Carrots, Not Sticks

There’s nothing more certain to get a laugh in a movie than when a character charges into her boss’s office, flings down a letter of resignation and announces, “I quit!”

But for employers, turnover is no laughing matter.

The cost of replacing an employee is far greater than the expense of advertising for a new one. There’s the time it takes to recruit, interview, hire and train the right candidate. There’s the reality of reduced productivity and lost opportunity costs. Team dynamics might suffer as colleagues adjust to a new person, and a company stands to lose significant institutional knowledge when a seasoned worker walks out the door.

The exact cost to replace a worker varies greatly by industry and level, but most estimates say that replacing entry-level employees costs 30 percent to 50 percent of their annual salary; mid-level, 150 percent-plus; and high-level or highly specialized, more than 400 percent.

A number of Mendoza professors study retention and turnover from different perspectives. They all agree that finding answers to retaining top talent is critical, and that there are pro-active ways companies can address the problem.

The Classic Model

Timothy A. Judge, the Franklin D. Schurz Professor of Management who studies a wide range of issues related to employee satisfaction at work, said that turnover rates vary widely by company and industry, as do the associated costs. In the fast-food industry, for example, turnover (a key factor driving retention that is calculated by dividing the number of exits by the number of employees for a given period) can range well over 100 percent. But the cost is low because it’s relatively easy to hire and train new workers.

That’s not the case for many industries, said Judge. “I work with a company in Notre Dame’s Innovation Park, Stay Metrics, that works with carriers in the transportation industry on turnover. Turnover is a huge issue in trucking; it is generally 100 percent. Yet replacing people is quite expensive, because recruiting and training costs are high (drivers have to be certified). Turnover is the No. 1 issue in the industry.”

Judge identified three primary factors that make turnover a costly problem:

• Recruitment costs. The more expensive and difficult it is to recruit employees, the higher the cost of their turnover.

• Training costs. The more training time required, the higher the cost of turnover. Professional and technical jobs, for example, often require substantial investments in training before someone can be productive. In such a case, losing a worker is quite expensive.

• Performance of those leaving. Judge said this is often a factor that is ignored by organizations, but shouldn’t be. “It’s not only how many are leaving, it’s who is leaving,” he said.

“The literature suggests that poor performers are somewhat more likely to leave than high performers. If that is a case in an organization, then they are profiting from turnover because it is helping them shed their weakest employees. However, that is not always the case. The upshot: A company needs to correlate turnover with who is leaving.”  

Judge said the classic model forecasts that turnover is a function of 1) the desirability of movement and 2) the ease of movement. There is less the company can do to affect the ease of movement, which is a function of the labor market and the degree to which an employee is able to relocate. However, the primary factor driving the desirability of movement is job satisfaction.

Companies that want to reduce turnover, therefore, should look at the satisfaction level of their employees, and find ways to improve it.

“Many organizations think this is all about pay,” Judge said. “While employees often complain about their pay, we find the two factors most important to job satisfaction are: a) satisfaction with the work itself (how interesting, enjoyable and challenging is the work itself); and b) relationships (satisfaction with supervision and coworkers).” In his work with the trucking industry, for example, Judge has found that drivers who have a good relationship with their dispatcher are much less likely to leave.

A short list of questions for organizations to ask themselves, said Judge, includes: Do employees feel their work is important? Does it give them a chance to learn new skills? Do they have flexibility and autonomy to make decisions?

Costco, Starbucks, Kohl’s and Whole Foods are a few examples of companies that have been successful in improving retention. “These companies operate in a service industry where turnover is typically quite high. Yet these companies beat the odds by taking a developmental approach to their employees,” Judge said. “They consider the work environment, invest in training and provide a culture that people find attractive.”

His main piece of advice for HR directors? “Measure job satisfaction accurately and scientifically. Study which elements of job satisfaction are driving turnover in your organization, and then focus on those elements,” he said. “Not only will turnover decrease, you will see other benefits from having a satisfied workforce. You don’t have to spend a ton of money on this, either.”

Well-being at work

Associate Management Professor Matt Bloom looks at turnover from the other side of the coin — the employee’s perspective. Bloom, who researches extensively in the area of well-being at work, recently wrote an article, “Want a happy office? Here’s what you need to know,” published on The Conversation website. In the article, Bloom cited a Gallup study showing that 80 percent of workers don’t like what they do all day.

That level of dissatisfaction, Bloom said, shows that there is clearly something more that people want from their work experience. Based on his research, he said the answer comes down to relationships, engagement and authenticity.

In short, this means for employees to feel good about their work, they want strong relationships with colleagues, as well as customers and clients. They also want to feel fully engaged — “able to bring their fullest and best selves” to the job at hand, as well as authentic, which essentially means “able to enact one’s deeply held values and strongest beliefs, especially those beliefs related to transcendence, spirituality or religiosity.”

“Being fully authentic requires that we be true to ourselves, expressing those most important, even sacred, dimensions that are our essence,” wrote Bloom.

These are profound areas that may seem difficult to address. Authenticity in particular, said Bloom, is less well-understood by business leaders than relationships and engagement. Nevertheless, he presented a case study of a Fortune 500 company that considered engagement and authenticity in designing a solution to reduce turnover.

The health-care company employed 3,000 customer service representatives in five large call centers, where annualized attrition was about 50 percent. The representatives each had to have in-depth knowledge of the company’s extensive slate of complex products and offerings. Further, the job had a steep learning curve, and becoming fully competent could take up to four or five years. It was clear that the company needed to retain individuals for more than five years so as not to lose precious intellectual resources. 

Bloom said he worked with one of the HR executives to craft a multi-pronged approach aimed at “showing the employees how critical they were to its success; offering more training and advancement opportunities tailored to their strengths; and connecting their personal values to their jobs and customers.”

Turnover dropped more than 50 percent, while employee satisfaction ratings greatly improved.

Bloom added that execution of the plan proved to be the difficult aspect, requiring a steadfast dedication on the part of company leadership. He concluded that three main factors led to optimal performance and a sense of well-being:

• The ability to learn, grow and be challenged by our work.

• High levels of engagement, in part driven by the use of

  personal strengths.

• A work environment that allows us to be authentic and enact our core values.

“If accompanied by a reasonable paycheck and good folks to work with, this likely represents what most of us want and need from work,” he said.

Millennials ahead

According to the Bureau of Labor Statistics, workers today remain at a job for an average of 4.4 years; expectations among millennials are even lower, with 91 percent of people born between 1977 and 1997 expecting to stay in their current job for less than three years. Because they see a job as a temporary arrangement rather than a long-term commitment, millennials of- ten behave like free agents, demonstrating little apparent loyalty to their employers.

“Baby boomers typically worked four jobs, Generation X’ers seven jobs, millennials 17 jobs, and the next generation will have seven jobs at a time,” said Tom Darrow, (ACCT ’87), the chair- man of the board at the Society of Human Resource Management, which studies the future of the workplace. “That’s a lot of job turnover, so there’s a whole shift out there in the mindset. Companies that want to go out and hire somebody for 40 years? That’s not going to happen. That doesn’t work for the company, and it doesn’t work for the employees.”

Why are millennials so quick to jump ship for another company?

According to Carol Phillips, the president of the marketing firm Brand Amplitude and an adjunct marketing instructor at Mendoza, younger workers are looking for more in an employer than just a paycheck. “Millennials want honesty and they want authenticity, and when they choose an employer they’re choosing a brand that’s going to say something about themselves. They’re looking for more meaning from their work. They’re looking for a company that aligns with their values, that doesn’t just say the right thing, but does it. And if they don’t get that, they’ll leave.”

One of the most characteristic traits of millennials, researchers

Even once they’ve succeeded in piquing a potential employee’s interest, however, companies still need to ensure they’re making the right hire. The human resources industry has developed sophisticated computer programs to analyze every aspect of a job candidate’s background, as well as rigorous interview processes that often involve a battery of skill and personality tests.

“There’s so much good coaching for how to interview and how to do a résumé, so most people look really good,” Darrow said. “In the recruiting industry, it used to be that we couldn’t find enough good candidates. Now there are too many, and the problem is they all look good. Now it’s not as much about finding people, but about the assessment to make sure we get the right candidate. There’s always going to be 5 or 10 or 15 candidates who could do the job. But we don’t want to just flip a coin.”

The most in-demand recruiting agencies these days, he said, are those that don’t just bring in a group of candidates, but actually help the company pick the best one for the job. Once they’ve selected that employee, companies may find that he or she defies stereotypes about millennials being difficult to work with. Although they may seem less loyal to the company than their older colleagues, millennials can actually be extremely dedicated workers if properly motivated.

Zero is Not the Goal

One last thought from a couple of the experts: While turnover can be expensive, it’s also important to realize that an optimal level of turnover is not zero.

“If a company retained all of its employees, it would not be dealing successfully with poor performers,” said Professor Judge. “Some performance problems simply cannot be fixed, and it is important to have new and fresh perspectives. I’m not suggesting that turnover ideally should be high for most organizations, but I am suggesting a goal of zero turnover is not only infeasible, it’s unwise.”

“People immediately think turnover is a bad word, and that’s not always the case,” Darrow said. “I started my career at PriceWaterhouseCoopers, and high turnover was expected. It was an ‘up or out’ kind of firm. If someone isn’t right for the com- pany, if someone isn’t engaged, then you either need to get them reengaged or you need to help them move on.

“To me, the word ‘retention’ implies that we need to retain everyone, and that’s not always true. The better word is ‘engagement’ — for as long as you have them, how are you going to keep them engaged?” 

Case in Point: Jake Bebar

The American workplace is in the midst of an epochal sea change.

In 2011, the first baby boomer came of retirement age, a tiny ripple in the workforce pond that is expected to grow into a tsunami. The Greatest Generation — a major force in the labor market for more than 20 years — has begun its exit. Labor reports say that 4 million workers will retire each year for the next 19 years. That’s almost 11,000 people per day.

And who will be filling their jobs? Meet Jake.

Jake Bebar is a senior management consulting major who zings into a room like a super ball of human energy. Although he’s just 22, Bebar already has an impressive list of campus and community projects he’s supported in various ways, including the Jubilee Initiative for Financial Inclusion (JIFFI), a payday-loan alternative micro-lender that he cofounded while still a sophomore.

Smart, curious and gregarious, he’s a technophile of the highest order, who can whip out his ever-present iPad and strategize a social media campaign on the spot that a paid consultant would envy. Yet he spent spring break in Ontario, Canada, studying the ancient meditation method Vipassana, eschewing access to phone, email and other technology.

And yet again, he’s a fan of “being busy.” “This past summer, I worked as an associate account executive at a financial marketing firm in Chicago from 9 a.m. to 5 p.m.,” he said. “Yet, I found myself too bored with just one job, so I worked as a host at an Italian restaurant from 5:30 p.m. to 11:30 p.m. five nights a week.

“To me, keeping myself busy and engaged leads to a higher sense of purpose and more motivation. It helps me give more back to the communities which have given so much to me.”

Bebar is a millennial — a member of the generation born roughly between the early 1980s and the early 2000s who will account for about 75 percent of the workforce by 2030, according to the U.S. Bureau of Labor Statistics.

Like many millennials, he is a study in contrasts, to be sure, with big dreams, wide-ranging passions, a steadfast commitment to social justice and a singular devotion to shaking up the status quo.

After commencement, Bebar will be working as a project manager for health-care software company Epic Systems in Madison, Wisconsin, implementing software in hospitals across the country. The position neatly encompasses his interests in technology, health care and working in areas that improves life for others.

How long will he work there? He thought maybe three to five years before his need for change takes him to the next opportunity.

“I only want to work for an organization that is continually challenging me and striving to make me develop into a better global citizen. Personal growth simply cannot occur in comfortable situations, and I continually strive to ‘be uncomfortable’ as my high school English teacher, Mrs. Fleming, so often advised me. If I ever find myself becoming complacent in a position, that’s a personal sign that it’s time to move on to something else.”

For companies trying to solve the problem of retention, millennials such as Bebar seemingly present a whole new landscape of challenges. But their demand for meaning and engagement might also point the way to a new vision for a workforce that’s engaged, evolving and yes, turning over.

“I’ve realized that we have a short time on this planet, and we need to make the most of it,” he reflected. “I sadly don’t have the time to be an expert in every industry and hobby, but I do have the time to be an amateur in many of them. It’s nice to get a good insight into different industries, and I think it helps me become a more well-rounded individual, even though I realize this definitely goes against the norm (though I’ve never been one to follow the norm).

“I’m not sure what my future holds, but I’m quite satisfied with that. It makes life more exciting!” 

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One Potential Stick

As companies consider how to keep their valuable employees on their payrolls — and off those of their competitors — many are turning to the use of noncompete clauses (NCCs), which prohibit former employees from working for another company in the same industry for a given period of time, to keep their employees around.

“Employers may see NCCs as one way to retain employees,” said Accountancy Teaching Professor Tonia Hap Murphy, who studies such agreements. “And employees may be more likely to stay put if they feel like they have few other attractive options because they’re hamstrung by these clauses.”

NCCs traditionally were used only by companies with valuable trade secrets, like technology or financial services corporations. But with the ever-increasing difficulty of retaining employees, their use has spread to every sector of the economy — even fast food. Last October, the sandwich chain Jimmy John’s came under Congressional scrutiny for making its workers sign contracts in which they agree not to work at a competing sandwich shop for two years after leaving the company.

Murphy called this an abuse of the NCC’s purpose. “A sandwich maker at Jimmy John’s can’t really hurt the company if he or she goes to work at Subway,” she said. “That’s not fair, and it’s getting in the way of employees making a living. It may make sense with a company like Microsoft that has a lot of trade secrets that employees could take to a rival company, but this is a different situation.”

Laws on NCCs vary from state to state, with California and North Dakota banning them entirely. Although they’re increasingly common, there’s evidence that they can be counterproductive.

“There are studies that say it’s a bad thing for management, because it’s never a good thing to retain employees by compulsion,” Murphy said. “Those companies may be harming themselves, because they’re harming employee morale. Employees might think, ‘The employer doesn’t trust me and is forcing me to stick around.’ Wouldn’t it be better to retain employees with good pay and benefits and prospects for advancement rather than keep them there with NCCs?”

Murphy added that there are other, less restrictive legal protections for employers, including confidentiality agreements that prohibit an employee from sharing sensitive or secret company information and non-solicitation agreements that prevent employees from soliciting the company’s customers.