Introduction

"Take my 20 best people and, virtually overnight, Microsoft becomes a mediocre company." - Bill Gates

When you compare the cost of replacing high performing staff with the significant bottom-line benefits gained from retaining their services, it's clear that retention planning is an issue that must move from the fringes of human resource planning to the heart of an organisation's staffing strategy.

But what are the costs of losing your best people? And how do you create an effective strategy to encourage high performing staff to stay?

Turnover - the real costs

The typical costs that arise from the loss of a key staff member can include:

1. Lost productivity while the employee looks for another job;
2. Time taken to conduct exit interviews;
3. Any money paid out in termination payments;
4. Time taken to perform the many clerical and administrative tasks associated with staff departures;
5. Slowed momentum due to the loss of specialist knowledge, corporate history;
6. Loss of co-worker/departmental productivity;
7. Loss of sales, revenue, profits and customers;
8. Adverse impact on critical project completion;
9. Advertising for a replacement;
10. Agency / internal HR recruitment fees;
11. Time required to review resumes;
12. Time spent on conducting candidate interviews;
13. Time required to perform pre-employment testing;
14. Travel / relocation expenses incurred to secure a replacement;
15. Start-up administration costs;
16. Induction and departmental training, materials and supervision.

To quote but one example, a medium sized New Zealand IT company (400+ staff) spent over $16 million on staff turnover in 2002.[2] And consider this, for a company with 200 employees, revenues of $25 million and an average profit margin of 10%, a staff turnover rate of 12.5% per year would represent 4% of that company's total revenues and 40% of their annual profits.

Got your attention yet?

So how do staff turnover costs escalate to such an alarming level? 'Cost of Replacement' metrics show that an average performing staff member costs about 90% of their salary to replace, while high performers can cost anywhere from 300% to 2,000%. Accordingly, when staff turnover rates start to escalate to over 10% per year, the total cost of this attrition begins to quickly mount.

By measuring the complete costs to your organisation of replacing your high performing staff, you become better equipped to gain a mandate to invest in developing an effective retention system that reduces the odds of people walking. 

An effective retention system requires many components - so to keep things simple, it's helpful to think of the following three phases: acquisition, induction and maximisation.

(i) Acquisition

Like it or not, staff retention levels are shaped well before the formal recruitment process commences. Ideally, your company should be so well thought of that high performers are motivated to contact you when seeking new opportunities. The key to this 'utopia' is to become known by your ideal employees as one of 'the' places to work - and there are two key areas that must be addressed to create that kind of 'buzz'.

Money Not Main Reason People Look Elsewhere According to extensive  research by Accenture, pay is not likely to have the greatest impact on employees' decisions to stay or leave an organisation. Instead, data suggests that employees who are planning to leave are most likely to do so for opportunities that allow them to use and develop their skills - or for opportunities in a company with strong leadership. This Accenture study compared satisfaction levels of "committed" employees compared to those "planning to leave soon" on 40 different topics of organisational importance, such as strength of management, compensation, training and workload. The topics with the widest disparities between the two groups of employees - called "satisfaction gaps" - are the key drivers of attrition. The widest gaps (between 32-34 percentage points) were found in areas such as "using my skills and abilities, "opportunity for management" and "company has a clear sense of direction;" consequently, those are the three major indicators of attrition. Pay, usually considered the most emotional factor in the employer/employee relationship, only ranked as the seventh most significant driver of attrition. Source: PeopleFirst Solutions

(a) How are you perceived?

High performers conduct their own due diligence on companies they consider working for. Therefore, having a positive reputation in the industry is vital.

Do staff live your brand - or are your marketing messages merely motherhood statements? For example, if you preach empowerment, work-life balance and opportunity, but in practice have high turnover due to under-staffing, poor communication, no recognition, or questionable ethics and promotional practices, don't expect the best to seek you out.

So, how do you go about finding out how your company is currently perceived? Just ask. If you're not already doing so, a structured exit interview process is a good place to start to learn what is causing staff to leave and can help you identify common issues to address. Furthermore, a regular staff climate survey can also provide an appropriate platform for staff to voice concerns before they spiral out of control. In addition, surveying job seekers and graduates to see whether they perceive you as a desirable place to work can also be a useful tactic to help build a well-rounded picture of how you stack up against the competition and where you need to focus your efforts to improve.

(b) Be diligent, but move rapidly

Most leading employers use a variety of interview and testing procedures to screen candidates. The important point here is that while you should definitely do this due diligence it should be conducted over an acceptable time period - candidates can sometimes have notoriously short interest spans. In a candidate short market, if you're not back to high quality applicants within 48 hours following each stage of the selection process, you risk losing their interest, or worse still, losing out completely to the competition.

Once you have found an appropriate candidate, and completed reference checking and testing, make the offer immediately. Swift feedback throughout the application process and offering the job as soon as you've completed your due diligence communicates that you're efficient, value their time and are prepared to move quickly once you've made a decision - all hallmarks of leading employers. Once they've accepted, your focus should immediately shift to their induction.

(ii) Induction Changing jobs is often stressful. Expectations are often high - so it is important that your company work to quickly reinforce to new employees that they have made the right decision to join you. Cultural assimilation is key. An effective induction process means that by the end of the first 4-6 weeks of employment, new employees would have been provided with information relating to each of the following areas:

(a) Resources: What tools and training do they need to hit the ground running? High performers want to kick goals fast - so make it easy for them to do so. There's nothing worse than waiting 6 weeks for a laptop or company car to show up or for software to be loaded to their computer.

(b) Routines: Which systems and regular events should they be part of? This can be anything from being included on the right e-mail distribution lists to being shown how to claim expenses. The sooner they understand the corporate rhythm, the faster they will adapt to your pace of business.

(c) Relationships: Who do they need to connect with? Establishing contact with key work groups such as their line manager/direct reports and informal networks is important. A well developed buddy or mentor system matching them with a peer or senior non-direct report can also be very effective. By using existing staff members to help integrate the employee into the fabric of the organisation, the new team member becomes linked to more colleagues and to more aspects of the business than a rapid-fire induction could ever hope to cover.

With an effective induction should come a productive first 90 days. After which time the fruits of a well-designed benefits package and clearly defined career path should help to maximise their potential for a long and rewarding career.

(iii) Maximisation

Employees often specialise in either a technical or management career track so each individual requires benefits and opportunities that match their preferences. Designing an appropriate benefits package means going beyond monetary considerations. No matter how much money people earn, financial compensation won't by itself maximise staff performance or retain staff. Effective benefits packages must combine two elements: tailoring to individual needs, and clear links to organisational goals.[3]

Typical benefits include exclusive end of year bonuses, additional vacation time, reduced working weeks, greater work-from home ratios, and guaranteed severance bonuses. Whether bonuses are cash, share options or non-financial rewards should depend on length of service and the employee's positive impact on both bottom line and corporate culture.

Whatever is agreed, it should be non-negotiable that if performance drops, they lose benefits in a fair and measurable way - taking life changing circumstances (e.g. marriage, divorce, having children, death in the family) into consideration when reviewing and setting targets. This gives rising stars motivation to improve, and 'experienced hands' incentive to stay focused, while showing that you care for them personally beyond the contract.

A study by Mercer Human Resource Consulting conducted in Australia in 2003[6] revealed that the most important attributes that Australian employees value about their job were:

1. The existence of opportunities for advancement,
2. Training, and
3. A clear career path.

It was also important for employees to be proud of their organisation and to have their achievements recognised by the leadership, the study found.

Accordingly, providing up-to-date training and opportunities to participate in innovative new projects help keep high performers motivated and productive. Cisco Systems, for example, has an excellent retention track record, with over 33,000 staff and a voluntary staff turnover rate of just 3% per year[7] in part because it is one of the industry leaders that is continually at the forefront of advancing the technology industry.

Conclusion

Making retention a cornerstone of your human resource strategy will not only reduce your turnover costs but strengthen your capacity to attract the best 'new blood' available. It also ensures that a good portion of the inevitable staff losses that do occur are genuinely beyond your control. Considering both the costs of inaction, and the growing skills shortage, it's really not a question of will you do something to improve your retention practices - but when?


• Article commissioned by SMF Recruitment for the SMF Recruitment client newsletter.
• Written by Victoria Small and edited by Paul Quinn, Quinntessential Marketing Consulting Pty Ltd.
• Disclaimer: The views and opinions expressed in this document are those of the author and do not necessarily reflect the view of SMF Recruitment Pty Ltd.


Article References:

[1] EOWA - (Includes an on-line calculator to help you quantify your turnover costs).
[2] http://www.itsinc.net/retention-newzealand.htm - "Retaining Top Talent In New Zealand" - Bill Rehm
[3] Towers Perrin Talent Report 2001 - New Realities in Today's Workforce, Pg 18.
[4] http://was.hewitt.com/hewitt/business/talent/subtalent/shor_it_money.htm
[5] http://www.useit.com/alertbox/20010304.html "Retaining Key Staff: What High Tech Employees SAY Versus What They Do"
[6] Shortlist Online, Friday 5th March 2004
[7] Fortune Magazine, January 2005 - America's 100 Best Companies to Work
[8] Research on industry benchmarked salary and benefits packages - http://www.livesalary.com.au