This post originally appeared on the Vail Centre blog.
Employee churn is incredibly common, and if you’ve witnessed it in your professional career, you might have walked away with a singular parting thought: this business values profit over the individual members of their workforce.
Whether it’s a seasonal business, like construction, the hospitality industry, or a retail outfit that employs a slew of part-time workers, the perception is likely the same, and the profits over people assessment spot on.
The irony is, of course, that low retention eats into a company’s profit margin big time. The real cost of losing an employee must be measured not only by the money spent on recruiting and training new employees, but also on losses in company morale, worker productivity, customer service errors and cultural impact.
The Dollar Cost of Low Retention
The Huffington Post recently reported results of a study conducted by the Society for Human Resource Management, which estimates that each time a business has to replace a salaried employee, it costs the equivalent of six to nine months salary to recruit and train a replacement. And it’s not highly paid workers, either. The Center for American Progress notes that, while the replacement costs are naturally higher in jobs that are complex and require specialized education, even for positions that pay less than $30,000 a year, the cost of replacing an employee was 16 percent of their annual salary. Across the board, the cost of replacement was just over 21 percent, but in some cases, the figure was much higher, up to one and a half to two times an employee’s annual salary.
At the same time, as an eye-opening Forbes article points out, current compensation practices provide little incentive for employees to remain at their jobs. The article notes that the average yearly raise for loyal employees is three percent, barely enough to keep pace with inflation. But when workers jump ship to another company, they stand to increase their salaries by 10 to 20 percent. Companies may say that they want to keep their best employees happy, but the reality is that “[s]taying employed at the same company for over two years on average is going to make you earn less over your lifetime by about 50 percent or more.”
Other Ways Low Retention Hurts Companies
High turnover costs the company in several ways — it’s not just the expense of training employees and paying higher salaries for new blood. Low retention rates permeates the company culture, affecting morale as well as public perception of the business and its products or services.
The Cost to Morale — When one employee leaves, it creates uncertainty among those who stay behind. Some will experience the loss of coworkers with whom they had a strong rapport by becoming less motivated, a feeling that could be strengthened if former coworkers report that their new job is more engaging or offers better perks and benefits. When several people jump ship in a short period of time, employees might begin to feel uncertain about the company’s future and start circulating rumors. A growing perception that the company caused people to leave — whether that is true or not — can affect productivity and loyalty among workers.
The Cost to Company Culture — Companies that have struggled to diversify their workforce can be adversely affected by the departure of women and minority members. The more homogenous a company culture is, the less comfortable it is to minorities, and the more susceptible it is to rumors that a worker’s departure was the result of harassment or discrimination. Since diversity at all levels correlates with heightened productivity in the workplace, any departures that make the company less heterogeneous are likely to hurt the company’s bottom line and might cause more minorities to leave due to a perception of bias or discomfort.
The Cost of Declining Productivity — Josh Bersin, the Principal and Founder of Bersin by Deloitte, a research and advisory services firm, discusses the economic value of employees over time in order to address one of the main problems with low retention, namely that it takes a new employee from one to two years to become a valuable member of the workforce. Until workers reach what he calls “the return zone,” where their engagement is actually benefiting the company, the business has to invest in the employee, with onboarding, continued training and mentoring. High turnover rates leave companies stuck in an eternal cycle of diminishing returns, where projects languish and new ideas never make it past the point of inception.
The Cost of Customer Perception — In the service industry, where job turnover can be particularly high, the cost of having new employees working phones and manning desks is obvious. New employees don’t have time to understand the intricacies of the job. They take more time to resolve questions and often don’t have enough experience coping with impatient customers. As anyone dealing with a phone chain knows, this can lead to customer anger and frustration, which in turn results in poor net promoter score values, bad social media reviews, and the loss of both existing and potential customers.
The Solution is a Commitment to Strong Leadership
The best way to build a company that retains employees are to create a diversified workforce and to invest in active mentoring of new hires. According to a paper written by Jonah Rockoff for Columbia Business School, mentoring is a very effective way to reduce job frustration and provides a strong incentive for employees to stay on the job. And most of all, it takes strong leaders with enough vision to allocate the resources to make this investment in new hires.
The Vail Centre’s Essential Skills for Leadership in Hospitality, along with its other leadership courses, are taught by some of the best educators at Ivy League universities. They demonstrate not only what it takes to be a leader in the service industry, but also how to turn work groups into inspired teams and to take a creative approach to problem solving. In short, the Vail Centre seeks to provide the type of education and training that upper management needs to offer solutions to the problems today’s companies face.