In today’s volatile economy, corporations are continually looking for innovative ways to enhance shareholder value and improve bottom-line results. While there have been a variety of strategies implemented to achieve these goals, successful organizations
by Site Staff
January 6, 2003
In today’s volatile economy, corporations are continually looking for innovative ways to enhance shareholder value and improve bottom-line results. While there have been a variety of strategies implemented to achieve these goals, successful organizations increasingly recognize that survival and growth in the current marketplace cannot occur without an effective talent-retention strategy. The ability to retain high-caliber employees will be a key differentiator between those organizations that profit and those that fail. “Good to Great” author Jim Collins argues that the most critical driver of growth for a great company is the ability to hire and retain the right people.
Organizations with high levels of employee commitment have significantly higher operating margins and net profits than organizations with low employee commitment. This was the conclusion of a three-year study conducted by International Survey Research (www.isrsurveys.com/isr_knowledgeworks.asp), which surveyed more than 360,000 employees in the world’s 10 largest economies. “Commitment” was defined as employees’ intention to stay with the organization and also recommend it to others as a good place to work. The top two determinants of commitment were found to be quality of leadership and the presence of developmental opportunities. Interestingly, it was found that the commitment level of employees in the United States falls significantly below levels in half of the world’s other major economies, which has noteworthy implications for U.S. companies’ ability to compete globally.
Retaining high-caliber employees in today’s competitive labor market challenges organizations to manage and develop talent effectively at all levels. Employees who feel that they are growing and developing in an organization are more likely to stay.
Paul Russell, PepsiCo’s vice president of Executive Learning, put it this way: “The bottom line here is that development has become a demand characteristic for today’s corporation. If your managers don’t feel they are growing professionally, they will, quite simply, go somewhere else where they will.” Russell cites PepsiCo’s recent organizational health survey where the reason most commonly cited for intention to leave the company was the prospect of better career growth and development opportunities elsewhere.
Turnover and the Bottom Line
The cost of turnover to an organization can be staggering. Recent estimates have put this figure at $100,000 for each professional or managerial employee that leaves the organization. The U.S. Department of Labor estimates that it costs a company one-third of a new hire’s annual salary to replace a non-exempt employee and up to 300 percent of a professional or managerial employee’s salary.
Jac Fitz-enz, Ph.D., founder and chairman of Saratoga Institute, and his colleagues have developed a formula for calculating the cost of turnover that considers expenses associated with termination, replacement, vacancy and learning-curve productivity loss. Their research indicated that the average cost of a termination for a non-exempt employee is approximately equal to six months of pay and benefits. For a professional or manager, this estimate jumps to the equivalent of a full year’s salary and benefits. These figures are considered to be conservative since they do not include secondary costs associated with the loss of customers and other consequences.
A Retention Practices Survey conducted in 2000 by the Society for Human Resource Management (SHRM) reported a 17 percent annual voluntary termination rate across the 473 organizations that responded to the survey. The highest rate of resignations occurred within the professional ranks.
Assuming that the cost of turnover for a professional employee is equivalent to one year’s salary and benefits, it is easy to see how quickly these costs can escalate to impact an organization’s bottom line and hamstring its ability to compete. Managing retention is obviously crucial for maintaining a competitive edge.
Addressing Retention Issues
In an effort to investigate best practices in this area, Beverly Kaye and Sharon Jordan-Evans conducted a study of 25 global talent leaders that spanned seven industries and represented 800,000 employees. These researchers found that despite the economic slowdown, organizations are in fierce competition for talent. In fact, the engagement and retention of talent has become a mission-critical priority for sustaining leadership in the marketplace. The solution for many of these organizations has been to try to establish a “retention culture.”
Some defining characteristics of a retention culture include:
- Holding managers accountable for talent management, including tying retention and development goals to performance reviews.
- Tapping existing talent for new opportunities within the organization.
- Training managers on retention and development strategies so that they can build a retention culture in their own business units.
- Targeting succession plans to star performers.
- Instituting formalized mentoring and career development programs.
Most of the retention research conducted during the past five years has concluded that an organization’s ability to retain its valued human capital is dependent on how well it develops its talent pool. However, many organizations fail to act upon this knowledge.
In “The War for Talent,” Ed Michaels, Helen Handfield-Jones and Beth Axelrod drew upon three research initiatives to investigate the variables that differentiated superior from average organizations when it came to managing talent. Their research was based upon the perceptions of 13,000 senior managers across 131 organizations who were asked how they attract, develop and retain top managers and how they build a talent pipeline to these positions. Only 3 percent of the respondents thought their organization developed people quickly and effectively, and only 8 percent believed that they effectively retained high performers. In addition, only 16 percent of the respondents thought that their organizations effectively identified high- versus low-talent employees.
Talent Management: A Key Proficiency
Talent management is broadly defined as a set of strategies designed to attract, retain and develop talent within organizations. Talent management encompasses the ability to:
- Define the standards and criteria for superior talent.
- Determine the skill levels and developmental needs of direct reports.
- Identify and create developmental opportunities tailored employees’ needs.
- Assess short- and long-term staffing needs against the current workforce.
- Create talent pools through structured development and succession-planning processes.
- Differentiate high from low performers and manage them accordingly.
Michaels, Handfield-Jones and Axelrod uncovered a surprising finding from their 2000 “War for Talent” survey. While 93 percent of the senior-manger respondents believed that managers should be held accountable for the strength of their talent pool, only 3 percent thought that their organizations actually did this. Their survey findings show that high-performing organizations are differentiated from average-performing organizations by the level of priority they place on strengthening their talent pool.
Whirlpool Corp., the number-one appliance maker in the United States, ensures that all levels of its leadership assume responsibility for talent management, according to Mahesh Subramony, manager of Organizational Effectiveness. “Developing breadth, depth and diversity of talent is a key priority at Whirlpool, and our regions and functions have full accountability for this process. Our CEO David Whitwam and the executive committee have made this a key corporate initiative, and we have put the necessary processes in place to support and drive it. Leaders are both trained and evaluated on attracting and developing talent, and the effective management of top talent is becoming a key leadership accountability at Whirlpool.”
Defining a Comprehensive Strategy
By implementing a talent-retention initiative, an organization makes a commitment to provide challenging growth and development opportunities to its top talent. In so doing, organizations stand to significantly enhance growth, profitability and success. The question is: How does an organization successfully implement and sustain this sort of culture?
The first step is to understand the retention issues in your organization. Determine what the voluntary turnover rate is within each job category and what impact that has on the bottom line. Once the voluntary turnover rates have been determined, the estimates provided by Fitz-enz will provide a good approximation of the impact on the bottom line. The next step is to gain an understanding of why people are voluntarily leaving the organization. This information can lead to targeted interventions that make sense for the organization.
A useful strategy for determining why employees are choosing to leave is to conduct a confidential exit survey. Responses must be confidential to encourage open and honest feedback. This can be accomplished by having a third party administer the exit surveys and present results in the aggregate.
Another approach is to conduct a “stay” survey to explore what keeps employees working with the organization. Most of the best-practice organizations in the Kaye and Jordan-Evans study also conducted interviews to identify strengths and developmental opportunities for improving their retention efforts.
The success of this initiative will be dependent upon key stakeholder buy-in, which will be determined by how well the process is aligned with key business objectives. The data collection and analysis plan should therefore incorporate key stakeholders’ input and address their concerns as they relate to the impact of retention on the bottom line. This input is ultimately necessary to support the business case for retention as a corporate initiative. The information provided through these data-collection efforts will also help direct and focus the talent-management interventions at both the organizational and the individual level.
PepsiCo recently conducted an internal study that focused on understanding the factors that influence their high-potential executives’ intent to stay or leave the company. They found that the “intent to stay” rating was nearly twice as high for the executives who rated the quality of their manager as high. This link helped establish the importance of manager quality and its strong relationship to executive retention.
Managers should have specific talent-development and retention objectives that are linked to their performance evaluation and ultimately to their compensation. An organization’s leadership will need to be trained in talent management. As a prerequisite to this training, senior managers need to buy into the notion that talent management is as important as managing the other critical aspects of the business.
Recognizing the investment required, managers need to use their time and resources wisely in developing their top talent and creating a retention culture. This means that the greater part of their talent-development efforts should be focused on high-potential performers.
This is not to say that feedback and coaching for lower performers is unimportant, but rather that efforts made to provide challenging growth opportunities will be better utilized by high-performing employees. The lower performers need to be candidly informed as to where they stand and what it will take to improve. At some point, with appropriate feedback and motivation, these individuals may also become high performers.
Ben Dowell, vice president of the Center for Leadership Development at Bristol-Myers Squibb Company said, “Part of our talent strategy for Bristol-Myers Squibb recognizes that aggressive talent management is fundamental to not only developing talent, but retaining talented individuals as well. As part of our talent review, we identify those individuals that are critical to the business and develop retention plans to assure that they are challenged in their current role, compensated appropriately and receive the types of experiences that will prepare them for a future to which they aspire. And very simply, it works”
An organization must be committed and prepared to offer a variety of developmental experiences to top talent. Managers will need to be trained in talent development and retention and have at their disposal the resources necessary to identify and develop high-potential individuals. They will need to be able to offer creative career development opportunities that are woven into the fabric of the organization and present mentoring programs. The investment made in strengthening an organization’s talent and building a retention culture will pay large dividends as the war for talent heats up in the new century.
Paul Russell of PepsiCo summed it up succinctly. “Today’s managers not only welcome, but expect the corporation to actively support their professional development,” he said. “The anticipated availability of such developmental opportunities weighs significantly in the decision to accept employment in the first place, and contributes in a big way to the manager’s decision to stay.”
John Scott, Ph.D. is vice president and co-founder of Applied Psychological Techniques Inc. (APT), www.appliedpsych.com, a human resources consulting firm that specializes in the design and validation of selection and assessment technologies, staffing for organizational change, performance management and litigation support. An expert in the field of human resource evaluation, John is an author and frequent lecturer. His e-mail address is firstname.lastname@example.org.