Is Employee Turnover Killing Your Profits?

It’s a good idea to get the bottom of why employee turnover happens and how to limit it.

Employee turnover costs US businesses more than one Trillion (1,000 Billion) US dollars a year.  That represents about 10 per cent of all US corporate profits, so it is nothing to be sneezed at.  It is therefore probably a good idea to get the bottom of why it happens and how to limit it.

According to the latest statistics from the US Bureau of Labor Statistics, the average US business turned over 44 per cent of its employees in 2018 and in some industries it was significantly higher.  It was 87 per cent in the Arts and entertainment and 75 per cent in accommodation and food services. At just under 15 per cent, Federal government agencies experience the lowest turnover.

Gallup research suggests each employee loss costs the business 150 per cent of their salary.  Deloitte Consulting partner Josh Bersin says his research shows that, depending on the position,  it could be as high as 200 per cent by the time you account for hiring, on boarding, training, ramp time to peak productivity, the loss of engagement from others due to high turnover, higher business error rates, and general culture impacts.

Besides those obvious cost cascades there are some less obvious, but no less important costs.  The significant direct costs put real time pressure on an organisation to hire a replacement and get them trained, settled and productive quickly.  The pressured hiring process can often lead to the new hire not being a good fit for the job and leaving (or being let go) within a year, thus compounding the costs.

The Harvard Business Review says that as much as 80 per cent of employee turnover is due to bad hiring decisions.  Similarly Leadership IQ’s Global Management Survey reported that 46 per cent of new employees turn out to be a bad hire within 18 months and only 19 per cent will turn out to be an unequivocal success.  When it came to teasing out the factors behind the failure they found  a lack of technical skills explains only 11 per cent of new hire failures, whereas coach-ability (the ability to accept feedback from bosses) accounted for 26 per cent of failures. 

Employee turnover is very real and very costly, so doing anything at all about it, no matter how small the impact, is likely to be a good investment.  The research suggests that there are some especially important factors that are key to retaining employees (that you want to retain).

Obviously the first rule is don’t rush.  It is important to ease a potential new hire into a job.  Ensure they have a good sense of who they will be working with and what the expectations are well before they are signed on.  This means going beyond the standard probation period clause and pro-actively ensuring compatibility with your culture and team preferably before they start.  Throwing a new hire in the deep end and hoping for the best is likely to be a bad idea.

Pay is also obviously a factor but the research shows that if the only thing you do is throw money at them, you are unlikely to be able to stop a valued employee leaving. While being paid too little for the role will definitely motivate churn, overpaying will not make up for an unhappy workplace.  A workplace survey by Equifax for example found that 44 per cent of workers who leave within a year take a pay cut. They want to get out so bad, the pay is not enough to keep them there. 

Pay does have an effect but it is relatively small. According to Glassdoor surveys, every 10 per cent increase in pay only reduces the likelihood of an employee leaving by 1.5 per cent.  So if you double their pay they are still 85 percent likely to leave. 

On the other hand opportunities for advancement and training are significant factors in employee retention.  Humans like to feel they are getting somewhere. Research repeated shows that role stagnation leads to turnover.  Glassdoor have even put a number on this, saying that every 10 months at an unchanged role increases the likelihood of an employee leaving by 1 per cent. 

According to exit surveys conducted by Gallup, more than half of all exiting managers say that in the 3 months before they left, no one in the organisation spoke to them about how they were feeling about their job or their future with the organisation.  If no-one is talking about your future with the company, it’s easy to come to the conclusion you don’t have one.

Gallup recommend proactive engagement about an employee’s opportunities for growth are key to retaining valuable employees.  They suggest you know the employee’s long term personal goals, allow them opportunities in roles bigger than their past experience and help them to acquire new skills to advance their careers.  In short, treat them as you yourself would like to be treated.  Let’s call that the Golden Rule for Employee Retention.  You could so a lot worse than applying it in your business.