High Employee Turnover can hamper efforts to create investment returns Google+

Wednesday, July 17, 2013

High Employee Turnover can hamper efforts to create investment returns

One of the many challenges that organizations face today, is to hire and retain good employees. An effective employee retention program can have a dramatic impact on organization's performance. Organizations have to grow together with their employees. An organization is only as good as the people it employs.As employees grow so does the business, and its bottom line. Companies normally understate this issue[1]. Most important assets in the organization are its employees, "they are the method by which they provide their service, and they create the first and usually lasting impression with customers, which becomes the cornerstone of the company's reputation." says Peter Criville, president of Shellville Services Inc.

An ineffective employee retention strategy has a bearing on the performance of an organization. It can consistently hamper efforts to create investment returns to the business of an organization. If nothing is done employee turnover, dwindling levels of retention, and the steady outflow of quality workers could result into high business cost for the organization. It is a mistake for companies faced with many challenges, such as increasing competition and decreasing margins, to be mindless on the issue of employee recruitment and retention. This will only end up costing the company more in the long run. Turnover has a direct impact on the success of the business and how consistently and efficiently it operates. It means the difference between success and failure and reputation in the marketplace. 

The cost of employee turn over can range between 1/2 to 4 times an employee's annual wages and benefits. Organizations need to identify top performing team members and develop strategies to ensure they stay in the organization for as long as possible. 

Employee retention has as much to do with how organizations hire and do after.According to Harvard Business Review, 80% of turnover can be attributed to mistakes during the hiring process.Traditional methods of hiring employees only provide a 14% likelihood of a successful job hire (Michigan State University)

Employee turnover needs not to been seen only from the perspective of those already employed. An organization that is not mindful of its employee turnover issues, risks having candidate employees leave even before they fully recruited. Such an organization will end up hiring employees who are not well fit for the job and the culture of the organization.

The importance of retaining top organizational talent cannot be understated. With the rate of employment growth in most economies especially developing economies, more and more jobs are increasingly available especially for the skilled and experience persons. What this means for employees is that it is now easier than ever to leave one's current position in search of greener pastures elsewhere. As competition takes centre stage in a fast growing private sector, employee turnover rates increases due to increased attractive markets for job seekers especially those with some level of experience. Of course where there is high unemployment levels, attracting employees might be simple but attracting quality skills is an uphill battle.


Although it is neither possible, nor desirable to completely eliminate turnover from an organization, there are very real associated costs which an organization must be mindful about and where possible minimize them. Some of the costs associated with employee turnover are unavoidable and must be expected to occur in the normal course of business.

William G. Bliss in his article "cost of employee turnover" indicates that the costs of time and lost productivity in an effort to replace a staff are no less important than the costs associated with paying cash to vendors for services such as advertising or temporary staff. "These are all very real costs to the employer".

Some costs of employee turnover are obvious and come quickly to mind, but there other costs which equally have serious impact on business that normally are not taken serious by employers.

Turning over one employee can cost around 1/2 of a low skilled hourly workers annual wages plus benefits, while losing a member of upper management level can cost 3 to 5 times his or her annual wages and benefits. For example a firm employing 40 employees each earning $4,250 annually, the costs of turning over 10 of these employees over the course of a year will be at least $212,500. Severance pay can also be a huge part of employee turnover costs. This is especially true with highly skilled employees and high-level management. Such wage costs do have direct linkage to returns on investment.

The obvious costs of employee turnover include expenses on recruitment and or hiring a new staff. When an employee leaves the replacement process- hiring and selection cycle starts again. Significant costs of employee turnover included in this process can be advertising costs of announcing a job opening to the masses, cost of hiring a recruitment agency, background checks, reference checks, drug testing, cost of overtime pay, temporary help and much more. Once decision to hire has been made, the costs of turnover don't stop, but rather continue. Sign on bonuses, relocation costs, and any increases in salary level necessary to attract new talent all add up fast not to mention the time spent by the human resource to orientate and train the new employee.

Some of other costs that are easily quantifiable but are not normally given much consideration include; work overload, new job learning costs, loss of loyal customers, knowledge base losses and information linkages.

Loss of an employee affects the productivity of other employees who temporarily sit-in for their former colleague. William G. Bliss puts this productivity to at least 50% of the person's compensation and benefits cost for each week the position is vacant and other employees are sitting in and to 100% when completely vacant. It takes on average two month to recruit and hire a new employee. During this time productivity can seriously dwindle since the other employees who pick up the tasks and responsibilities. On top of being overloaded which of course diminishes their productivity, are also not necessarily familiar or trained for the task. This drains staff morale and further hurts productivity.

The negative affect on productivity continues even when a new employee is hired, he or she still has to be accustomed with the work. Of course the effect of declining productivity reflects itself in form of reduced business returns though it might be difficult to specifically attribute the cause to the turnover.

There is always a learning curve associated with any job which can be a considerable period of time but varying between individuals. It takes a new employee to catch-up with the rest of the staff. During this time, productivity cannot be as good as it is for the old staff.

Employee turnover can lead to reduced level of customer loyalty. This is significant loss to business. Many employees develop and share a real connection with customers as a result; they enjoy a loyal following of customers with whom they have related. When the employee leaves almost all of his loyal customers might move with him or her. It becomes worse when he or she has crossed to competition. The former employer can pay dearly; customers are sometimes loyal to the employee, not the company. The real cost is with the customer," Criville says. "Customers have a negative perception of a firm that has employees coming and going like a revolving door. Clients prefer to see the same faces every day. They get to know employees and gain a comfort level with them as a result they trust develops, job gets done and the customer pays.

Another serious cost to companies when they lose employees is the loss of organizational knowledge base. G. Bliss puts this loss to 50% of the person's annual salary for one year of service. Many employees are able to become experts in the field they work in and they leave with that knowledge base. They are no longer available to share this knowledge and mentor junior members in the company. In the event that they cross to competition, not only do they go with company valuable secretes, they also transfer the knowledge to the competition. Of course the impact is on business returns even if it might be near to impossible to quantify the actual effect due to the employee/s that left.

Then a staff leaves a manager has to understand what work remains, and how to cover that work until a replacement is found. This action could involve both time and money costs.


Although turnover is inevitable organization can apply some measures in order to reduce the scope. Some businesses (e.g. food services, accommodation, leisure and hospitality) are more susceptible and do experience higher turnover than others. Turnover is a challenge in these sectors, but it does not mean companies should cripple down.

Most of the turnover causes are around the mistakes in the employee selection process. Companies hire wrong people for the wrong jobs[2]. A Harvard University study attributes up-to 80% of employee turnover to mistakes made during the hiring process. 

A Michigan State University indicates that for a successful job hire; traditional hiring techniques - resume reviews, interviews only provides a 14% accuracy, Reference Checks and Interviews contribute 26% accuracy, while Behavior-based Personality Assessment, Reference Checks and Interviews can contribute 38% accuracy. Meanwhile Abilities , Personality Assessment , Reference Checks, Interviewing can ensure at least 54% accuracy, while Values – Interests, Abilities, Personality Assessment, Reference Checks Interviews and can maximize at 66% accuracy. Finally Personal Attributes - Job Matching + all of the above can contribute 75% accuracy

Michigan State University study shows that effective utilization of powerful personality assessments are shown to increase the likelihood of a successful job hire to 75%.The power of these assessments is stunning and provides a powerful insight into the values, behaviors, and attributes the job candidate possesses. The report offers hope in regards to these horrendous odds of hiring the right employee. This information can then be compared against a Benchmark established for the job position and an informed hiring decision can now be made.

The report indicates that most employers use a combination of application, interviews, resumes and employment reference checks. These methods are best described as subjective. They are highly vulnerable to data distortion or falsification. Resumes are often exaggerated or falsified. Interviews are greatly influenced by "first impressions, appearance halo effects or chemistry". References are usually groomed or coached. They conclude that subjective recruitment and hiring methods provide useful, but limited information. They recommend use of modern recruitment methods like use on-line applications and interviews (this has limitation in a number of developing countries), integrity screenings and executive profile assessments, job matching benchmarks (reasons for existing job, knowledge needed, what cannot be done without it) and background verifications. The information collected is highly accurate and reliable. Screenings and profiles are not as vulnerable to faking or distortion and halo effects. Validity indicators on assessments help to verify the authenticity or candor of the candidate's responses.

The key to recruitment, Wendover says, is to identify and then target the exact employee a company needs. Without that specific knowledge, many organizations end up settling for whoever walks through their doors. "What does not work well is desperate hires, just putting an unqualified warm body into a position," Criville says. "That is a recipe for failure." It is not a good decision to settle for a second-rate employee simply for the sake of filling a position. If a person will not be around for long, why spend money training him or her just to do it all over again? It's probably smarter to pay overtime to current employees to fill the gap and take time finding an employee who makes the grade.

Becky Mollenkamp in her article "Recruiting and Retaining Employees" recommends that making connections with local educators, community leaders and other employers takes time and effort but pays. To her the effort is a more affordable and productive option. In fact, some businesses are so fond of referrals that they pay for them. "We believe good people know good people so we pay referral bonuses," Criville says.

It is important to immediately schedule interviews once candidates for a position have been identified. Timeliness is extremely important," Domboski says. "You can lose a good applicant an hour after they apply."

There are many other things a company can do to create an environment that discourages turnover. It should be noted however that some of these most popular benefits are typically the most expensive. But there are also plenty of free and inexpensive ways to reward and retain employees.

The most obvious way to attract and keep employees is to offer competitive pay. There are also a whole host of desirable benefits, each of which comes with a price tag. According to Becky Mollenkamp a company is more appealing if it offers affordable medical and dental insurance, paid vacation and sick days, a 401k, holiday bonuses, tuition reimbursement, health club membership and incentive programs tied to attendance or safety. These benefits help set the company apart from its competition and allows for recruiting the best candidates available.

Many firms in developing countries emphasize experience as a prerequisite for employee recruitment this means that for the experienced worker the switching costs of seeking new employment are no longer a significant factor in deciding whether or not to leave an organization. The implications for employers should be clear. It is now more important than ever to retain the team members a company.

In his book, Good to Great, Jim Collins highlights on the importance of having the right talent on the organizational bus. Hiring individuals who are truly fit to succeed in the position for hire dramatically increase the chances of that employee being satisfied with his or her work and remaining with the company for an extended period of time.

Clarity on the terms and conditions of work is also important in ensure employee retention. Communicationin the effort to retain employees to has become so important that it almost matches with salary scale itself. Employees need to know their roles, job description, and responsibilities within the organization. Any new company policies or initiatives have to be communicated to all employees to be sure that everyone is on the same page. Nobody wants to feel that they are being left out of the loop. Where there are no clearly defined performance benchmarks, employees will feel frustrated or discouraged. In a performance driven workplace a lack of clarity regarding job duties and expectations can cause fear and anxiety among employees who are unclear of what is expected of them. Even worse outright anger, conflicts and mistakes can occur when employees are not aware of what is expected of them. It makes it also difficult for a supervisor to objectively evaluate performance based on expectations and job duties that are not known. The result is unfair judgments that of course will not go down well with the victimized employees.

Involving employees in decision making is also important in ensuring their retention. In many developing countries most indigenous companies are individually owned. Decision making on critical issues remains in the hands of the directors or owners of the businesses. This has an implication in the level of participation of the employees in decision making. It is incredibly important to include team members in the decision making process, especially when decisions will effect an individual's department or work team. This helps to create a culture of employee involvement and will generate new ideas and perspectives that top management might never think of as important. When employees participate in setting limitations, targets and benchmarks for their performance, it enhances their morale to ensuring they achieve accordingly. However failure to have them participate can cause resistance, resulting into friction and job terminations

Employees are engaged in day today operations of the company and are thus well versed with the dynamics of works. Where work is in sections that are linked and synergized, allowing employees to share their knowledge with others will help the company to harmonize synergies and linkages. This will not only help increase the general performance of the employees, it will also make them appreciate general challenges and even devise means to overcome them. The sharing of information between employees facilitates mentoring and supervision since they are able to pick benchmarks and repercussions from within themselves. Information gap leads employees into mistakes they would never have committed if they were in the know of the traps in place and associated repercussions.

Shortening the feedback loop on employee performance is important to keep the employees in check but with minimal haggling which is a recipe for job terminations. It is important not to wait for an annual performance evaluation in order to get feedback on how an employee is performing. Most team members enjoy frequent feedback about how they are performing. Shortening the feedback loop will help keep performance levels high and will reinforce positive behavior. Feedback does not necessarily need to be scheduled or highly structured; simply stopping by a team member's desk and letting them know they are doing a good job on a current project can do wonders of boosting their morale and help to increase retention.

Employee retention also depends on compensation packages available. An employeewants to feel that he or she is being paid appropriately and fairly for the work he or she does. Employees take it upon themselves to find out what other companies and organizations are offering in terms of salary and benefits. They start knocking at competitor dowers in a situation where they feel they are not being offered competitive compensation packages.

Employers should provide adequate time for the employees to be with their families. Employees have families which are incredibly important to them as it is to their employer. When work begins to put a significant strain on one's family no amount of money will keep an employee around. Companies that do not stress the importance of balancing work and employee's personal life risk losing valuable staff. Incentives given to employees like extended lunch once a week, annual leave, and family reunion parties etc generate employee loyalty to an organization.

Opportunities for growth and development are important in ensuring employee retention. An employee will get bored and begin thinking of leaving the organization if he or she gets stuck in one position for along time with no possibility for advancement or new opportunities. Where there are no opportunities for growth and development in which employees acquire new skills, knowledge and stature, an employee will find that his future is hopeless and will look for that organization where he or she would be a good fit.

An employee will live longer with the company if the job provides career and makes him or her feel like an integral part of the team. Companies need to teach employees about the business and the industry as a whole, organize for them sectoral associates meetings and give them training on how business operates. "Developing an associate to feel self-worth, pride and a sense of belonging to our business is very important," Domboski says. "Since some are working independently or alone, motivation is a key in ensuring employee retention."

In an effort to ensure employee retention, it is also important to reward and recognize employees for their hard work. Employees at all levels in an organization want to know that their efforts are appreciated and recognized[3]. Recognizing employees for their hard work and let them know they are appreciated can be one of the single greatest factors influencing employee retention. Less costly and sometimes more extravagant actions like a short e-mail or stopping at a staff's desk and saying quick "thanks" can really boost morale. Other options include a mention in the company newsletter for outstanding performance or gift coupon to a restaurant or movie theatre, certificates of outstanding performance, performance based promotions - the possibility list is endless.

Employees want to have supervisors who are respectful, responsive, listener, courteous, and friendly. More importantly employees need supervisors who set clear performance expectations, deliver timely solutions and feedback, live up to their word and promises, and provide an environment conducive for growth and development. Failure by supervisors and management to provide this can cause an employee to start looking for greener pastures.

Employees prefer to work in an environment where there is fair and equitable treatment, where there is no favoritism and preferential treatment of individual team members. Inequitable treatment results in animosity and resentment in an organization. It leads to development of untouchables which creates noxious organization culture and foster resentment among team members. This culture gets worse and can create a devastating exodus of valued team members. Flexible scheduling is welcomed by many people, particularly those with childcare or transportation issues. Recognition in all forms, whether it is a simple pat on the back or a small monetary gift, keeps employees motivated.

Exit interviews are powerful tools. Encourage departing employees to honestly state the reasons they are leaving (an impersonal survey may encourage honesty more than a face-to-face interview). Consistent and similar same issues, such as low pay or lack of recognition may signal cause for investigation and need for changes in those areas. "People leave and it's the employer's responsibility to find out the reason why and pursue every avenue to halt future associates from departing." Domboski says

Companies need to prepare for turnover. Managers should constantly assess who is in their workforce, with an eye towards who may be likely to leave and when. If the average employee leaves after 5 years and there are several people who are in their fourth year of employment, chances are that there are a job opening within a year is most likely. Active recruiting and perhaps even doing some premature hiring or adding paid apprentices to a workforce could be a good strategy, where it is anticipated that an employee will leave soon.

It should be noted however that even companies that recruit carefully, offer every possible benefit and have a perfect training program will lose employees. Employee Turnover is a necessary evil; gone are the days employees remained with one company for the rest of their working time. In a global village today, people are more restless. All that the companies can do is to minimize the rate of employee employees leave.

[1] http://www.therainmakergroupinc.com/index.asp  

[2] "Finding the right applicant can be as difficult as looking for a needle in a haystack," says Lynn Domboski, director of human resources for Matrix Integrated Facility Management in Johnson City, N.Y.

[3] Employees Place High Value On Being Appreciated David Saxby,

1 comment:

Donna Roland said...

I couldn't agree more with your opening statement. In fact, I think hiring and retention is the one of the most daunting problems for budding businesses and employes like local SME's. Even bigger corporations aren't exempted with this menace. In my years of observing these organizational strategy patterns, I've seen companies devote prime resources in their hiring and human resource departments just to alleviate the problem. At first look at the short-term, it will cost the company a bit more, but the long-term benefits have can pay-it-off tenfold. Another alternative startegy I've encountered was utilizing 3rd party consultants as hiring solution managers or outsourcing specialists. This strategy actually cost companies a lot less than the first, but there are underlying technicalities that these would entail; but nothing too burdening on the part of the company. In the end, it's the amount of organizational effort that will determine the success of such endeavor. Donna Roland @ EpiphanyStaffingGroup.com

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