Monday, February 15, 2010

Insuring Employee Retention

Business Strategies

Smile I recently had a conversation with a business owner about their employees and how they have a zero attrition rate.  I was amazed.  This is most employers’ dream. 

Attrition is defined differently by different business owners.  Often, it’s defined to favor the employer showing less attrition than reality.  As defined by TheFreeDictionary by Farlex, attrition is the following:

  1. A rubbing away or wearing down by friction.
  2. A gradual diminution in number or strength because of constant stress.
  3. A gradual, natural reduction in membership or personnel, as through retirement, resignation, or death.
  4. Repentance for sin motivated by fear of punishment rather than by love of God.

When applied to business, it’s often the third of these definition is what people have in mind.  Namely, attrition is “A gradual, natural reduction in membership or personnel, as through retirement, resignation, or death.”  Notice that this definition doesn’t include layoffs or dismissals.

Why should you care about attrition? There are numerous reasons:

  1. Costs to your business of searching, selecting, signing, and training new employees
  2. Employment reputation that may be marred as a result of high attrition, leading to repulsion of the more qualified employees
  3. Customer satisfaction suffering as a result of having to work with new employees with whom they may not have any relationship

So far as the bottom line is concerned, businesses should be very concerned about turnover costs, the first of the above reasons.  In an About.com article titled, Fighting Employee Turnover Costs, Darrell Zahorsky explains variances in these costs.  I won’t regurgitate what he’s already explained, except that the cost depends on a multitude of factors and can vary from 50% to 200% of an employee’s annual salary.  He has better calculations in the article for pinpointing the exact costs and I recommend you read it if you wish to get more precise numbers.

Let’s substantiate this large variance with an example.  Assuming yours is a high-tech company, the variance for an employee paid at $100k annually would amount to $50k-$200k.  That’s no small amount!  Depending on the size of a company and its attrition rate, such costs could quickly deteriorate profit margins and run a business…well, out of business. 

This is especially alarming in tough economic times when cost-reduction is a high priority for any organization that wishes to beat out its competition.  Hence, reducing the attrition rate from 15% to 10%, for example, with its significant positive consequences, could quickly improve an organization’s margins. The question then becomes, what are the factors necessary to insure high retention. There are multiple:

  1. Employees have expressed their personal and professional goals to management
  2. Employee goals are aligned with the employer’s
  3. Employees actually see progress toward reaching their goals
  4. Employees are satisfied with their management’s ability to make business decisions that benefit the customers and them
  5. Employees actually realize the benefits of the employer’s decisions (the management’s promise to deliver comes to fruition)
  6. The organization is constantly growing, thereby gaining new business and providing new employee opportunities
  7. The benefits of the company’s success are shared with employees

Assuming we agree that all of these factors need to be in place for a zero attrition condition, how can you implement such a system?  We’ll discuss the implementation steps and consequences over the next few weeks. 

What Do You Think?

Feel free to share your thoughts and experiences with your company’s employee policies and attrition below.