According to the U.S. Bureau of Labor Statistics, employee turnover is highest in industries such as hospitality, banking and finance, healthcare and the service sector. Turnover also seems to vary by wage and role of employee. For example, employee turnover of salespeople is often particularly high. This should be of critical importance to businesses because turnover is a huge expense. According to a study conducted in November 2012 by the Center for American Progress, the estimated average cost to replace an employee in the U.S. was 16% of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year), 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year), and up to a whopping 213% of annual salary for highly educated executive positions. That means the cost to replace a $10/hour retail employee would cost a company on average $3,328, while the cost to replace a $40k manager would be $8,000. And the cost to replace a $100k C-Suite exec is $213,000.
If employee turnover is so costly and generates no value, then it should be every company’s focus to keep employee turnover as low as possible. But how? And what is the right amount of employee turnover? Given how costly it is, what should the target rate be for this “wasted” cost? While zero employee turnover is ideal, it is certainly not realistic for any organization that isn’t family-owned and operated. So what is the bulls-eye on staff retention?
Employee Turnover Rate
According to some sources, the so-called “golden turnover rate” that companies should aim for is 10%. That means that a company with 100 employees should have 10 employees at most leave (for any reason) in a given year. That is the ideal. That said, most industries are not hitting that target. According to a study in 2013, the total employee turnover rate by industry in the U.S. exceeded that target rate for all but one sector, and one other sector came close.
It can be argued that employee turnover can be a good thing, depending on who the people heading for the door are. The departure of low-performing staff can, in fact, be healthy for an organization, and have a positive impact on everything from employee engagement to productivity and profits. The departure of top performers, however, can be problematic and reflect problems within the organization. However, not all employee turnover is a reflection of the organization. Studies have shown that turnover is higher with certain demographic groups than others. Millennials are known for their job-hopping, seldom staying at job for over a year or two. Notwithstanding, very high employee turnover is generally not a good sign. But it is a problem that can be solved.
While any company with a high employee turnover rate should ask “why is our churn so high?”, perhaps a better question for all companies to consider is “What makes an employee want to stay with their employer?” There are many variables, but here are some of the most important.
10 Reasons Employees Stay with their Employer
Let’s start with the obvious. Many people are prompted to shop for a new job because of compensation. While good employees may enjoy what they do, ultimately they work because they need to earn a living. Even the most altruistic employees have bills to pay and must contend with an ever-increasing cost-of-living. It is doubtful that most any employee would work another day in his life if he suddenly became independently wealthy. Therefore, it should surprise no one that polls show nearly 20% of people left a job because they weren’t getting paid enough. In some instances, the pay issue was tied to not getting an annual salary increase. In other instances, compensation increases were simply not keeping up with the position’s salary in the marketplace or increases in cost of living.
Once a valuable employee gives notice, trying to adjust compensation is likely too late. Even if the employee accepts the offer of a raise in order to stay put, both employer and employee often feel resentment for being put in that situation. The employee might feel that the only way he was offered what he was worth was by giving notice. And the employer might feel that the employee used another job as a way to extort more money. At the very least, the employer might look at the employee as disloyal. Neither will be happy, and the pay increase could end up being a temporary band-aide. When it comes to compensation, it is best if a company has a regular employee review program and evaluates performance and compensation on a regular basis. Compensation should also be addressed if there is a promotion or change in position.
Most employees value mentoring. There is value in instantly knowing how well he did on a particular project or task. Sometimes that feedback might be brutally honest, but whether kind or critical, it is accurate and worthwhile. Mentoring also allows an employee to accurately evaluate his skills, see his blind spots and to determine a plan for improvement. It is especially valuable to new or younger employees who are still ‘learning the ropes.’ Employees are able to learn from those with more experience, wisdom and maturity. It is not surprising, then, that companies that offer mentoring have lower turnover because employees are able to get honest feedback, identify professional weaknesses, and have a real roadmap to improve and grow. Companies that want to reduce their employee turnover can inexpensively develop an employee mentoring program that increases connections to the company, improves performance and reduces turnover.
Psychologytoday.com listed “Not challenged at work” as the second highest reason for an employee to leave a position. Why? There are several reasons. In the fast-paced world of change, the work environment is a classroom in which employees are always learning about themselves and their chosen field of work. Employees are increasingly aware that skills learned last year might be outdated by next year, and so are always striving to learn to ensure they remain relevant.
Moreover, people are living in an increasingly socially-connected world. Given that employees spend the majority of their day at work, they want to leave their place of business knowing they’ve made a positive and worthwhile contribution to the company, their clients, their own personal development, and perhaps, in a small way, to the greater good. Simply put, an employee’s happiness is based — in part — on whether he has been able to grow at work, and has a regularly confirmed self-perceived sense of accomplishment and contribution.
And, whether they know it on a conscious level or not, feeling challenged at work is not just good for employees’ personal and professional progress. It is also good for their long-term mental health. A study conducted in Germany examined the mental functioning of 1,054 participants aged 75 years or older over a period of 8 years. At the same time, the participant’s former jobs were assessed for required intellectual engagement. Intellectual engagement involved tasks requiring executive functioning (scheduling work and activities), verbal demands (evaluation and interpretation of information), and fluid intelligence (selective attention and data analysis). Those whose former jobs engaged all three (executive, verbal and fluid) intellectual fields showed the highest scores in mental engagement assessments conducted over the eight years. Those whose former jobs had the least mental stimulation had the greatest incidence of developing dementia and experiencing memory loss.
Ultimately, employees need to feel challenged at work, and not just by being flooded with more of the same work they already do. An easy way companies can challenge employees is by engaging them in finding ways to improve department processes, cut expenses and solve problems. Employees that contribute should be recognized and rewarded for their contributions.
According to a ProOpinion survey, 26% of workers feel that career advancement opportunities drive them the most at the office. And a CareerBliss market research report on worker morale found that opportunities for promotion ranked higher than compensation in workplace importance. Employees intuitively understand that putting forth exceptional effort at work should lead to promotions, raises and recognition from peers and supervisors alike. Employees value the opportunity to advance their positions at work through special projects and various job openings. Moreover, the benefits of planning for career development can extend not only to employees, but also to organizations themselves.
But organizations often miss the mark when it comes to providing advancement opportunities that both attract and retain employees. Companies may lack the necessary infrastructure or management to fully develop career pathways for workers. This can be problematic when valuable employees start to feel “stuck” in their current positions. Without the right opportunities, staff could start looking elsewhere for improved upward mobility. By the same token, employees sometimes need a helpful prod in the right direction toward specific career paths at companies. With the knowledge that hitting certain benchmarks can turn into promotions, employees are more inclined to work harder every day and stick with an employer long-term.
Employee involvement in decision-making has become increasingly common as companies see benefits in keeping employees at all levels actively engaged in core activities. A primary reason employee involvement has grown is because it has been shown to increase employee commitment to their organizations. By involving employees actively in decision-making, company leaders affirm the value of their employees. Employees more naturally develop deeper commitments to organizational and departmental objectives when they help set them and are involved in achieving them by offering input and making decisions that affect success. When company leaders create an environment that encourages employees to share ideas and to get involved in decisions, they also often get more informed perspectives with regard to what customers want. When top managers make all critical decisions on their own without employee involvement, their ideas are limited to their perception and past experiences.
Next week we will look at the other five reasons that compel employees to stay with their employer. Those are the real factors that spur employee loyalty and can help any company reduce employee turnover. Stay tuned!
Quote of the Week
“Commissions add up, taxes are a big drag, margin ain’t cheap. A good accountant costs money as well. The math on this one is obvious, yet investors often fail to recognize it: Keep your costs low and your turnover lower, and you will win in the end.”
© 2016, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.