I can tell the economy is recovering: we’re suddenly seeing companies tell us that “employee retention” has become a critical issue. Let me give you some research-based perspectives on this critically important topic.
What does Retention Mean?
Nearly all companies measure turnover. In some industries (retail, customer service, hospitality) turnover rates of 30-40% are common and sometimes even accepted. I had a conversation with one HR manager who told me “we design our organization around high-turnover: we make sure jobs are easy to learn so we can rapidly assimilate new people.”
While this may be a reality in many companies, our research shows that it’s not a sound strategy. Regardless of the role they play, tenured employees
drive far greater value than those who are “cycling through” the business.
Many studies show that the total cost of losing an employee can range from tens of thousands of dollars to 1.5-2X annual salary.
Consider the real “total cost” of losing an employee:
• Cost of hiring a new person (advertising, interviewing, screening, hiring)
• Cost of onboarding a new person (training, management time)
• Lost productivity (a new person may take 1-2 years to reach the productivity of an existing person)
• Lost engagement (other employees who see high turnover disengage and lose productivity)
• Customer service and errors (new employees take longer and are often less adept at solving problems). In healthcare this may result in much higher error rates, illness, and other very expensive costs (which are not seen by HR)
• Training cost (over 2-3 years you likely invest 10-20% of an employee’s salary or more in training, that is gone)
• Cultural impact (whenever someone leaves others take time to ask “why?”).
And most importantly of all, we have to remember that people are what we call an “appreciating asset.” The longer we stay with an organization the more productive we get – we learn the systems, we learn the products, and we learn how to work together.
The Economic Value of Employees over Time
Consider the following simple chart. It simply shows that initially most employees are a “cost” to the organization, and that over time, with the right talent practices, they become more and more valuable. Our job in HR is to attract the “right people” and move them up this curve as rapidly and effectively as possible.
Fig 1: Economic Value of an Employee to the Organization over Time
Obviously for us as employees, we see this same effect. Early in our days in a new job we feel somewhat unproductive and often search for ways to add more value. But in the right environment (onboarding, coaching, training, teamwork) we rapidly “find our place” and start to add more and more value.
A New Model to Drive Retention: Your Talent “System”
Right now retention has become an important topic for many reasons. The economy is picking up; young employees want more career growth; the work environment in companies has not kept up with the outside world; management doesn’t always understand how to motivate younger people; and in developing economies the workforce is simply in great demand and the competition for talent is fierce. Added to this, of course, tools like LinkedIn now make it easier than ever for you to look for a new job (or get poached).
And we know that high-performing companies have loyal employees. I can’t quote statistics on this topic, but it’s well understood that high-performing companies serve their employees just as well as they serve their customers. One of the most important studies on this was done by Harvard many years ago and it proves that only by making your employees happy can you ultimately make your customers happy.
Other research by Wayne Cascio called “Lay off the Layoffs” similarly shows that companies that push layoffs on their employees create long term problems which often take years to fix. The reason? Layoffs, like retention problems, create low levels of employee commitment which in turn move employees back down the value curve. Covey’s wonderful book “The Speed of Trust” clearly explains this in ways that leaders can understand.
So how do we “improve” or “fix” our retention issues?
Much common wisdom over the years blames first line management. Over and over I hear the words “people don’t leave companies they leave managers.” Of course there is much truth to this – nobody wants to work for an uncaring, difficult manager. But our research shows that the real “retention model” in companies is far more complex.
When we look at retention (Deloitte has both a “retention diagnostic” as well as a “retention analytics” model) we find that each company has its own unique “retention model.”
Typically the model involves a whole variety of factors, and these factors take on different weights depending on the age, demographic, and role of the employee. So your goal is not to simply do one thing, but to understand your own company’s “retention drivers” by role.
Some of the interesting things to consider:
• Compensation plays a role, but not as much as you may think. All the experience we have shows that for mid-performing people compensation is a “hygiene” factor – too little money will definitely create high churn, but over compensating people won’t make up for a poor work environment.
Of course in sales and other highly competitive positions compensation is critically important, but it is by no means the only driver.
• Job fit is critically important. For years companies have talked about the “employee value proposition.” In reality there is a “job value proposition.” Are you attracting the “right people” for each job? Some jobs are particularly demanding (ie. consulting roles where travel is intense). If you honestly explain these roles and their positives and negatives you will attract people that “fit.” If you over-sell the job you’ll suffer high turnover.
• Career opportunities matter. Today most companies are going through a “crew shift” as boomer generation employees retire and millenials and young people enter management and high value positions. Younger folks are motivated by growth, career opportunity, and meaning. Our research several years ago showed that while young people want the same types of benefits and work-life balance as older people, they are particularly focused on fun, collaboration, and the ability to be with others they enjoy. So the prospect of a “career” is more than just advancement (which was the way I was raised).
• The work environment matters. We’ve done lots of research over the years on recognition, engagement, leadership, and management. It all shows clearly that people at work respond through Maslow’s Hierarchy of Needs. Once they are “safe” – ie. paid well, they look for more meaningful value at work. Is this work taking advantage of my skills? Do people appreciate me? Is the environment inclusive and diverse so that I feel that I fit? Does this company do work I feel proud of?
These “non-compensation” and “non-job” factors are bigger than ever now. We’re going to be launching new research on the employee value proposition in the coming quarters and all evidence shows that we have to think about our organizations as a “system” which engages employees. The CEO sets the tone and leadership plays a role, but so do all these other cultural and human aspects of the workplace.
Is your organization suffering from a retention challenge? Are you feeling “disconnected” or perhaps unrewarded in your job? If the answer is yes, I’d suggest that your CHRO or CEO needs to be thinking about retention in a more strategic way.
Ultimately the most successful and enduring organizations in business are those that have a common sense of mission, a deep respect for their employees (and customers of course), and put time, energy, and money into building a highly engaging environment. They carefully select the “right people” with lots of hard work, and once people join they take the time to make sure they have development opportunities to move up the value curve.
“Retention” may be no more than a symptom, but it’s something you should take seriously. In today’s heating economy and rapid shift in demographics, you’ll be competing for talent regardless of your industry.
I welcome comments and feedback, and share your story if you have a minute.