Reducing Employee Turnover

With today's baby boomer generation beginning to retire from the labor market, many companies are finding it increasingly difficult to retain employees. Turnover is becoming a serious problem in today's corporate environment. The employment culture is changing as well. It is now relatively common to change jobs every few years, rather than grow with one company throughout the employment life as was once commonplace. In addition, employees are increasingly demanding a balance between work and family life.

Turnover costs for many organizations are very high and can significantly affect the financial performance of an organization. Direct costs include recruitment, selection, and training of new people. Much time and expense go into this process. Indirect costs include such things as increased workloads and overtime expenses for coworkers, as well as reduced productivity associated with low employee morale. Estimated costs vary from organization to organization, some as low as a few hundred dollars to as high as four times the annual salary of the employee.

It has been estimated that, on average, it costs a company one-third of a new hire's annual salary to replace an employee.Therefore, at minimum wage, the cost to replace an employee is estimated at $3,700.

There are many potential causes for turnover. Area economic conditions and labor market conditions affect general turnover rates and can be very difficult to manage. However, certain causes associated with turnover in any specific job or organization can be managed. These include such things as non-competitive compensation, high stress, working conditions, monotony, poor supervision, poor fit between the employee and the job, inadequate training, poor communications, and organization practices.

For a company to develop a retention strategy, several steps must be taken. First, they must assess the current situation and measure the turnover rate in their company. Turnover is calculated simply by dividing the number of annual terminations by the average number of employees in the work force. The average employee turnover rate is 14.4 percent annually, according to the Bureau of National Affairs. How does your company compare?

A company must also measure the cost of turnover, develop retention strategies, and plan for some expected turnover and a changing workforce culture. Employers must recognize that quality of work life is becoming more and more important to employees.

What initial steps can be taken to reduce turnover? First, hire the right people and continue to develop their careers. Does your company have an ongoing career development program, tuition reimbursement, or skills training program? An investment in upgrading the workforce is one of the best investments a company can make when looking at long-term growth. Hiring the people that are a good "fit" with the culture of the organization—meaning that their values, principles, and goals clearly match those of the company—and then training as necessary will go a long way toward ensuring employee loyalty and retention.

Second, most companies with low turnover rates are very employee oriented. They solicit input and involvement from all employees and maintain a true "open-door" policy that avoids closed-door meetings. Employees are given an opportunity for advancement and are not micro-managed. Intrinsic rewards are critical. Employees must believe they have a voice and are recognized for their contribution. Remember that "trust" and "loyalty" are a two-way street. Does your company's culture encourage open communication and employee input?

Third, develop an overall strategic compensation package that includes not only base and variable pay scales, but long-term incentive compensation, bonus and gain-sharing plans, benefit plans to address the health and welfare issues of the employees, and non-cash rewards and perks as well. To be competitive in today's labor market, most companies find it necessary to offer a standard benefit package, including health, dental, and life insurance, vacation and leave policies, and investment and retirement plans. But what more could be done that would be cost effective toward creating an employee-oriented work environment?

Creativity in compensation and benefits can make quite a difference to the welfare of the employee. A company should assess overall employee needs when addressing retention issues.

If employee welfare is a genuine concern, what about child care? How much employee absenteeism is attributable to not having a dependable babysitter? Although the costs and liabilities involved in providing onsite day care can be prohibitive, perhaps a company could subsidize childcare in some manner. Sometimes, just negotiating rates for your employees with area childcare providers could be very helpful. Maybe some kind of a company match would be possible. Household chore assistance is another possibility that is being used by some companies.

Consider other options—such as alternative work schedules or flextime, or perhaps preventative health care and wellness programs such as fitness center memberships—as possible cost-effective benefits. Don't forget that perks or non-cash rewards to recognize exceptional performance can be critical. Service recognition, event tickets, trips, and public recognition can send strong messages to the public regarding company culture and values. Simply examine the issues and needs of your employees and try to develop creative programs to address these needs.

Although many costs associated with these suggestions may seem prohibitive, as well they may be, the company must evaluate the costs of current turnover, analyze the reasons for the individual organization, and develop strategies that in the long term are less costly than continued turnover. Some of these suggestions may not be so costly in comparison.

Just a word of caution: Be fair and consistent in establishing compensation. Promote from within if possible. Attempt to avoid bringing new people on board at a higher rate than current employees. Policies to prevent discussion of wages simply do not work. Furthermore, such policies are in complete opposition of "open-door" communications.

Although many companies use contract employees to address fluctuations in business, working side by side with someone who is making twice the rate of pay without any commitment or loyalty to the company can be a real morale killer. Avoid this if at all possible!

If your company follows these steps and shows a genuine concern for the well being of your employees, you may not have to pay the highest wages n town to have the lowest employee turnover rate.

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Authored by: Willis Mushrush, Business and Industry Specialist, University of Missouri Extension
Source: Creating Quality Newsletter, Volume 11, Number 5, May 2002

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