Closing the Revolving Door

 

Economic recovery is not the time to lose key employees.

The Business Journal, May 21, 2004  By Becca Mader
Featuring Jessica Ollenburg of HRS  

 


Employers may feel that the sluggish economy of recent years has given them a pass from worries about employee turnover.  When unemployment is high, unhappy employees are less likely to look -- or find -- a new job.

But with the economy in recovery and the number of available jobs growing in certain sectors, employers still unconcerned about turnover may soon get a rude awakening.

"The irony is that, at the very time employers need their people because business is improving, they may begin to see their ranks thin because people are walking out the door,"  said Joan Lloyd, owner of Joan Lloyd & Associates Inc., a management consulting and training firm in Wauwatosa.  "This is the very worst time for employers to spend their resources to fill these holes."

Employee turnover is a reality -- and it's costly.

When an employee quits, turnover can cost a business 25 percent of an employee's salary to 1.5 times the salary depending on the person's job, human resource specialists say.  To minimize turnover, companies should gauge employees' satisfaction every year.  From such data, employers can determine which positions are the most important to focus on and what employers are looking for in their jobs and then implement strategies such as better benefits, training or communication, human resource advisors said.  Such efforts are critical, especially as the job market improves and employees feel more comfortable switching jobs.

In 2003, the turnover rate for the north central region of the United States, which includes Wisconsin, was 9.6%, according to the Bureau of National Affairs Inc., a Washington DC based research association.   The turnover rate means employers in that region see 9.6% of their employees turn over during the year.  Nationwide, the annual turnover rate was 10%.

Understanding the Cost

Human resource advisors said many employers do not have an accurate understanding of the potential cost of turnover at their business.   Typically, they don't even think about it until the employee leaves. Once companies conduct a cost analysis in advance, however, they will have a better sense for how much and how to invest in order to keep their employees, human resource experts said. (See Labor Intensity Quotient)

Turnover costs come from four general areas:  transition, lack of productivity, and hiring and training their new employee, according to Colleen Dougherty, managing principal for the Wisconsin offices of Right Management Consultants Inc., a Philadelphia-based career transition and organizational development firm which has offices in Appleton, Madison, Milwaukee and Mosinee.

Transition expenses include the cost to do exit interviews, pay separation or severance or from continued benefits.  Costs associated with a vacancy can stem from additional overtime required from other employees or additional temporary help.  Replacement costs include entrance interviews, reference checking, moving expenses and recruiting fees.  In-house recruiting and screening could cost an average of $8000 to $12000 for a new employee (although outsourcing the effort should provide cost relief), according to Jessica Ollenburg, President of Human Resource Services, Inc., a management consulting firm based in Greenfield.  Training for new employees can include orientation, coaching, materials and benefits.

The more complex the position and more productive the employee, such as in sales, the more expensive turnover will be, Dougherty said.

In a 2003 survey on turnover and absenteeism at 281 businesses in Wisconsin and Illinois, MRA - The Management Resource Association Inc. of Waukesha found that (according to perception by employers who responded to survey) external hires cost companies about $1,200 per position, which included advertising, recruiting, travel, relocation costs and referral bonuses.  It did not include training time, administrative support or staff time.  While those numbers seem low, if companies take into account most turnover takes place during an employee's first three years on the job, the costs add up, said Mary Hunter, senior manager in employee relation services at MRA.  Companies experienced 60 percent of employee turnover within an employee's first two years according to MRA's survey.

"Look at all the time you spend in finding the right person, bringing them up to speed and getting them ready so they are really making a productive contribution."  Hunter said.  "If you turn them over within two years, do you really get a return on investment?"

Money Saved for Retention

The money companies save on turnover can be applied toward retaining employees.  After calculating the costs, companies then can figure out which positions are the most costly to lose and therefore more valuable, Ollenburg said.  From there, employers can concentrate on selection and retention strategies.

"Once you determine the costs of turnover, you can make some bottom line decisions as to how much to spend to attract, screen and retain,"  she said.  "As long as you are saving more money then spending, it is a good business decision."

Numerous turnover rate calculators, such as an online tool provided by the University of Wisconsin-Extension's Center for Community Economic Development, are available to help companies, said Bill Pinkovitz, a UW-Extension Professor who created the calculator, available at http://www.uwex.edu/ces/cced/publicat/turn.html.

Most often employees leave a position because of a (perceived) better opportunity or dissatisfaction with their current position.  The first factor might be inevitable, but the second factor can be addressed, said Tim Lawler, president of The Lawler Group, Management Recruiters of Milwaukee North, a Mequon recruiting firm.

To understand what keeps employees happy and engaged, employers should survey their workers' job satisfaction no more than once a year, Dougherty said.  She also recommended employers conduct a survey during times of great change, such as a merger, acquisition or company restructuring.  (HRS recommends strong caution here!  Among other caveats:  Be careful not to heighten awareness of dissatisfaction nor solicit information regarding issues the employer cannot/will not change!)  Most often employees are looking for a clear career path or advancement opportunities, mentoring programs or better job descriptions.   (Visit recent HRS employee motivator survey.)  Others may be searching for more flexible scheduling.  Companies can also provide something as simple as additional communication, Ollenburg said.

By keeping employees aware of company changes and asking their help in bringing about such changes, employers will create a more engaged employee.