• Why retention matters
• Why retention is now so challenging
• The special challenges of a diverse work force
• Why people stay—and why they leave
• Examples of companies that successfully retain employees
• Tips on managing for retention
H iring and retention are two sides of the same coin.They complement each other, and if both are done well they produce what every company des- perately needs: first-class human assets. In this chapter we will shift our focus from the hiring process to strategies for keeping the good people you already have. If you did everything described in the previous chapters right, and filled all your positions with only talented, hard-working peo- ple,you’d most likely have a considerable advantage over your com- petitors, since few companies ever accomplish this goal. But your hiring success would create another challenge: keeping those star employees on-board.After all,if your human assets were measurably superior, other companies would notice and try to lure them away with higher pay, more authority, and more appealing work situa- tions—perhaps the same inducements you used to recruit them! You’d find yourself on the defensive, forced to look at your own employment practices,benefits,and compensation scheme to deter- mine if these were unconsciously undermining bonds of loyalty between your company and the great people you’ve hired. Retention is a challenge faced by many of the world’s most admired companies.Consider the experience of many companies in the United States from 1992 to 2000. U.S. businesses enjoyed tremendous economic prosperity during this period and just about every able-bodied person who wanted a job was enlisted in the work force. In many employment categories—particularly high- skilled areas such as IT, software development, electrical engineering, accounting, and finance—demand outstripped supply, touching off what has become known as the "war for talent."Many companies recognized that a lack of human talent was a serious constraint on future growth and pulled all the stops in order to retain their most valuable employees. Ernst & Young went so far as to establish an Office of Retention with direct reporting responsibility to the CEO.Others set up work-life balance programs to alleviate stress on the home front. Casual dress regimens, on-site child care, and foos- ball tables proliferated.More than a few companies allowed employ- ees to bring their dogs to work. Books and magazine articles on "how to keep your employees happy and productive" were cranked out by the score. The great war for talent in the United States appeared to end with the recession that hit the country in late 2000.The high-tech sector was the first to be hit.Even IT professionals—the people for- merly in greatest demand—were furloughed by the thousands. Lay- offs followed in other industries as the recession rippled through the economy. Even Charles Schwab, a pioneer in the field of employee development and work-life balance, was forced to downsize. Between late 2000 and early 2002 the national unemployment rate almost doubled. But recessions don’t last forever, and most people recognized that the war for talent would heat up again once the economy got back on track.And in some sectors of the economy, the war never really subsided. So, what is the retention situation in your business? Are all of your employees toiling happily in the company vineyards? Don’t bet on it. According to a 1999 study of 2,000 employees by Hudson Institute and Walker Information: 1 • 33 percent are "high risk"—that is,they are not committed to their present employer and not planning to stick around for the next two years; • 39 percent are "trapped"—they aren’t committed to the organ- ization but are currently planning to stay for the next two years;and
• only 24 percent are "truly loyal"—both committed to the organization and planning to stay on for at least two years. Thus, if your employees are anything like the ones surveyed, more than half are prepared (or preparing) to bolt! This chapter is the first of several on the subject of employee retention.It explains why it is so important to your business—and so challenging.It offers insights into why people stay with their current employers and what factors influence them to leave.Two companies with remarkable success in employee retention are highlighted as examples: Southwest Airlines and SAS Institute. Finally, this chapter offers suggestions on what you can do to retain your best people. Why Retention Matters Retention is the converse of turnover (turnover being the sum of voluntary and involuntary separations between an employee and his or her company). Industry-wide and company-specific measures that track turnover rates reveal that most companies surveyed by the Center for Organizational Research had turnover rates in the 15 to 50 percent range, though a sizable minority enjoyed single-digit turnover (see figure 3-1). Retention isn’t simply a "feel good"issue.The retention of good employees matters for three important bottom-line reasons: 1) the growing importance of intellectual capital; 2) a causal link between employee tenure and customer satisfaction; and 3) the high cost of employee turnover.Let’s examine each of these in turn. The Importance of Intellectual Capital During the Industrial Age, a firm’s physical assets—such as machin- ery, plants, and even land—determined how strongly it could com- pete. In the current "Knowledge Era," intellectual capital is what defines a company’s competitive edge. Intellectual capital is the unique knowledge and skills that a company’s work force possesses. Today’s successful businesses win with innovative new ideas and top-notch products and services—all of which originate in the knowledge and skills of employees.Examples of people who possess intellectual capital include computer programmers, network engi- neers, technical designers, CPAs, and direct-marketing analysts. Other possessors of intellectual capital are: • mid-level managers (they know whom to contact to get things done) • top-level executives (they have years of business savvy and industry knowledge) • strategic-planning/business-development professionals (they know how to do competitive and other forms of analysis) • human resource professionals (they understand recruiting, employment law,compensation,and other critical employee- relations issues) • in-house legal counsel (they understand intellectual property, securities,and other areas of business law)
Whenever employees leave, the company loses their hard-won knowledge and (often expensively) acquired skills. When those employees go to a competitor,the loss is compounded.Not only has your firm been deprived of an important part of its knowledge base, your competitors have gained it—without having to invest the time and dollars in training that your firm may have invested. Retention and Customer Satisfaction Everyone understands that customer satisfaction is one of the most—if not the most—important factors in business survival and growth.This is another reason that retention is so critical. Simply stated: Employees who are satisfied with their work and their company are more likely to create satisfied customers.Although this may be intuitively obvious,a growing body of research supports this correlation. This fact was amply illustrated by Sears Roebuck, which in the early 1990s was rapidly losing money and customers. A new management team led by Arthur Martinez was brought in to stop the losses and revitalize the aging retail giant.As reported in a land- mark Harvard Business Review article, one of the initiatives under- taken by the new management team was a study that involved eight hundred company stores and thousands of store personnel. 2 That study examined a number of important relationships and found that: • negative employee attitudes and behaviors adversely affected the satisfaction of Sears customers; • high employee turnover reduced customer satisfaction and store revenues;and • the extent to which store employees understood their jobs and the company’s strategic objectives had a direct bearing on their attitudes and behaviors. The study concluded that employees’ attitudes toward their work and toward Sears were both poor and that these attitudes were producing employee behaviors that measurably reduced customer satisfaction and sales revenues. Using these insights, the Sears team
developed an "employee-customer profit chain model" that quanti- fied the causal links between employees’ attitudes, job tenure, and the financial performance of the store in which they worked.They even formulated metrics capable of predicting the impact of employee attitude, tenure, and behaviors on revenues. (See "Case Study: Retention and the Service-Profit Chain" for some history behind the creation of this model.) Sears’s findings are echoed by many other studies, including a multicompany project that concluded that "employee attachment predicts customer attachment.When employees feel an attachment to the firm, they are more likely to share their positive images and feelings about the firm with customers. When customers are exposed to favorable testimonials, they respond more favorably to the firm." 3 Likewise, a William M. Mercer survey of senior human resource executives in large enterprises reported that "more than half of (study) participants see poor customer service as a conse- quence of attraction and retention problems." 4 The Cost of Turnover The high price of turnover is the third major reason that retention matters. Employee turnover involves three types of costs, each of which saps bottom-line results: • Direct expenses,including the out-of-pocket cost of recruiting, interviewing,and training replacements.(In a tight labor mar- ket,replacements may require a higher salary than the people who are defecting—not to mention the potential cost of sign- ing bonuses.) • Indirect costs,such as the effect on workload,morale,and customer satisfaction.Will other employees consider quitting? Will customers follow the employee who left? • Opportunity costs,including lost knowledge and the work that doesn’t get done while managers and other employees focus on filling the slot and bringing the replacement up to speed. The Sears employee-customer profit chain model is a method- ological descendent of an earlier model developed by Harvard Business School professors James Heskett,Earl Sasser,and several associates.Called the "service-profit chain,"it likewise recognizes the role of employee satisfaction,loyalty,and retention. Seven fundamental propositions form the links of the service- profit chain: 1. Customer loyalty drives profitability and growth.A 5 percent increase in customer loyalty can boost profits by 25 to 85 percent. 2. Customer satisfaction drives customer loyalty.Xerox found that "very satisfied"customers were six times more likely to repurchase company equipment than were customers who were merely "satisfied." 3. Value drives customer satisfaction.An insurer’s efforts to deliver maximum value include funding a team that pro- vides special services at the sites of major catastrophes.The company has one of the highest margins in its industry. 4. Employee productivity drives value.Southwest Airlines deplanes and reloads two-thirds of its flights in fifteen minutes or less;pilots fly an average of twenty hours more per month than their competitors.Fares stay low while service remains high. 5. Employee loyalty drives productivity.One auto dealer’s annual cost of replacing a sales rep who had eight years of experience with one who had less than a year was $432,000 in lost sales.
What do these add up to? Estimates vary widely,in part because the cost of losing and replacing an employee depends on the individual and the industry involved.But it is rarely low.For employees in gen- eral,the U.S.Department of Labor estimates a turnover cost of about one-third the new person’s salary. Among managerial and profes- sional employees, the percentage increases dramatically. Generally, estimates are in the range of one to two times the departee’s annual salary. Those figures mask lots of variability, however, much of it related to the effectiveness of the departing employee.The cost of losing a highly effective employee is obviously much higher than the cost of losing an average performer—even though the salaries and benefits of the two may be very similar.To help estimate your cost of employee turnover, please visit www.elearning.hbsp.org/busi-
of such employees may actually eliminate certain hidden costs.Con- sider,for example,the costs of having mediocre or incompetent peo- ple in key positions,as cited in the introduction to this book.What is the cost of the poor decisions often made by such employees? Brad- ford Smart has estimated the cost of an inept middle manager at roughly $1.2 million per year.The price tag goes up as you consider incompetence at the senior management level.And what is the cost associated with the poor morale and defections they create? That’s anyone’s guess. Why Retention Is So Challenging The challenge of retaining good employees is complicated by a number of factors: demographic conditions, cultural expectations, and upheavals in the world of work. Demographics In some countries, most notably the United States, demographic changes have made retention especially challenging. Here are just a few of the remarkable statistics from the American scene: • The work force overall is maturing.Currently,the average age of employees is 35.Some 3.75 million workers have already turned 55.By 2015,the population of Americans in the prime management age range of 35–45 will be 15 percent less than it was in 2000.(See figure 3-2.) • Economic growth is outpacing the growth of the work force.The U.S.economy has been growing at 2.4 percent while growth in the labor force lags behind at only 1.2 percent. • The supply of highly skilled technicians and professionals is being overwhelmed by demand—particularly in computer- related fields. The ramifications of these trends are clear:a pronounced shortage of skilled workers—and escalating competition among companies to recruit and retain those that are available. Cultural Expectations People’s expectations about work also strongly influence retention patterns. In some countries, for example, employees often spend their entire lifetime working for one firm. Employees, their col- leagues, and companies consider one another almost as family, and give each other the same dedication,commitment,and support that one would give family members. In contrast, the cultures of other countries emphasize fast-moving and continual change—including rapid "job-hopping" by workers in search of the best possible com- bination of work, compensation, and future opportunities. Some countries’ employment laws—particularly in France, Germany, and Italy—make it difficult to fire or lay off workers, while in other regions companies can freely let employees go. As you might guess, a company’s retention goals might be more or less challenging depending on the cultural factors that shape its region’s or industry’s employment trends. Upheavals in the World of Work Finally, changing economic and cultural circumstances can produce dramatic upheavals in the work world.Here are just a few examples: • A trend toward free agency.Free agents—self-employed work- ers who serve various clients on a temporary,contract basis— now make up 15 percent of the American work force. • The dissolving employer/employee contract.With the wave of reengineering and restructuring that hit many parts of the business world in the 1970s and 1980s—and again in the 2000–2002 business downturn—some companies downplayed the importance of the work force.As a result,old assumptions about employer paternalism and employee loyalty evaporated. Today,most workers assume that they must take charge of their own employability and careers—even if that means moving from firm to firm.In the United States alone,most people will hold 8.6 different jobs between the ages of 18 and 32. • An intensifying need for technical skills.Economic develop- ment around the globe,the emergence of the Internet econ- omy,and accelerating advances in technology in general have increased the demand for people with advanced technical skills. With a global marketplace for technical labor,competition will be intense and come from unlikely quarters. • A growth in Internet recruiting.As described in the previous chapter,the Internet has made it easier for employees to learn about—and apply for—jobs at other companies.And it’s no longer just the young folks who are computer savvy enough to surf the Web for the perfect job.Workers of all ages and back- grounds are feeling more and more comfortable using the Internet to explore outside job opportunities. • Demands for greater work-life balance.In the United States, where two-earner households are commonplace,many are simply fed up with workplace hours and practices that put corporate needs ahead of personal and family obligations. Weekend meetings.Vacations interrupted by e-mails from the office.Too many hotel nights.Long daily commutes.Many employees,particularly women with young children,are walk- ing away to take lower-paying jobs nearer to home or finding other situations that make work-life balance more feasible. When you put these trends together, it’s clear that companies can no longer expect employees to join them early in life and stay indefinitely. Instead, firms must actively and creatively encourage good people to stay—especially in high-tech markets. The Special Challenges of a Diverse Work Force Retention is especially challenging when the work force is highly diverse. And this is the type of work force that managers in many parts of the world today face.From age and gender,to part-time ver- sus full-time status,to ethnicity,race,sexual orientation,and physical ability—companies are both benefiting from and struggling with differences among employees."One-size-fits-all"strategies for keep- ing good people simply don’t work any longer.Companies can best improve their retention rates by crafting creative, specialized strate- gies for each major segment of the work force. The Contingent Work Force Members of the "contingent work force"—part-timers,contractors, and temporary employees—offer some important advantages,as well as difficult challenges, for managers and HR departments. Primary advantages include: • Flexibility—companies can customize these workers’schedules to meet current work flow and demands,using them only when needed. • Affordability—firms save money on payroll taxes,health bene- fits,and other expenses by employing temps,part-timers,or freelancers. Challenges include: • High turnover—sometimes as much as 200 to 300 percent— which introduces unpredictability and instability into the firm’s culture.
• A lower degree of loyalty to the firm and its products. • A growing demand for the same benefits that regular employ- ees receive—such as satisfying work and career-development support. Because the contingent work force is such a valuable resource,many companies are now developing programs designed specifically to retain these employees.For example,one company offers contingent work force members skills training in exchange for a six-month commitment. Younger Workers Younger workers—primarily those in their twenties—bring energy, freshness, and state-of-the-art technical knowledge into a firm’s work force. Demographic trends, in the United States especially, have created an unprecedented shortage of these workers, who are often referred to as "Gen-Xers." These workers pose some difficulties: • Young workers are particularly interested in defining their career paths and taking jobs that will help them advance to their next jobs. • Many young workers are more comfortable with rapid change and flat management structures than are older employees.This can create misunderstandings and tensions between the two generations at work—especially when a supervisor and a direct report hail from different generations and have different work expectations. • Many young employees want their employer to define a career ladder for them—a professional track that will let them build up to a level of compensation that will enable them to support young families. How can your firm meet its younger workers’needs and thus retain the best among them? These four strategies can help:
1. Understand their background, and customize their work accord- ingly. These young people know about "downsizing"from the experience of their parents;they have accepted the truth that nothing is certain in the corporate world.Consequently,they’re most loyal to their own skills.If there is any group for which job modification or a "stretch"assignment is not only a good but an essential idea,it’s this one.At the same time,they’re com- fortable with timesaving and instant-communication devices (e-mail,instant messaging,and the Internet) and so tend to perform tasks quickly.Thus short-deadline,multifaceted proj- ects may be especially appealing to them. 2. Include professional development in your value proposition to this group. To appeal to younger workers,your firm can demonstrate its commitment to supporting and clarifying their career paths (for example,through high-tech career- management resources like the Internet and job boards). 3. Lead through learning. Employees in their twenties place a high priority on learning and developing new skills.Provide teaching and coaching on a regular basis,as well as mentoring and internship programs.Give new recruits the opportunity to learn about the rest of the company by allowing employees to make presentations about their departments and jobs. 4. Seek independent, continuous feedback from all employees. Capitalize on this group’s everyday learning by soliciting con- tinuous feedback through any of the new online tools available today. 50+ Employees Employees in this age group merit special attention for two reasons. First, for some companies they represent a sizeable percentage of their employees. Second, mature workers (in the United States, the "baby boomer" generation) have extensive knowledge and rich business experience—they thus embody a major portion of any
firm’s intellectual capital. Many have life skills such as reliability, patience,or fair-mindedness—the types of hard-won skills that peo- ple gain only by grappling with day-to-day responsibilities over many years. According to the author of the article "How to Keep Your 50-Somethings," these employees also pose several difficulties for companies: 5 • They are moving closer and closer to retirement each day.As they begin to retire,whole plants or departments may be deci- mated. • In regions where the economy is booming,many older work- ers are setting their sights on early retirement,a second career, or a better job somewhere else. • Others may become sick or injured or will leave to care for an aging parent—and never return. To keep boomers on your payroll and productive, you may have to create a workplace in which conventional wisdom about job descriptions,hours,pay,benefits,and so on go out the window.Keep these four tips in mind: • Ask mature workers what they need. Merely opening a dia- logue in this way can help you better serve this age group’s needs.For example,many older workers may value long- term health care insurance more than a big raise. • Support flexibility. Life seems shorter at 50-plus;many employ- ees at this age want to work part-time,job-share,or telecom- mute.They’re also interested in sabbaticals,unpaid time off,and released time for community projects.Consider any of these offerings,as well as "phased retirement,"which lets employees reduce their hours in stages rather than all at once. • Make their work interesting. On the job,many boomers want autonomy,a sense of meaning,and a chance to keep learning. This can mean redesigning the way tasks get done.Let mature employees work on their own,and provide whatever training they need to pick up new skills—particularly in the area of technology.
• Tailor your compensation system. Avoid "one-size-fits-all"pay plans.For example,while younger employees may want cash, older ones may prefer larger contributions to a retirement fund. Be creative! Female Employees In the United States and many other Westernized societies, the end of World War II triggered an unprecedented flood of women into the workplace.Now,that trend is reversing—in some alarming ways. For instance, women are leaving corporate America at twice the rate of men—many of them trading the corporate world for the entre- preneurial frontier.Why? Many corporate women are discouraged by the "glass ceiling"that blocks their advancement.Others want or need more flexibility than their employers can provide. Still oth- ers—like their male counterparts—have developed business con- cepts that they would rather pursue as individuals than as employees of some faceless corporation.The resulting "brain drain" carries a heavy price. How can your firm respond? Try these four strategies: 6 1. Analyze the current situation. Identify how many women hold upper-management positions in your firm and how many are in the pipeline.Then talk with these women—find out what’s important to them,and then find ways to meet their needs. 2. Eradicate "invisible" barriers to women’s success. Take a hard look at your corporate environment.Barriers to female success can be subtle—but very real.Identify high-potential women and give them equal access to career-enhancing opportunities: line positions,skill-building opportunities,special project assignments,committee leadership,and appointment to high- visibility teams. 3. Cultivate support throughout the organization. For example, hold supervisors responsible for meeting the company’s gender- equity goals.Assign an ombudsman to handle any bias inci- dents.Send a message from the top that signals acceptance of a broad range of leadership styles and an invitation to top tal- ent—male and female—to progress through the ranks. 4. Promote the understanding that women’s ways of managing are good for business . Many older books on management advise women to act like men in order to succeed.Today,a wealth of research contradicts this approach.Specifically,numerous female entrepreneurs offer more flexibility,understanding,and an open management style—all of which can give their corporations a vital competitive edge. There are many ways to address gender concerns in the workplace. No matter how you choose to do so,communication,creativity,and a proactive approach will help. Race, Ethnicity, Sexual Orientation, and Other Differences Human beings have a long history of treating one another unfairly because of differences—whether the difference is race, ethnicity, sexual orientation, physical ability, or another characteristic. Many people have suffered discrimination in the workplace—sometimes covert, sometimes open—if they didn’t fit in with what others thought of as the "mainstream"culture.This kind of unfair treatment carries a high price for businesses. Companies can’t afford to neglect the talent found among peo- ple who are "different."Every talented employee counts,and finding ways to keep them simply makes good business sense. So, how can your firm benefit from—and sustain—the many forms of diversity represented in its work force? Observe the four points identified above with respect to women. Remember, too, that members of nonmainstream groups are keenly alert to insincere gestures aimed at mollifying them.They’ll be watching to see if your organization will "walk the talk." Promises made but not delivered will not go unno- ticed. At the same time, promoting unqualified nonmainstream employees will alienate everyone.Also,if the opportunities for growth and advancement aren’t really there,pretending and proclaiming that they are will only hurt your organization.
Why People Stay People stay with a company for many different reasons, including job security,a work culture that recognizes the importance of work- life balance,recognition for a job well done,flexible hours,or a sense of belonging.These reasons can vary widely from country to coun- try. However, in cultures in which it’s assumed that people may freely change jobs,the major motivations for staying are: • Pride in the organization. People want to work for well-man- aged companies headed by skilled,resourceful leaders—that is, top-level managers who have a clear vision of the firm’s future, who can devise powerful strategies for success,and who can motivate others to realize that vision. • A respected supervisor. Even more important is the employee- supervisor relationship.People are more likely to stay if they have a supervisor whom they respect and who is supportive of them. • Fair compensation. People also want to work for companies that offer fair compensation.This includes not only competitive wages and benefits but also intangible compensation in the form of opportunities to learn,grow,and achieve. • Affiliation. The chance to work with respected and compat- ible colleagues is another element that many people consider essential. • Meaningful work. Finally,people want to work for companies that let them do the kinds of work that appeal to their deepest interests.Satisfying and stimulating work makes all of us more productive. The findings of the McKinsey & Company "War for Talent 2000 Survey" of middle and senior managers generally supported these findings.That survey asked managers how important various factors are in their decisions to join and stay with a company.The results are shown in figure 3-3.The bold items are those that have a strong causal relationship with the overall level of reported satisfac- tion.Authors Ed Michaels, Helen Handfield-Jones, and Beth Axel- rod make a case from these and other findings that companies can attract and retain talented people if they pay attention to what they term the "employee value proposition," or EVP. EVP is the work- place equivalent to the value proposition that every company knowingly or unknowingly offers its customers: a measure of perceived value for a particular cost.They suggest that if companies want to be more successful at attracting and retaining talent,they should evalu- ate and strengthen their value propositions to employees: To create a compelling employee value proposition,a company must provide the core elements that managers look for—exciting work,a great company,attractive compensation,and opportunities to develop.A few more perks,casual dress,or more generous health plans won’t make the difference between a weak EVP and a strong one.If you want to substantially strengthen your company’s EVP,be prepared to change things as fundamental as the business strategy,the organization struc- ture,the culture,and even the caliber of leaders. 7 Though the data on which Michaels et al. base their conclusions focused on managers and executives,it’s likely that other employees will respond similarly. Why People Leave People also leave organizations for many different reasons, but pri- marily because one or more of the above conditions was either absent at the beginning or has since been eliminated. For example: • The company’s leadership shifts. Either the quality of top management’s decisions declines,or new leaders—whom employees don’t yet trust or feel comfortable with—take the helm. • Conflict with immediate supervisors. People may also leave when their relationship with their bosses becomes stressful or problematic,and they don’t see any other options in their company.(See "Managers and Supervisors Are Key"for more on this topic.) • Close friends leave. One or more colleagues whom an employee particularly likes and respects leave the firm,thus taking away an affiliation that is very meaningful to that employee.
You can have terrific pay and benefits, employee-friendly poli- cies, and all the other things that induce loyalty and retention, but a few rotten apples can spoil the barrel. Specifically, a bad manager can neutralize every retention scheme you put in place. Gallup researchers Marcus Buckingham and Curt Coffman put it this way: Managers trump companies.It’s not that . . .employee-focused ini- tiatives are unimportant. It’s just that your immediate manager is more important. She defines and pervades your work environ- ment. . . . [I]f your relationship with your manager is fractured, then no amount of in-chair massaging or company-sponsored dog walking will persuade you to stay and perform.It is better to work for a great manager in an old-fashioned company than for a terrible manager in a company offering an enlightened, company-focused culture. a Beth Axelrod,Helen Handfield-Jones,and Ed Michaels of McK- insey & Company reached a similar conclusion about bad man- agers,which they describe as "C performers.""[K]eeping C per- formers in leadership positions lowers the bar for everyone—a clear danger for any company that wants to create a perform- ance-focused culture.C performers hire other C performers,and their continued presence discourages the people around them, makes the company a less attractive place for highly talented people, and calls in question the judgment of senior leaders." b (We have more on C performers and how to handle them in a later chapter.) While many say that the company culture is what matters in retention,the culture of operating units is what really matters to the people who work in them.If the boss is a jerk or an incom- petent,the best people will leave. Managers and Supervisors Are Key a Marcus Buckingham and Curt Coffman,First,Break at the Rules (New York:Simon & Schuster,1999),34. b Beth Axelrod,Helen Handfield-Jones,and Ed Michaels,"A New Game for C Players,"Harvard Business Review 80, no. 1 (January 2002): 83.
• An unfavorable change of responsibilities. A person’s job responsibilities change so that the work no longer appeals to his or her deepest interests or provides meaning or stimulation. Perhaps the number-one point to keep in mind when thinking about why people leave is this: People most often leave for the wrong reasons.That is, they leave without really understanding why they’re unhappy or what opportunities to improve things may exist within the company.Thus they jump from company to company, making the same mistake each time.Consider this example: An engineer is promoted to a managerial position because he’s a high performer and has been with the company for a while.This person may not even like being a manager.But because he hasn’t yet identified his deepest work interests,he doesn’t make the connection between his new role and his unhappiness.Instead,he concludes that he just doesn’t like the company anymore—and starts looking for another job. Unfortunately,when he finds another job outside the company,it’ll likely be another managerial position.He’ll work at that job for a while before realizing that he’s still unhappy—at which point he will decide that the new company,too,is a bad fit for him. Mid-level managers seem to repeat this pattern more than any other employee group. Two Retention Champions Most people recognize Southwest Airlines as a highly successful company. In an industry plagued by strikes, desperate mergers, and buckets of red ink,Texas-based SWA boasts thirty consecutive prof- itable years—something that no other major airline can do. Less well-known is the fact that SWA’s employee turnover rate is just over 4 percent, half that of its competitors. People who sign on as SWA employees clearly like their jobs and stick around, cutting the company’s recruiting and training costs.And high employee morale rubs off on customers,making them satisfied and loyal users. SWA’s strong relationship with its employees is the legacy of Herb Kelleher, who created an employee-focused workplace based
on informality, camaraderie, teamwork, and dedication to customer satisfaction. Just as he differentiated his product with his business strategy (low price,no frills,on-time),he differentiated SWA’s value proposition to its employees. Studies of the SWA work en- vironment indicate that it delivers on the qualities we’ve already identified under "why people stay"—pride in the organization, compatible supervisors, fair compensation, affiliation, and meaning- ful work. Also with a turnover rate of just over 4 percent, SAS Institute is another retention champion. Its low employee turnover is even more remarkable given that SAS is in the software development business, where turnover generally runs in the 20 to 25 percent range.Most of its 8,000-plus employees could walk away from their jobs and quickly land new ones—and probably at higher pay rates. But they don’t. SAS’s secret for employee retention is a working environment that few would ever trade.Fast Company magazine did a feature story on SAS several years ago, describing it as "Sanity, Inc.," a calm and humane place in a high-pressure world. 8 The SAS work environ- ment has many features that employees appear to value highly:indi- vidual offices for all,flexible work schedules and programs that help employees integrate their work and family responsibilities,an on-site health facility,and unlimited sick days.Parents can use the company’s on-site day care facility and even have lunch with their children. Most unusual of all is the fact that the company’s Cary, North Car- olina,campus headquarters closes at 6 p.m. It would be easy to dismiss the SAS approach as too soft-hearted and soft-headed to be sustainable in the hardball software industry. But the company has a long-term record of growth and profitability. Its high spending on employee-friendly programs doesn’t come out of potential profits but from the millions it would otherwise spend on employee turnover. The company has calculated what it saves through its low turnover rate (relative to its competitors) and used those savings to fund a better life- and work-style for everyone on the payroll. Figuring that it saves somewhere between $50 million and $70 million per year in turnover costs, SAS estimates that it can spend six to eight thousand dollars per employee on workplace enhancement.And it is still ahead of the game when you figure the greater productivity of teams that stay together, the knowledge that stays in the company, and the bonds that link customers to individ- ual employees. Managing for Retention: An Overview So what can managers do to keep as many good employees as possi- ble? Here’s a short list that will cover most of the bases.We’ll get into more details on many of these points later in this book. 1. Get people off to a good start. Getting people off to a good start begins with hiring people who are suited to their jobs and making sure that they understand what they are getting into (both in terms of the culture of the company and the specifics of their job descriptions).A good start also begins with a new- employee orientation that makes them feel welcomed and part of the group. 2. Create a great environment—with bosses whom people respect. Managers often assume that company policies and corporate culture determine the working environment.They do,to an extent.But policies can be circumvented.In any case,the atmosphere in a department or unit is more important to indi- vidual employees than the culture of the corporation as a whole.How does your unit stack up on this score? Bad bosses are not conducive to a great environment.How many of your unit’s managers or supervisors are repellent to their reports? How many have temper tantrums,berate their charges in public,blame others for their own failures,or never have the sense to say "Thanks,you’re doing a good job"? If your managers or supervisors are repellent,count on every employee with marketable skills to leave. In the end,it’s better to replace bad managers and supervi- sors than to replace an endless stream of employees. 3. Share information. Freely dispensing information—about the business,about financial performance,about strategies and plans—tells employees that you trust them,that they are impor- tant partners,and that you respect their ability to understand and contribute to the business as a whole. 4. Give people as much autonomy as they can handle. Many people enjoy working with a minimum of supervision. So, give people as long a leash as they can handle. Doing so will make them happy and make your job as manager easier. Send a team off on its own with the charge of exploring a new market or solving a business problem. If it’s feasible, carve out a whole business unit and let its members work on their own. 5. Challenge people to stretch. Most people—particularly the ones you want most to retain—enjoy a challenge and the feeling that you’ve entrusted them with bigger responsibilities than they had a right to expect.So put the people you want most to retain into jobs that will make them stretch—and give them the support they need to succeed. 6. Be flexible. A survey by Ceridian Employer Services (in Min- neapolis) confirmed what savvy managers already know:Flexi- ble work arrangements are highly successful in retaining employees.Nearly two-thirds of Ceridian’s respondents felt that virtual teams,flexible work plans,and telecommuting were effective in boosting retention.To be sure,not every manager has the authority to create whole new work arrangements.But nearly everybody can allow some on-the-spot flexibility,letting employees rearrange work to care for a sick child,for example, or to keep a doctor’s appointment.Today’s harried employees value that kind of flexibility highly. 7. Design jobs to encourage retention. Nothing is more soul- deadening for an intelligent contributor than a job that is too repetitive, too isolated, insufficiently challenging, or downright unpleasant. So if you see unacceptable high turnover in a critical job category, take a good look at what you’re asking people in that job to do every day.You may be able to cure the turnover problem through job redesign: adding variety to a repetitive job, engaging isolated employees in occasional team projects, upping the challenge, and so forth. If a job involves one or more repugnant tasks, consider eliminating or out- sourcing those tasks. 8. Identify potential defectors early. Great work environments and great jobs are a matter of opinion;what challenges one person may terrify another.You won’t know how well you’re doing on either score unless you ask. As a manager,you routinely interact and share views with your direct reports.Think about adding "defection detection" to these communications.Doing so will help you identify potential defectors in time to take effective countermeasures. Conduct a "stay interview"by asking people how they feel about their assignments,company policies,and the working environment.Ask about individual goals,whether they feel included or excluded by the corporate culture,and what would keep them with the company.For an interactive tool on con- ducting a stay interview,please visit www.elearning.hbsp.org/busi-
Summing Up This chapter has described major issues relating to employee reten- tion and highlighted ways in which managers can make a difference. In particular: • Retention matters because high turnover creates high replace- ment costs and is clearly associated with low levels of customer satisfaction,customer loyalty,and lost revenues. • Retention is particularly challenging today due to a number of factors—in particular,an aging work force and a growing imbalance in the supply and demand of qualified personnel.In addition,today’s workers have different expectations about work-life balance. • People stay with their employers when they see the organiza- tion as a source of pride and affiliation,when they respect their supervisors,when they are fairly compensated,and when they perceive their work as meaningful. • People seek greener pastures when leadership changes unfavor- ably,when they are in conflict with their immediate superiors, when close friends depart,and when their responsibilities change in ways that they do not favor. • Managers can make a difference by following the nine "Manag- ing for Retention"points outlined in this chapter.