Retention and Turnover
Just as employees can no longer rely on paternalistic management structures to shield them from the effects of market cycles, technological change, or international competition, employers can no longer assume that employees will stay if circumstances—and these can be push or pull factors—encourage them to leave.
This has demanded the attention of employers because the ability to attract and retain the best talent represents a decisive competitive advantage, one that will determine the current and future profitability of most companies. So, it is not surprising that increasing thought is being paid to issues of employee retention and to the costs of high employee turnover.
There are two propositions here. The first involves the retention of key employees. Employment may be insecure for a large portion of the American workforce, but for those with critical skills and talents the reverse is true. The transformation of corporate employment from corporate benevolence to a talent market has granted employees an advantage that gives every indication of being permanent. While this issue involves far fewer employees, its effects are magnified by the increasingly specialized nature of skills within the knowledge economy. Often, employees lost to one company will find a place with their direct competitors. And when it comes to innovators, the benefits lost with their resignation can be immense; Dr. John Sullivan suggests that it could be 5 to 300 times that of an average employee.
The second proposition, which this discussion will concentrate on, involves the ongoing costs of turnover in lost productivity, lower morale, damaged corporate reputation, compromised customer service, and employee defections—not an exhaustive list, but a representative one. The last item, the “self-reinforcing cycle,” in which turnover breeds turnover, is particularly important: higher turnover has a direct, negative effect on competitive advantage that is independent of any consideration of staffing levels; a company may achieve savings by transforming labor from a fixed to a variable cost, but this comes at a cost. The higher turnover this leads to will diminish its ability to innovate and compete, as well as having a direct effect on its bottom line. According to a 2007 PwC Saratoga Institute study, which explored retention rates across 11 major employment sectors in the United States, turnover-related costs can be significant, with a range up to 40 percent of pre-tax income in some industries.
A Short History of the New Labor Market
What were the factors that caused this new relationship between employees and employer to come about? When the Fair Labor Standards Act was passed in 1938, it was clearly designed, like previous minimum wage and child labor laws, to protect wage earners rather than “exempt” salaried employees. Salaried employees were largely excluded from the Act’s provisions because it was assumed that they were already well protected by the paternalism of their employers. This assumption was broadly correct and remained so until the recession of the early 1980s and the fundamental changes that the recession heralded. It was reciprocated by employees who embraced the sometimes oppressive cultures of their employers. Writing in the Administrative Science Quarterly in 1970, J.M. Pennings could confidently conclude that work-value systems could not be meaningfully framed in terms of intrinsic and extrinsic rewards, but rather were the “subjective attitudes and opinions with which an individual evaluates his job and work environment.” In other words, employees used co-workers from their own organizations as the reference group by which they determined relative satisfaction.
The recession of the early 1980s upset this. Intensified competition, restructuring, the shifting power relationship between senior management and shareholders, and accelerating technological change all contributed to the transformation of the employment culture; where a mutual lifetime commitment had been the norm, there emerged a largely contingent arrangement between employers and employees. Downsizing was the most notorious aspect of these changes, and remains, often in response to oscillations in the economy.
Perhaps the most useful way to understand the hold that downsizing had on the American economy is to see it as an instinctive corporate response to the intensification of market forces: it was a way of avoiding coming to terms with them by shifting the burden to employees. It was a strategy of retrenchment, not of growth, which survived into the 1990s boom as an expression of hope—nostalgia for the control and stability of the post-war decades. In this light, we can see it as an expression of the lack of any clear strategy of adjustment to emerging global realities.
However we interpret the changes that swept through the American economy in the 1980s and 1990s, it is clear that they have established a new reality in which the relative freedom of employees from any expectation of reciprocal loyalty is at the heart of an entirely new set of challenges for American business. Employee turnover is highly detrimental to competitive advantage. And yet, with employee behavior shaped by market forces more than by loyalty, it is the most valuable employees, those whose departure would be most detrimental, who will generally have the greatest opportunity to leave.
The Costs of Employee Turnover
The costs of employee turnover range from tangible to intangible—paying out benefits, hiring temporary replacements, paying to advertise or head hunt a replacement—to the abstract and unquantifiable, such as the effects on morale, creativity, and corporate reputation. These apply to every industry and every category of job, from retail service to software design. They can be understood in terms of the local disruption of a single defection from a team project, or in terms of the bottom line of a corporation.
Turnover costs can be broadly categorized as direct or indirect, though the dividing line is somewhat arbitrary. The direct costs of higher turnover fall into two general categories: the financial cost and administrative time involved in departure and replacement, and the direct effects on the productivity of the immediate coworkers and managers departing employees have left behind. The first category includes: the costs of benefits owed and the administrative cost of processing them; the extra costs involved in hiring temporary employees or in paying overtime to cover the workload of vacant positions; the human resources time involved in a separation (exit interview, paperwork etc.); the various costs of recruitment, which can include developing job descriptions, reviewing resumes, interviewing, evaluating assessments and background investigations, as well outlays for advertising and/or recruitment services; the financial and administrative costs of any formal training; and the administrative cost of processing new employees.
These are costs which any company would do well to minimize—it has been estimated that total direct replacement costs average approximately 50 percent to 60 percent of the employees’ salaries. But to see the bottom line as the defining issue would be to fall into the same conceptual trap that led to rampant downsizing. Some level of turnover is inevitable, and to an extent desirable. The greater cost of turnover lies in its effects on a company’s ability to innovate, to compete, and to respond to the market and turnover has a direct effect on this ability; it leads to direct disruptions of optimal workplace organization, which compromise productivity and, at least potentially, undermine work quality. These disruptions begin with the managerial time and attention that must be dedicated to dealing with an employee departure and in reassigning responsibilities and assisting remaining employees. Another important direct cost is the time and attention that coworkers and managers will spend in orienting, training, and assisting a new employee, above and beyond whatever formal training might be required, until the new employee is fully effective. Finally, there is the lower productivity of new employees and its add-on effects on the interdependent tasks of a team. Too much turnover will undermine the ability of a team, or a company, to interact with the demands of the marketplace.
The same is true of the more indirect costs of turnover. Most of these are costs measured in the quality of relationships—internal and external. The loss of a skilled employee, or a well-liked coworker, can lead to decreased team morale, resentment at increased workloads, and disgruntled customers. If an employee is leaving because of “push” factors, he or she may be disruptive or negative in the period leading up to their departure with workplace relationships and sabotage relationships with customers. If they have played a key role in an ongoing project, it may have to be abandoned; at the very least, the disruptive effects of their departure will be multiplied. After years with a company, the value of the skills and knowledge that an employee takes with them will be far greater than all the quantifiable costs involved in retraining and habituating their replacement. The more effective the employee, the greater the disruption to the employer if that employee leaves.
The effects of turnover have so far all been expressed in terms of individual departures, and the responses of team members and managers, as if a company’s bottom line simply reflected their cumulative individual effects. However the effects of turnover on the effectiveness of a company are far more diffuse. Too much turnover can breed insecurity, resentment, and a determination to leave, even among employees not dealing with the direct effects of a coworker’s departure; a loss of competitive advantage can generate a feedback loop in which general corporate malaise increases turnover and amplifies coworkers’ negative responses to it.
What is a company, or a human resources department, or a manager to do, once it’s recognized the detrimental effects of too much employee turnover, and has accepted that market-driven employee-employer relations are here to stay? They’ll almost certainly turn to the growing literature about employee retention—which will first reinforce their impressions of just how important retention, especially of key employees, has become. According to Wellins, Bernthal and Phelps, for example, in 1982 an average 62 percent of American companies’ market value was defined by their tangible assets, and 32 percent by their intangible assets. By 2002, these figures were more than reversed with almost 80 percent of company value coming from its intangible assets. A 2012 OECD (Organization for Economic Co-operation and Development) study identified knowledge-based capital as the single most important factor determining which developed economies would thrive and which would stagnate. Not only is turnover a demand on company resources and capacities, but those employees are themselves an asset which a company needs to treat with the care their importance warrants.
But what strategies should companies adopt to retain the employees in whom all this capital is embodied, or by whom it is created in the form of intellectual property? These companies offer employees competitive wages and benefits along with financial incentives like bonuses and stock options. According to a recent Towers Watson insider report, surveys indicate that retirement programs are becoming increasingly important as a factor in younger employees’ decisions to accept or keep jobs. These are important elements, but they share the assumption that employers can (or should) simply offer the most enticing package they can assemble, or afford, and rely on market forces to attract and retain employees.
These strategies might attract and retain employees, just as lowering prices might attract customers, but this is an approach that relies on strategies rather than insight. It goes nowhere toward addressing the elephant it has led into the room. Persuading employees to stay in the job and inspiring them to dedicate themselves to the work are two quite different things. A 2009 Wall Street Journal article takes a more sophisticated approach: “Determined to keep your most talented executives? The best way to keep them from leaving is to prepare them to do just that.” It suggests retaining executives by helping them accrue the skills, experience, and relationships that will advance their careers and increase their value in the job market.
The authors’ research has revealed that executives stay longer if their job offers them the opportunity to enhance their employability. The key insight here is not the discovery of a new thing that employees want—a more effective “bribe”—but the recognition that employee commitment is an interactive process. Employees, from senior executives to junior members of a team working on a project, can be given the power to define and embrace their own reasons for staying and contributing. The point at which this approach crosses the line from “more, better bribes” to something quite different comes when employees embrace the opportunities they are being offered and cross the line into engagement with the work.
“Engagement” might have emerged relatively recently in the discussion about employee turnover and retention. The realization that the most compelling work-related motivations are those that fulfill the fundamental human needs for purpose, a sense of achievement, and recognition from others, from “achievement and growth in the quality of the work itself,” goes back at least as far as Frederick Herzberg’s 1959 book, The Motivation to Work. Herzberg and his associates concluded, from their interviews with more than 200 managerial and professional employees, that the cause of their unhappiness at work was a conflict between the structure of modern bureaucracies and human nature. Disengagement was not something that these employees wanted, it was something that the work imposed, despite employees’ desire to engage with work and to imbue it with positive meaning.
What does it mean, then, that as Susan Cantrell and James M. Benton report, business executives “consider employee engagement to be critically important to the success of their business,” and employees describe themselves as “disengaged or actively disengaged from their work” in almost the same proportions: 71 percent versus 72 percent? It does not mean that these 71 percent of employees lack loyalty or lack extrinsic motivations to work. Their salaries and benefits might have been fine and they might even have positive feelings towards their employers, but engagement is more than a mere commitment to the company or a willingness to stay—it is not just another answer to desired retention, though it is that. It is a quality of the relationship between people and their work. Wellins and Bernthal define engagement as “the extent to which people enjoy and believe in what they do, and feel valued for doing it.” Engaged employees work harder, but more importantly, they work better, with more of their faculties engaged—from their creativity to the larger projects that their team’s work is a part of. Engaged employee may not stay, but as long as they do, their contribution will be more valuable because of their engagement.
A discussion of engagement would not be complete without an acknowledgement that there is some disagreement over exactly what the term means, and over its ultimate benefit. Kevin Kruse, for example, writing in Forbes, stresses commitment to the company and its goals, and in doing so evokes images of an earlier age of paternalistic corporate culture. Wellins, Bernthal and Phelps emphasize the importance of the employees’ connection with their own goals and their co-workers. Regardless of the definitions used, where there is engagement there is most often satisfaction from the work and a willingness to put forth effort beyond that which is minimally required for satisfactory performance. These understandings of engagement agree on one thing: its benefit. Yet this is not universally acknowledged. Dr John Sullivan suggests that engagement “may be a byproduct, not a cause—In many cases, it is not the engagement that is driving the productivity but vice versa.”
The capacity for engagement lies in all of us as an integral and essential part of our human nature. Nurturing its full capacity effectively requires a shift in understanding at every level of an organization. It is at least possible that engagement can flourish to the point where it as definitive of workplaces as paternalism and loyalty once was.
 Sullivan, John, “Bold Approaches for Successfully Retaining Every Innovator,” Dr John Sullivan: Talent, Management, Thought, Leadership (2013). Accessed Sep. 26, 2014 from http://drjohnsullivan.com/retaining-every-innovator-1/.
 This is the term used by Croucher, Richard, Geoff Wood, Chris Brewster, and Michael Brookes. “Employee Turnover, HRM and Institutional Contexts,” Economic and Industrial Democracy (November 2012) vol. 33 no. 4 605-620.
 “Driving the Bottom Line: Improving Retention,” PwC Saratoga Human Resources Services (2006). Accessed Sep. 23,2014 from http://www.pwc.com/en_US/us/hr-saratoga/assets/saratoga-improving-retention.pdf.
 Pauley, Traci M. “Executive Compensation,” in Robert K. Prescott, and William J. Rothwell.(eds) Encyclopedia of Human Resource Management, Key Topics and Issues, Vol. 1 (John Wiley & Sons, 2012).
 Cappelli, Peter, “The New Deal at Work,” Chicago-Kent Law Revue. 76 (2000): 1169.
 Pennings, Johannes M. “Work-value Systems of White-Collar Workers.” Administrative Science Quarterly (1970): 397-405.
 United States Department of Labor, Bureau of Labor Statistics, Mass Layoff Statistics. Accessed Dec. 11, 2014 from http://www.bls.gov.
 Allen, David G. “Retaining Talent: “A Guide to Analyzing and Managing Employee Turnover,” (SHRM, 2008). Accessed Sep. 12, 2014 from http://www.shrm.org/about/foundation/research/documents/retaining%20talent-%20final.pdf.
 Wellins, Richard S., Bernthal, Paul, and Phelps, Mark, “Employee engagement: The key to realizing competitive advantage,” Development Dimensions International (2005): 1-30.
 “New Sources of Growth: Knowledge-Based Capital Driving Investment and Productivity in the 21st Century,” Accessed Sep. 17, 2014 from http://www.oecd.org/sti/50498841.pdf.
 Nyce, Steve, “Attraction and Retention: What Employees Value Most,” (March 2012). Accessed Sept 19 2014 from http://www.towerswatson.com/en/Insights/Newsletters/Americas/insider/2012/Attraction-and-Retention-What- Employees-Value-Most-March-2012.
 Craig, Elizabeth, Kimberly, John R., and Cheese, Peter, “How to Keep Your Best Executives. The Key: Make it Easier for Them to Leave,” The Wall Street Journal Biz Insight Human Resources (October 26, 2009). Accessed Sep. 20, 2014 from http://online.wsj.com/news/articles/SB10001424052970203946904574302011865406286.
 The quote is from the introduction to the 1993 edition. Herzberg, Frederick, Mausner, Bernard, and Snyderman, Barbara Bloch. The Motivation to Work (Transaction Publishers, 1993), xi.
 Cantrell, Susan, and Benton, James M., “Harnessing the Power of an Engaged Workforce.” Accessed Sep. 14, 2014 from http://www.accenture.com/SiteCollectionDocuments/PDF/harnessing.pdf.
 Wellins, Bernthal & Phelps op cit, 2.
 Kruse, Kevin. “What Is Employee Engagement,” Forbes Leadership. Accessed Sep. 24, 2014 from http://www.forbes.com/sites/kevinkruse/2012/06/22/employee-engagement-what-and-why/.
 Sullivan, John. “What’s Wrong With Employee Engagement? The Top 20 Potential Problems,” Accessed Sep. 20, 2014 from http://www.ere.net/2012/02/23/what’s-wrong-with-employee-engagement-the-top-20-potential-problems/.