Friday, January 5, 2007

Market-Wise Retention

Key Topics Covered in This Chapter
• Differentiating between employees in terms of economic value to the organization
• Seven market-based strategies for improving retention
E very large organization has a distribution of low, average, and high performers. Nevertheless, most corporate retention programs—which are typically expensive to implement—don’t differentiate between them.At the same time, every organization is subject to labor market forces over which it has little or no control.There is likely to be a "buyer’s mar- ket" for some job categories and a "seller’s market" for others.Thus, a company must do its best to identify which employees—or employee segments—represent the highest value to the organiza- tion, and then apply its resources in a manner that optimizes their retention in a free labor marketplace. 1 Not All Employees Have Equal Value The human resources people who toil in the field of hiring and retention are no strangers to the labor market which,like every mar- ket, is subject to the laws of supply and demand.They also under- stand the cost of replacing personnel. Those experiences do not, however, always find their way into retention efforts and programs. In this regard they would benefit from the experience of their col- leagues in the marketing department. 2 Marketing people know that some customers—generally identi- fied as customer segments—are more valuable to the corporation than others. From the marketing perspective, various qualities make them more economically valuable: • they spend more dollars on company products • they purchase the high-margin products • they remain as customers over longer periods of time • they need relatively fewer inducements to remain loyal For example, if you worked for a credit card operation, which of these customers would you find most valuable: Helen is a professional with a high income and high net worth.She travels frequently for business and pleasure,charging her airline tickets, hotel bills,meals,and car rentals as she goes.Helen also keeps thou- sands of dollars of emergency cash on hand in the credit card company’s money-market account,even though it pays only about 2.5 percent interest.She’s been a cardholder with the same company for the past fifteen years and doesn’t need any special discounts or inducement to stay on board.Both of her college-age children have cards on the same account. Herb has a moderate income and modest net worth.He uses his card for online purchases,shopping,and restaurant meals.Whenever he accumulates an account balance that he cannot pay off in a few months,Herb transfers his balance to whichever card company offers him a special six-month,low-interest deal.When that period expires he switches again to whichever company will offer him a special inducement. From a marketing perspective, Helen is a valuable customer while Herb has negative economic value. Smart marketers learn how to differentiate between people like these and target the cus- tomer segment that Helen represents, and once they capture those valuable customers,they are not reluctant to spend money on things that will keep them loyal.In their view,it’s money well spent.Money spent trying to acquire and retain Herb and the segment he repre- sents is generally wasted. We used a credit card company as an example but could as easily have used another:a retail stock brokerage,a subscription magazine, a cell-phone service,a long-distance phone service,an Internet serv- ice provider, a bank. In each case, the old 80/20 rule applies, where 20 percent of the customers create 80 percent of the profits. Smart marketers learn to identify the profitable 20 percent segment and concentrate their customer retention efforts on them. Chances are that you do not see the same market-oriented approach in how your company deals with its employee retention problems. Performance evaluations make it possible to identify the employees who add the most value, yet retention efforts are seldom skewed toward these high performers. True, merit bonuses are awarded and people get promotions if they do well,but salary struc- tures seldom differ markedly between people in the same job cate- gories (adjusted for years of service) even though their productivity levels may be very different. In an article for the Harvard Business Review, Peter Cappelli highlights UPS as an example of how one company successfully dif- ferentiated between two groups of employees, with the aim of improving retention of the group with the highest value to the company. 3 In effect, the company redistributed turnover from a high-value, hard-to-replace employee segment to an employee seg- ment that was easy to replace and train. UPS recognized that drivers have some of the most important skills in the delivery business.They know the idiosyncrasies of the routes and they have direct relationships with customers.Finding,screening,and training a replacement driver are all time-consuming tasks;it may take a new hire months to learn the details of a particular route.When UPS studied the reasons its drivers left,it discovered that much of the turnover could be traced to the tedious and exhausting task of loading packages at the beginning of a run.It therefore unbundled the loading task from the drivers’job and assigned it to a new group of workers. The turnover rate for drivers fell dramatically. Of course,turnover in the new loading jobs averages an eye- popping 400 percent per year.But that doesn’t matter.With high hourly wages and low skill requirements,the loading jobs are fairly easy for UPS to fill,typically with students or other part-timers,and fairly simple for new employees to learn. Managers spend so much of their time putting out fires and dealing with problems that they don’t always give a lot of time and attention to determining which employees represent the greatest value to their operations. So, within your unit, make a list of the individuals who: • provide formal or informal leadership to others, • consistently create excellent results, • contribute practical and valuable new ideas, • require little or no supervision to accomplish their tasks, • facilitate the work of others, • have unique knowledge or skills that would be costly and time-consuming to replace,and • could do the company great harm if they defected to direct competitors. Managers typically give even less thought to the employee segments that are most essential. So think about the employee segments in your operation that: • are essential to the operation but in short supply, • create the most disruption when they defect, • are most costly to recruit and train, • control the company’s link to customers and, • act as important information transfer "nodes"within the company. Once you’ve identified the individual employees and employee segments that have the highest value,be sure that they receive the lion’s share of retention resources and attention.
UPS in this instance was less concerned with its overall reten- tion rate than with the retention of particular people who were costly to replace and who added substantial value through their direct interface with customers. It identified a key employee segment and took an active step in retaining them,even though that action would make retention of a less-valued segment more difficult. Now ask yourself: • Which are my company’s (unit’s) most valuable employee segments? (See "Tips for Recognizing High-Value Employees and Employee Segments.") • Which employee segments are least valuable and/or easily replaced and trained? • How are our current retention efforts allocated with respect to these very different segments? No company has an entirely free hand in how and to what degree it can allocate its retention efforts. Dramatic compensation differences between individual employees may create friction and resentment between people who must work together. Labor agree- ment and government regulations likewise stand in the way of some market-based approaches. Qualified retirement plan statutes, for example, do not tolerate differences in the terms of plan participa- tion or percentage-of-compensation contributions. Nevertheless, there are strategies for keeping the best or, at a minimum, keeping them longer.We turn to these next. Market-Based Retention Strategies Cappelli suggests a number of practical retention strategies that rec- ognize labor market realties and value-differences between employee segments:new compensation plans,job redesign,job customization, strengthening social ties,and hiring the less mobile.Linking potential defectors with internal job opportunities is another market-wise tool for retention.
New Compensation Plans Most people in the know give compensation a low rating as a reten- tion strategy. Compensation matters in the sense that you cannot recruit or retain desirable employees if they view their compensation as unfair or noncompetitive. Even people who are more dedicated to their crafts or professions than to money see their compensation as an indication of the organization’s appreciation of their contribu- tions and abilities.If they feel undervalued,they will walk.(See "Tips for Getting Compensation Right.") Nor is compensation a reliable motivator.Years ago, Frederick Herzberg, the tribal elder of motivation, found that the incentives employers most commonly use to motivate—including pay raises— produce temporary performance improvements at best. 4 We need only look to the "retention champions"profiled in the previous chapter to appreciate the limited utility of compensation as a motivational and retention tool.Southwest Airlines is near the bot- tom of the list in terms of entry-level pay within its industry (though pay relative to its competitors improves with longevity). Never- theless, SWA employees are highly motivated to deliver on the air- line’s strategy, and defect at half the rate of the airline industry as a whole.Meanwhile,SAS Institute,the software company,experiences approximately one-quarter the turnover rate of its industry even though its pay scales are no higher than those of competing compa- nies.And unlike workers in most other high-tech companies, SAS people do not receive stock options. SWA and SAS are not unique cases.The limited value of pay as a retention tool is corroborated by various studies.Typical of these is a 1999 American Management Association/Ernst & Young work- place survey,which ranked compensation low on the scale relative to most other employee-retention factors. 5 Clearly, other strategies have greater impact on retention. Peter Cappelli offers these pieces of advice for market-wise compensation: 6 • Pay "hot skills"premiums to employees with crucial,rare expertise.This keeps them in place for critical periods—for example,the late design stages of a key product.Stop premiums when the skills become more available or less important to your business. • Pay signing bonuses in stages—for example,pay out the new CEO’s sign-on bonus over five years. Job Redesign Job redesign is another retention strategy,as the UPS example men- tioned earlier makes clear. If you can identify the elements that cre- ate satisfaction and dissatisfaction within a particular job,you may be able to split off the dissatisfying tasks entirely and give them to other individuals who will appreciate the work. Outsourcing unwanted tasks is another solution, and something that every company prac- Compensation really matters. But as a retention issue, it’s one of the easiest to address—much easier than organizational culture. Here are some strategies for getting compensation right: Figure out what wages your industry is offering. You can do this by hiring a compensation and benefits consulting firm—or by trying these more affordable options: • track classified ads on the Internet • network with members of human resources organizations • consult trade organizations Examine internal pay disparities. Make sure that the pay for each job is roughly equivalent to that of similar jobs across the organization. Don’t assume you have to outspend your competitors. Just make sure you can meet employees’most important tices to one extent or another. The big securities dealers on Wall Street, for example, don’t ask their traders and clerical personnel to clean out the restrooms and vacuum the carpets before they go home at night.They outsource those tasks to commercial cleaning companies.Your company does the same. So, if you experience unacceptable turnover in key jobs that are difficult and costly to refill,put each job under a microscope and ask: • Which aspects of this job create employee dissatisfaction? (Ask several employees directly.) • If we separated objectionable tasks from the job,would we need to add something else to keep it a "whole"job? And what would that something else be? • Assuming that someone must do the objectionable tasks,what alternatives exist for handling them? • Which is more costly to the organization,job redesign (and its consequences) or the current rate of turnover in the key job? Psychologists Timothy Butler and James Waldroop, directors of M.B.A. career development programs at Harvard Business School, have used the term "job sculpting"to describe their own form of job design. 7 Their prescription is to design jobs that match the "deeply embedded life interests"we identified earlier in this book (application of technology,quantitative analysis,counseling and mentoring,etc.). For instance, a competent engineer with a deeply embedded life interest in counseling and mentoring might be asked to plan and manage the orientation of newly hired engineers. A salesperson with an interest in quantitative analysis might be given new duties working with the firm’s market-research analysts.Effective job sculpt- ing is only possible,however,when managers ask questions and listen carefully to what their employees tell them about their real interests. Job Customization Companies have almost always tried to fit people to jobs.Their writ- ten job descriptions and workplace routines itemize tasks and performance expectations and dictate where, when, and how the work will be performed. People are expected to conform to these what-where-how descriptions, which in reality may be highly arbitrary. Fitting people to jobs generally fails to serve the individual employee’s primary interest, which is to fit the work into his or her life situation and future plans. So when supply and demand in the labor market favors the employee, companies should think of cur- rent and potential employees as "customers" and make an effort to recognize and satisfy their needs. Job customization can be a power- ful method through which to achieve this. To appreciate the power of customization, consider the product and services side of the economy. In this arena, competitive markets have forced companies to provide some level of customization of the things they sell. Burger King lets customers "Have it your way." Levi’s allows shoppers to customize any of its standard jeans or cre- ate unique ones from scratch. Dell, the kingpin of customizers, has pummeled its rivals with a "make-to-order" strategy for personal computers,while its competitors build and offer PCs on a take-it-as- is basis.That strategy has been a winning ticket in a highly competi- tive buyer’s market. Customization is a powerful tool in any buyer’s market—including the labor market.To customize a job to satisfy the needs of both company and employees, think about the what, where, and how of the job. The what can be covered through job redesign. Where the job is performed may involve some degree of "telework" or work from a satellite location.The how of work may be altered—and possibly improved—by examining specific work processes. Strengthening Social Ties The annals of warfare are filled with moving stories of heroism and sacrifice by individual combatants. Soldiers throwing themselves on live grenades to save their comrades.Medics crawling through with- ering fire to reach the wounded. Soldiers with "ticket home" wounds slipping out of field hospitals and limping back to the front line to support their buddies. What motivates this type of selfless behavior? It’s not usually "the cause," nor is it for "the Army."What motivates such heroics is more often the bond to people they know and with whom they have shared experiences.The military describes that bond as "small group cohesion." Such cohesion is powerful stuff and generally trumps any allegiance we may have the larger institution of which our small group is a part. Small group cohesion,or "social ties,"as Peter Cappelli describes this dynamic, is another strategy you can use to improve the reten- tion of valued employees in tight talent markets."Loyalty to com- panies may be disappearing," he writes, but "loyalty to colleagues is not. By encouraging the development of social ties among key employees, companies can often significantly reduce turnover among workers whose skills are in high demand." 8 He cites the successful case of Ingage Solutions (Phoenix), which maintains a low 7 percent annual turnover among notori- ously mobile software engineers by creating golf leagues,investment clubs, and softball teams.These create a social network and personal bonds between fellow employees."Leaving the company," he points out, "means leaving your social network of company-sponsored activities." Reconfiguring linear work processes into team-based processes can also create social ties.This was initially attempted many years ago in Sweden by Volvo, which eliminated its traditional assembly-line method of production and turned over responsibility for large chunks of assembly to teams. Nucor, whose steelworkers are the most productive in its industry, likewise organizes its production people into closely knit teams. Hiring the Less Mobile Cappelli’s last tip for retaining people in hot labor markets is to hire from segments of that market that are just barely warm."When peo- ple go out recruiting,"he writes,"they often focus on attracting pre- cisely those people who will be more difficult to retain. By shifting their sights to workers who can do the job but are not in high demand, organizations may be able to shelter themselves from market forces." 9 So, before you hire someone, give some extra thought to the work experience, skills, education, and native talent you presume a successful candidate must have.You may discover that someone with less of the above—and a person with less employ- ment mobility—can do a credible job.This advice not only can help in retaining employees but also underscores the vital link between hiring and retention. Reaching further down into the talent pool to fill a position may require that you do more training—which costs money—or you may have to redesign your jobs a bit. But in each case, weigh the cost of training and/or job redesign against the lower probabil- ity of turnover costs in that position.That’s market-wise hiring and retention. Tap Your Internal Labor Market In an efficient market for talent, opportunities outside the company are bound to draw people away. Since most people are opportunity seekers, be sure that your free-ranging talent is aware of the oppor- tunities that exist inside your own company. In a large corporation there’s always a good chance that potential defectors can find what they’re looking for in another operating unit or department. So make sure that internal postings are available and easy to access.One way to do this is with an online internal job search tool. Here are a few tips to observe in creating such a tool: • Make sure that the tool’s language and presentation convey the message that "it’s okay to look for a new job within the com- pany."A personal note on the site from the CEO can help here. Let people know that you want them to stay,whether in their current positions or in others. • Make the tool fun to use.Add graphics,links to training pro- grams,a self-assessment utility,and anecdotes about other employees who’ve built their careers by moving around the company. • Personalize the tool.For example,let job seekers register one or more "personal search agents"(PSAs) that will automatically notify them via e-mail whenever a new opening of interest is posted.Allow people who are concerned with confidentiality to use a personal,noncompany e-mail address. Summing Up This chapter has taken a "market-driven" approach to the challenge of employee retention.Here are key points to remember: • Not all employees have equal value to the organization;some represent greater value to the enterprise than others. • As a manager you should identify high-value individuals and high-value employee segments.Scarce retention resources should be allocated to these two groups first,since high turnover in less valuable and easier-to-recruit job categories is unlikely to matter as much. • Compensation is relevant in terms of retention,but "fair" compensation is often sufficient.You can use special compensa- tion arrangements to address short-term issues. • Job design,as exemplified in the UPS case,can help with reten- tion.By identifying the elements that create satisfaction and dissatisfaction within a particular job,it is sometimes possible to split off the dissatisfying elements entirely and shift them to less critical employee segments. • Customizing jobs,particularly for individuals and segments in high demand,can be a powerful retention tool in a hot labor market. • The work-based social ties between individuals may in- directly strengthen an employee’s commitment to their organization. • In some cases you can improve retention by deliberately recruiting people who are in less demand,though this may result in greater training costs. • By linking footloose employees with job opportunities within the larger organization,it may be possible to reduce organization-wide turnover rates. 100 Hiring and Keeping the Best People

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