sector total employees in August 2014 had been revised to record

1,033,247 persons (News Straits Times, 2014)

3

Turnover intention which is defined as a conscious and deliberate willingness to leave the

organization (Tett and Meyer, 1993). Employee turnover presents many challenges for firms

from the high replacement cost, demanding training requirements, loss of learning and

experience effect, reduce morale among the remaining organizational members and critical

financial performance consequence (Reiche 2008). Turnover intention can be either voluntary

or involuntary. Voluntary turnover is determined as the procedure by which employee

willingly and voluntarily terminates membership of the organization (Bluedon, 1978).

Involuntary turnover is a measurement of whether the organization in question plans to

remove an employee from a position, causing the turnover.

4

1.3 PROBLEM STATEMENT

The employee is the main asset for an organization. One of the factors of successful

achievement of an organization is the employee. Without employee, the organization could

not generate the organization's performance success. The employee also is the one who has

the function and ability to organize and manage the outcome of certain assignment.

According to the department of statistics Malaysia, Total employees engaged in the

Manufacturing sector in November 2011 were 1,004,325 a decreased of 268 persons or

0.03% compared with the preceding month. Year-on-year, the number of workers employed,

however, increased by 11,670 persons or 1.2%, as compared to 992,655 persons in November

2010. Total employees in October 2011 were a revised positive 1.5% year-on-years to record

1,004,593 workers.

Employee turnover occurs when employees of organization voluntarily leave their job and the

vacancy must be replaced. For further identification, turnover is expressed as an annual

percentage of the total employees. For example, 25 percent employee turnover would mean

that one-quarter of employee at the beginning of the year has left the organization by the end

of the year (Wong, 2010).Turnover should not to be confused with layoffs, which involve the

termination of employees at the employer's discretion in response to business conditions such

as reduced sales or a merger with another organization.

5

The severity of turnover varies widely by type of business and the economic health of the

region where organizations are located. In today's working environment, employee turnover

issues have increased tremendously. High employee turnover can have a devastating effect on

a company, especially if the lost employees are high performers. According to the Saratoga

Institute, which specializes in quantitative human resources measurement systems, the

average company loses about $1 million with every 10 professional employees who leave

(Garger, 1999) This matter of course affecting the human resource practice of recruitment

and selection, training and maintaining the workforce.

Turnover is very costly for an organization and the cost is due to termination, advertising,

recruitment, selection, and hiring (Abbasi Hollman, & Hayes, 2008). When an employee

leaves an organization, the ability of the remaining employees to complete their duties may

be affected. Besides that, if a high number of employees leaving the organization, this can

cause workload to the other employee. This is because; to find a replacement it will cause

time consuming. However, if the organization manages to find a replacement, somehow

different problem may arise. For example, the new employee needs to be trained and be

guided by another employee so that the new employee can perform the job well.

6

Besides that, the new employee also needs to adapt to the organizational culture. This is one

of the problems that an organization should take seriously. This is because; the employee

must know the organizational culture so that he knows how to adapt to the surroundings and

the organization environment. In addition, not only it brings negative consequences towards

the employees, a high rate of job turnover in an organization may impact its overall

performance. The overall productivity of the workplace tends to decrease with high turnover.

Since a new employee has a period of adjustment, he won't complete tasks as quickly as the

person he replaces. Group projects that rely on the new team member may slow down, which

affects experienced employee productivity levels. The loss of momentum when an employee

resigns may also affect morale Furthermore, turnover in any profession could bring direct

cost (e.g. separation cost, replacement cost, training cost) and indirect cost (the loss of

productivity while the new employee achieves full mastery of the job) (Cascio, 2000; Mor

Barak, Nissly & Levin, 2001). By having this cost, it can affect the organization budget

because, an organization can use the budget to do something that's useful to the company and

gain more profit instead using it for other things.

There are several programs that organization can use in order to ensure employee does not

have the intention to quit the job. The program is employee retention program that focuses on

competitive salary and benefit, be engaged program where it encourage the involvement of

employees in the organization’s activities and exit interview program for obtaining valuable

information from the departing employees, which can be used to enhance existing retention

programs. This program, of course can help the organization to change the employee's

intention to quit the job.

7

1.4 RESEARCH QUESTIONS

This research focuses on 2 main objectives which are:

1. To identify the effects of ethical leadership on employee turnover intention in

manufacturing industry.

2. To identify the effects of job related stress on employee turnover intention in

manufacturing industry.

In order to achieve the research objectives, the following research question was developed for

this study:

1. Is ethical leadership affect the employee turnover intention?

2. Is job related stress affects the employee turnover intention?

1.5 SUMMARY OF RESEARCH HYPOTHESIS

In this research I would like to investigate how ethical leadership and job related stress

influence turnover intention of the employees. The following hypothesis is proposed for

testing:

Hypothesis 1

There is negative relationship influence between ethical leadership and turnover intention.

Hypothesis 2

There is positive relationship influence between job related stress and turnover intention

8

1.6 SIGNIFICANCE OF STUDY

This study is significant to leaders because leader have an important role to diminish the

work related stress. Leader behaviour has an important effect on employee behaviour, such as

job satisfaction and organizational commitment (Van Knippenberg et al, 2007). Besides that,

thru the designated questionnaire, it will also provide the insight information of the

employee’s perspective on turnover intention as well. By doing this research, manager can

use the information gathered, to help the organization to revitalize their retention program

accordingly. That information can be used as guidance on how to make the program suitable

with the employee needs. Besides that, this research can give benefits to the organization

internal environment. The internal environment is composed of the elements within the

organization, including current employees, management and especially corporate culture,

which defines employee behaviour. If the management really perform well and take care of

the employee welfare, there will be no issue regarding leadership and job related stress.

Lastly, the result of this thesis will help the manufacturing industry to revitalize their existing

retention program to be more meaningful to the employees. The result will indicate which

factor that more significant towards the turnover intention, that eventually be used by the

organization to zoom into. The result also helps to indicate the employee’s point of view on

the existing job and organization, which able to trigger the next solution in order to prevent

any turnover intention. This will help to improve the relationship between the employee and

the organization, and eventually will create loyalty in a long run.

9

1.7 CONCLUSION

The main target of this study was to assess the effects of some employee work related

perceptions and attitudes on their turnover intention which has most harmful consequences

for the organization. Leadership is an important factor to decrease the turnover rate and stress

another factor to increase it. Specifically, in this study, concentrated on the effects of ethical

leadership and job related stress on employee turnover intention. As for the next chapter, will

more focus on the literature review and hypothesis development?

10