Reduce turnover, increase profits

Jan. 3, 2008
Tom Moriarty explains what it takes to attract and keep qualified workers, and how employee retention rates affect companies' profitability.

If the people you work with and your direct reports were offered equivalent or slightly better compensation elsewhere, how many would stay with your team? How much of a difference in pay or benefits would it take for a good employee to jump ship? Better yet, how can you, as a leader, foster a situation that increases the stickiness of your team? By stickiness I mean, of course, making it more difficult for outside influences to tempt a person away, or making it a no-brainer for a Class A employee to choose your team over some other company’s team.

Organizations that develop employees, offer opportunities for people to contribute ideas and provide them with the skills to improve their own performance are much more likely to have an engaged workforce. Some organizations argue that it’s too expensive to train people who might then take their training elsewhere. That might be true to a degree, but if you’re known as a company that invests in employees, you’ll attract quality people and retain them longer. Besides, the only thing worse than training people who later leave is not training them and having them stay.

A Web search on the phrase “employee engagement” will turn up a number of links related to the Gallup Management Journal polls. These polls, updated annually, measure the relative percentages of employees in three categories: engaged, not engaged and actively disengaged. Engaged people come to work and proactively contribute to organizational goals. Not-engaged people show up and do what’s asked of them and not much more. Actively disengaged people harbor overt distrust of the organization and refuse to contribute to its objectives. Moreover, actively disengaged people might try to destabilize your systems and the accomplishments of others. The current Gallop poll survey of 1,000 people indicates the distribution is 29% engaged, 56% not-engaged and 15% actively disengaged.

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Related studies show that companies in the top quartile for employee engagement have 18% greater productivity — and 12% higher profitability — than bottom-quartile companies. If that level of performance existed across the board at your company, the results would be a 260% faster growth in earnings per share.

The organizational pulse

Any organization that’s concerned with attracting and retaining qualified workers should read a few recent Gallup Management Journal studies. They link the degree to which employees are engaged to profitability. This is noteworthy for corporate management in this era of mergers, acquisitions and spin-offs. Gallup recommends measuring six benchmarks for trending engagement:

  • Absenteeism
  • Average years of service
  • Quality performance
  • Safety performance
  • Productivity
  • Customer satisfaction

In addition to benchmarking, survey your team members about general climate and job satisfaction, as well as motivation and coaching. General climate and job satisfaction surveys provide an overview of the culture and general mood of the organization. Motivation and coaching surveys provide more targeted information on the organization’s supervision skills. Periodically using identical surveys can help you confirm that changes are being made. Examples of surveys can be found at

Increase employee engagement

The consensus among several research groups is that certain general management factors drive employee engagement:

  • Trust/integrity — how well managers communicate with employees and lead the employees to value their relationships with managers.
  • The work itself — making it stimulating day-to-day; providing opportunities for employees to try new skills and contribute at higher levels.
  • The connection between employee performance and company performance — helping employees understand how their work contributes to the company's success.
  • Offering career growth paths and helping develop employees’ professional skills.
  • Building employee pride in the organization — paying attention to how much self-esteem the employee feels as a result of being associated with the company.

The first step is to figure out where you are by using benchmarks and surveys. You need to know how well you’re performing relative to your industry and to other business units within your larger organization. Next, establish objectives and goals for improving these measures. Third, develop a plan of action that outlines the initiatives, resources and people who are responsible for executing each initiative.

Objectives and goals include the improvement you want to see, by how much, and what’s to be used to measure progress. Include a glossary of common definitions so everyone is speaking the same language. Get objectives and goals reviewed and approved by the level of the organization that has control over the necessary resources. The plan of action puts the objectives and goals into operation. Improving employee engagement would mostly center on providing training for managers and supervisors. The specific training topics are based on the findings from the benchmarks and surveys.

Convincing senior leadership

Consider the concept of return on reduced turnover (RORT). It’s an idea that explains why it’s important to invest in leadership and management training. You can improve business performance through increased profit margin by reducing costs. Calculating RORT requires only simple math. The numbers you need include your organization’s profit margin, current turnover rate, the cost associated with employee turnover and training costs.

Your course of action should be to improve the organization’s leadership and management skills. Generate an environment that improves employee satisfaction. This requires senior leadership to support a professional development program that enhances the skills of managers and supervisors.

The effects of employee turnover on a business are highly variable. Sales and executive-level jobs are generally associated with higher turnover costs because these positions have a major effect on revenues and strategic decisions. Hourly employees typically have lower unit turnover cost, but there’s generally more turnover in the lower levels of the organization because there are typically more people in the hourly ranks who are most affected by suboptimal leadership and management performance.

On the basis of percentage of annual compensation, various sources estimate turnover costs to range from 25% to 250%. The groups that provide these estimates include government organizations (such as the Department of Labor) to nonprofits and, of course, consulting firms.

Let’s calculate the RORT associated with attracting and retaining qualified hourly workers and line supervisors. For cost of turnover, assume 40% of direct compensation costs, which is the Department of Labor’s current estimate. This means a position that pays $45,000 per year has a corporate loaded compensation (what that position actually costs the company) of approximately 35% more than an employee’s pay; $60,750 per year ($45,000 x 1.35). A 40% turnover cost means that turnover at this position results in an $15,750 cost ($60,750 - $45,000) to the business. These costs represent recruiting, interviewing and training the new person, lower team productivity, administrative costs associated with stopping/starting payroll, taxes, insurance and, perhaps, overtime and contractor costs to accommodate the gapped position.

Now, assume an organization with 150 employees at this level faces a nominal 10% turnover rate, about 15 positions annually. At an average cost of $15,750 each, the annual turnover cost for 15 people is $263,250 per year. If the company has a 5% profit margin, sales need to exceed $4.725 million ($263,250 ÷ 0.05) to account for turnover costs. This represents $315,000 per position that turned over ($4.725 million ÷ 15).

Leadership development program cost

If you have multiple employees to train, it’s much more economical to bring the trainer to your site. Travel time to off-site training requires attendees to miss more time from their responsibilities. It incurs the cost of travel, hotels and meals. The off-site location might have too many outside distractions to make it conducive to learning.

Bringing a trainer to your site, on the other hand, means time allocated to training is the only time employees are away from their responsibilities. Also, one set of travel costs for one person makes it more attractive to bring the training to the trainees. When you use on-site training, you also maximize the number of people you can train and keep costs within your budget. Students will learn as a group and support each other’s progress.

Expect to pay about $75 per student per hour for in-house training. This rate should cover training materials, but excludes travel and expenses for the trainer. Best results are attained with spaced training, perhaps one three- to four-hour training session each month. Monthly training costs under these guidelines are about $300 per student (4 hours x $75/hr), with travel and expense costs estimated at $1,000 per session. The annual training cost for 10 employees would be about $48,000, or $4,000 per month.

The payoff

Now, let’s explore the payback you get for reducing by one-third that original 15 people per year turnover rate. If we dedicate less than $50,000 annually to this purpose, we have better than a 1.64:1 payback ($15,750 x 5 = $78,750 saved divided by $48,000 cost = 1.64). We also would need $1,575,000 less sales revenue to achieve the same annual profit ($78,750/0.05). If you plug in your own numbers, you’d be able to convince your management of the value of a professional development program. If you reduce turnover by one third, which is a realistic goal, you also achieve:

  • Greater team continuity
  • Lower absenteeism
  • Improved morale

Program recommendations

As previously stated, the first step is to measure current turnover, absenteeism, safety and other factors. Then, conduct general climate and job satisfaction surveys, as well as motivation and coaching surveys. You need this baseline data to prove the value of instituting the program.

Once you know where you’re starting, design and implement a professional development program for managers and supervisors. Design the program to include topics that provide tools for empowering leadership. Work with a trainer who can cover a range of topics customized to your needs. Use the survey results to develop the right mix of topics. Typical subjects might include:

  • Building trust: The game of collaboration
  • Building teams: A blueprint for high performance
  • Face-to-face communication for professionals
  • Effective meetings: The power to get things done
  • Emotional excellence: Handling life’s challenges
  • Taking responsibility: How to be proactive not reactive
  • Conflict resolution: The road to win-win
  • Empowering employees: A guide for success
  • Setting performance expectations: A guide to managing people
  • Team decisions: Making things happen
  • Winning relationships: Strengthening self and others

Find a facilitator who has an operations and maintenance background in industry or facilities management. It’s important to have a facilitator who can develop rapport with the employees. I’ve sat in silent agony as a knowledgeable facilitator, whose career experience was in an office setting, tried in vain to get a group of blue-collar, burly fellows to participate in training exercises that required them to stand in a circle and hold hands. The same exercise might have worked well in training bank or hospital supervisors, but it wasn’t appropriate for those deer-hunting, NASCAR-watching guys from the plant floor in heavy industry. That facilitator lost their interest in that moment.

If your organization has a significant number of not-engaged or actively disengaged employees, or has difficulty attracting and retaining workers, the root cause might be the leadership and management skills of your managers and supervisors. Obtain the resources to fund the program by presenting a compelling business case that considers total costs.

Once you have the support to design and implement a leadership and management improvement program, select a facilitator who can connect with your managers and supervisors. Do the training at your site or somewhere nearby. Schedule time between sessions so employees can practice what they’ve learned. Measure key indicators and survey trends periodically to document the improvements.

The class size should be in the range of eight to 20 people. If you have fewer than eight, consider including those you are grooming for leadership positions, or offer seats to other businesses in your area. More than 20 people can diminish the quality of training. If you have more than 20 students, amortize the cost of the facilitator’s travel costs and expense for each trip by scheduling multiple sessions for separate groups. However you decide to structure leadership and management development in your organization, the result should be a leveraged return on the investment, an improved work environment, and better-quality leadership and management.

Tom Moriarty, P.E., CMRP, is president of Alidade MER, Inc., Satellite Beach, Fla. Contact him at [email protected] and (321) 773-3356.

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