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Retaining Top Talent (Part 1): The Costs and Causes of Turnover

January 28, 2015

A CEO and business owner I know was facing an increasing level of turnover. His company is successful, well managed, growing and seemingly a great place to work, yet turnover was higher than in previous years and continuing to grow. More importantly, he had lost some of his stars and future leaders. Is this inevitable because of the competition for talent in his industry or is it a sign of a serious problem? What can he do about it?

 

 

The last few years have been a unique period wherein we did not need to worry much about turnover.  After the financial crisis employees were happy to have a job and not looking.  All that has changed.  As we return to more normal unemployment rates, we face a pent up demand for more interesting work, career advancement and salary growth. Voluntary turnover rates are have nearly doubled in four years (see figure) and will continue to rise.  Whatever was our recent level of turnover, it will get worse unless we take action and satisfy that demand.

 

 

The Costs of Employee Turnover

Turnover is expensive.  Various studies have pegged the cost of employee turnover at between 20% and 200% of annual salary with the percentage increasing with level of employee and length of time in the job.   For high tech, creative and knowledge workers earning $60,000+ it is easy to see how turnover costs can equal 100% of salary:

 

  • Recruiting / advertising costs plus the time of senior people spent in recruiting can easily be 25% of starting salary.

  • Knowledge workers start with negative productivity.  They take more time of team members and expensive supervisors to bring them up to speed than they can possibly contribute at first. They are fully productive only after a year or two.  Compared to the experienced person they are replacing, the lost productivity and training time of others can easily be 25% of salary.

  • Employees who leave have a negative impact on morale and productivity of those who stay.  Moreover they can trigger others to leave and/or to benchmark their salaries against potential offers.  This can result in futher turnover, counter-offers and salary increases.  This can easily cost 25% or more of one salary.

  • Employees who leave can impact key customer relationships, or schedules of strategic projects.  This can also easily cost 25% or more of one salary.

  • Finally, recruiting is an imperfect process.  You may replace the good person who left with one who does not work out.  Then the costs are multiplied.

 

So, what does this mean to your business?  Data from CompData Surveys shows that average voluntary turnover across industries in the U.S. is currently around 10%; total turnover is around 15% and rising. If you are average, if turnover costs are 100% of salary and if benefits and recruiting costs are 70% of your total costs, then turnover is costing you ~10% of total costs.  If you pretax profit margin is 10%, turnover is eating half of your profits; you would be making 20% pretax without it.  You cannot reduce it to zero (and would not want to), but you can perhaps change total turnover by 5%.  This would have the impact of changing your pretax margin from 10% to 13%.  It can be done – do you have another strategic initiative that has the same degree of payoff?

 

Of course, costs are much higher if you are losing your stars.  If creativity is important to your success, you have undoubtedly noticed that fewer than one in five to one in ten of your employees contribute almost all of the truly creative ideas that cause your company to stand out, to win business or to have superior products. Lose these stars and you could be affecting a significant portion of future revenues. Moreover, replacing stars is not straightforward; there is almost no way to identify them in the interviewing process. You may have to hire five or ten more people before you acquire another star. 

 

 

Why Do Employees Leave?

 

Employees leave because they are not sufficiently engaged in their jobs and then some trigger causes them to start looking for a job or they are approached from the outside. You cannot prevent them from being approached, but you can affect their engagement. So, what causes them to be engaged? A survey by the Society for Human Resource Management in 2011 identified the following factors as critical in employee engagement:

 

  • The work itself including the variety of work, meaningfulness of job, opportunities to use skills and abilities

  • Relationship with immediate supervisor

  • Relationships with co-workers

  • Autonomy and independence

  • Organization’s financial stability

  • Overall corporate culture

  • Management’s recognition of employee job performance

  • Training, professional development, career advancement opportunities

  • Organization’s commitment to corporate social responsibility

 

Notice that pay is not on this list.  Pay is a reason for people to leave, but not a reason to stay. If you have engaged employees who like the work they are doing, like their relationship with their co-workers and supervisors, believe that their contributions are recognized and appreciated, see opportunities for career development and advancement and they are happy with your company’s ethics and social responsibility, then you can pay them up to 10% below the market wage and not lose them.  But if they ever find out that you are paying them 30% below market, then you will have broken trust with them and you will lose them -- and others.

 

The relationship between employees and supervisors and their skills in mentoring and career development has been shown to have the biggest impact on engagement and thus on turnover.  Assuming you have interesting work for your employees and career advancement opportunities, the one thing you can do to have the biggest affect on outcome is for your supervisors and managers to be good mentors, to recognize signs of employee dissatisfaction and to have meaningful career development discussions with them. But for them to do this well will take formal training -- and leadership from you.

 

Do not wait, your world is changing.

 
Coming up: Retaining Talent (Part 2) -
The Importance of Career Development and Mentoring
Resources
 

Business Costs to Replacing Employees

2013 Turnover Rates by Industry

Employee Job Satisfaction and Engagement.  SHRM Research.

 

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