Replace or Pay More?

A recent report looking at 31 corporate case studies from the Center for American Progress (a liberal-leaning think-tank) details the high costs of employee turnover, and recommends implementing workplace policies that retain your performers and reduce costs.

In a recent article on employee retention, Josh Bersin of Bersin by Deloitte outlined factors a business should consider in calculating the "real" cost of losing an employee. These factors include:

  • Cost of hiring a new employee (i.e., advertising, interviewing time, screening time, and onboarding).
  • Cost of on-boarding a new person including training and management time.
  • Lost productivity: it may take a new employee 1-2 years to reach the productivity of an existing person.
  • Lost engagement: other employees who see high turnover tend to disengage and lose productivity.
  • Customer service and errors: new employees take longer and are often less adept at solving problems.
  • Training cost in time and expense.
  • Cultural impact... Whenever someone leaves others ask "why?"

Here's a common scenario: an employee -- average performance but has been with the company for several years -- comes to you and says she's been doing some research, and her position is worth 5% more than she is being paid. Your budget is already tight, what is the best solution?
a. Give her a hearty "thank you" and a $100 gift certificate for a job well done.
b. Give her a 2% raise at year end (or whenever you normally give pay increases).
c. Give her the 5%, effective immediately.
d. Offer nothing -- with the economy the way it is, she's lucky to have a job.

I can tell you right now that option D is the worst choice, and option A is great for the budget, but terrible for morale. ("Why did she get a gift certificate?" ask the high performers, before they start to get new jobs.) Option B will tide you over a bit, but . . . Option C is your best choice.

Turnover costs include productivity losses during training, recruiting and lost work while a position is vacant. For all jobs earning less than $50,000 per year -- more than 40% of U.S. jobs -- the average cost of replacing an employee amounts to 20% of the former employee's annual salary. So in our scenario choosing to not give even a middling performer a raise may net a temporary cost savings, but if she quits you'll be out 20% of her salary. Although employee replacement costs are a one-time expense and a salary increase is ongoing, it would take four years of at higher salary to equal the cost of replacing her one time.

It's true that high turnover, lower-paying jobs (those under $30,000 a year) are slightly less expensive to replace, at only 16% of annual salary, but that still adds up quickly. For instance, 37% of hotel/motel and food services employees voluntarily quit a job in 2011. That represents a major expense to businesses already running close to the bone.

Jobs that are very complex and that require higher levels of education and specialized training tend to have even higher turnover costs. In one study, economist Eileen Appelbaum and sociologist Ruth Milkman find that executive positions, which are well-compensated and likely have stringent educational credential requirements, have higher turnover costs than jobs with low educational requirements -- an astronomical 213% of the employee's salary.

Employee turnover is an important economic issue because about 20% of all workers voluntarily leave their job each year and an additional 16.6% are fired or otherwise let go involuntarily. In the long-term, even if a firm saves money by firing an employee who has stolen or has very low productivity, in the short-term the firm must address the costs of replacing that worker with one who will perform the job better than the one fired.

High turnover rates are often the result of poorly-thought-out workplace policies. Teh high rate of hotel/motel employee turnover reflects an industry with low wages and few workplace benefits or policies that help workers address the inevitable conflicts between work and family obligations.

Workplace policies that reduce employee turnover can help companies improve their bottom line. Family-friendly policies such as paid family leave and workplace flexibility help retain valuable employees who need help balancing work and family. The CAP states: "For example, research has found that access to any form of parental leave makes women more likely to return to work after giving birth. Moreover, by 2050 up to 20 percent of Americans will be older than age 65, and improved leave policies would allow workers to provide the care their elderly parents may need without having to sacrifice their livelihoods."

There is no such thing as a one-size-fits-all benefits package, and some policies can do more harm than good. But a wise employer looks at all of the options to help maintain a stable, happy, workforce.

The article from CAP is interesting reading: (read it here).

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Lisa Mc Sherry

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