Employee retention and turnover are the most objective measures of employee satisfaction and dissatisfaction in businesses. As a result, many employers try to retain employees through basic strategies, such as increased pay and benefits. However, research shows that there are less expensive and more effective ways to retain employees.
William M. Mercer, Inc. (1998) discovered, when surveying 206 medium to large companies in 1998, that businesses with high turnover often lost employees because of dissatisfaction with compensation.
On the other hand, the research also revealed that, in companies with low turnover, the majority of employees cited emotional factors, including work satisfaction and good work relationships, as the main factors affecting their retention. The minority of employees in these companies said that financial factors, such as compensation and benefits, were the motivating factors for their retention.
This literature review looks at the factors affecting employee turnover and recent research on which employee retention strategies are most effective.
The Cost of High Employee Turnover
According to many researchers, employee turnover is an expensive process for all businesses. In the past, both employees and employers regarded loyalty as a high value in the workplace. In today's global society, loyalty has subsided and high employee turnover, whether initiated by the employer or the employee, has become a significant challenge for businesses.
After the corporate downsizing of the 1980's and early 1990's, employees perceive themselves as survivors and, as core employees, have positioned themselves as targets for attracting competitors (Solomon, 1997, p. 46-52). As a result, businesses have been forced to address the issue of employee retention in an effort to maintain a competitive edge.
Many businesses strive to identify individuals who show signs of dissatisfaction. However, the majority of these businesses accept the externalities that drive employee turnover, and the increased manpower costs, or disregard incorporation of a retention strategy into their human resources plan (Baker, 1979. p. 2). Baker's research shows that poor company policies are one of the main reasons for high turnover (Baker, 1979).
For many workers in the United States, professional advancement within the United
States is characterized by a need to change jobs. Promotion opportunities rarely contribute to the accumulation of professional knowledge, especially in technical positions. Many companies fail to provide training that would enhance the marketability of their key employees (Deutsch, 1982, p. 106-108).
In many industries, employee retention is not just a good idea; it is a crucial one. In industries, such as healthcare and biotechnology, there is a shortage of qualified workers. According to the American Hospital Association, 168,000 healthcare positions remain open today (Brannick, 2002). This number is expected to increase over the next several years.
In industries that have employee shortages, companies will find it more and more challenging to adequately fill their positions with quality employees, making employee retention impossible to ignore.
Effective Strategies recent American Management Association (AMA) survey on employee retention, which was conducted through interviewing human resource professionals, revealed the following practices were the most effective employee retention strategies: technical training; employability training; flexible work hours; tuition reimbursement; sabbaticals; extended parental leave; professional accreditation; stock grants; and external conferences (Brannick, 2002).
The survey suggested two key findings regarding employee retention (Brannick):
Employee training and development is an effective retention tool
Retention tools designed to meet individual employee needs (such as flexible work arrangements, tuition reimbursement, sabbaticals, and more) are perceived to be more effective than those tools designed to meet the company's needs (such as managerial training, pay for performance, interpersonal skills training, and more).
In addition to providing retention strategies deigned to meet individual needs, companies also benefit by providing financial incentives to employees for staying with the company for a certain period of time.
However, research suggests that while money is important, many employees are willing to sacrifice money if they have other benefits, such as flexible work hours and training. In addition, retention bonuses guarantee employee attendance rather than performance. In many cases, financial rewards result in retaining employees who would rather be elsewhere.
This research indicates that while retention bonuses can be effective, they are often little more than a way for employees to use the company's resources (money, education, etc.) to help prepare them for another job outside the company. Therefore, they do little to address the key reasons for employee turnover.
According to the AMA, there are three effective employee retention strategies that serve as a cheaper and, often, more effective way to retain top talent (Brannick):
Understanding why employees stay and why employees leave.
A willingness to address factors that affect turnover in a business. Based on feedback from employees, businesses can identify high priority turnover factors and make necessary changes.
Evaluation of employee selection practices to ensure that the right people are hired.
The Problem of Employee Retention
With nearly half of all small companies indicating that their biggest problem is a labor shortage (Solomon, 1997), employee turnover has become a major concern for businesses, especially when it comes to difficult to replace highly skilled, professional, employees.
While many businesses and researchers stress the importance of training and good customer service in running a successful enterprise, the importance of hiring and retaining quality employees is just as important as providing effective training and maintaining an effective customer service strategy (Perry, 2001).
Harvard Business School provides significant research on the relationship between profitability and employee satisfaction (Perry, 2001). Through a study of several successful organizations, researchers proved a direct correlation between the two, which was published in the Harvard Business Review.
Norrell Staffing Inc., a national staffing assistance company, took the research, which is known as the Service-Profit Chain, and made it a core aspect of their business philosophy.
The Harvard research basically stated that profitability is a major business objective of all businesses. While various businesses have different objectives, client retention, which is directly tied to client satisfaction, plays a major role in achieving most of those objectives.
The Harvard researchers suggested that businesses that wanted to meet and exceed customer expectations should tune into their needs and desires. The researchers asserted that the frontline employees, who had the most contact with the clients, were in the best position to do so.
Therefore, it is important to motivate employees to not only provide good customer service but also serve as an active listening post for feedback and new ideas. According to the Harvard researchers, the best way to achieve this goal is through internal service or satisfied employees. Benefit programs, work environment, technology tools were all suggested as ways to improve employee morale and, as a direct result, employee retention.
In order to successful retain employees, research shows that businesses must provide their workers with enough information and support systems to effectively enable them to assist customers and do their jobs well.
Tools that enable employees to respond to the needs of customers quickly and efficiently, such as help desks and databases, are of great importance in employee retention, as they help employees feel productive and secure.
Identifying core employees and developing programs to retain them often serves as the competitive advantage that successful businesses need in today's global marketplace, which is driven by talent, technology, innovation, knowledge and ideas.
Many companies focus on retaining their assets, especially during times of economic stability, yet many fail to realize that retaining core employees is just as important. During an unstable economic climate, many companies are forced to reduce their staff. This can be disastrous if the companies fail to retain an experienced and established core group of employees.
There are many reasons that businesses should pay attention to employee retention strategies. For example, the cost of losing employees can be drastic. According to the Harvard Business Review, frequent estimates of turnover costs range from $10,000 to $40,000 per person, depending on several factors, including search fees and training cost.
Harvard research revealed that retaining employees can actually increase revenues, estimating that "a 5% increase in retention results in a 10% decrease in costs and productivity increases ranging from 25% to 65%." (Harvard Business Review, 2001)
While the financial value of retaining employees is substantial, the losses associated with losing employees extend beyond dollar figures. Indirect costs, including the loss of knowledge, client rapport, and inefficiencies in productivity should also be assessed, as well as the impact on employee morale.
In many cases, when a series of employee layoffs occurs, a "second wave" occurs shortly afterwards, as key employees, who are burdened by the increased workload and lack of job security, resign.
What Research Reveals
In the April 2002 edition of the Journal of Applied Psychology, the Gallup Organization asserted that a more engaged employee is a more productive employee. The research also showed that an engaged employee is also a more profitable employee, a more customer-focused employee, a safer employee, and an employee who is more likely to withstand temptations to leave the company.
In the December 2001 issue of Journal of Applied Psychology, research provided by…