When is Good Retention Bad?
David Earle

While retention is the second most tracked staffing metric after cost, tracking it as a single benchmark is hardly useful. If your company’s turnover is 13% and the industry benchmark is 15%, should you be satisfied and move on to a more pressing problem? Not without a closer look. Your apparently superior metric may or may not be praiseworthy.

Superior employee retention, or low employee turnover, is not automatically good or bad. It can identify a well-managed, dynamically successful company or it can identify a badly managed company with low employee performance standards; an employer offering jobs in an area where they are scarce and especially valued, or a stagnant company with poor prospects.

Quits – BLS, Q3 2009

These are the types of retention benchmarks our clients most often request in hopes of quickly and easily validating their staffing competitiveness. In response, we remind them that industry benchmarks are aggregates that average reports from companies that are both:
 

• Superbly and poorly managed
• Expanding and downsizing
• Winning and losing market share
• Well and poorly located to compete for good employees
• Securely positioned and competitively challenged
• Staffed by older and younger workers
• Staffed by highly and lowly skilled workers
• Good and bad places to work by job marketplace reputation
   

In other words, they average winners, losers and also-rans, representing a “C” in terms of best practice, not a “B” and certainly not an “A.”

Retention is also the wrong staffing benchmark to measure simplistically because of its scope. The other core staffing metrics - time, cost, quality and satisfaction - evaluate only the front end of the employee lifecycle, or how efficiently and effectively you are bringing people into the organization. But retention speaks to the whole employee lifecycle – not only how well you are evaluating and selecting candidates, but how well you are managing them, engaging them, training and developing them, and rewarding them. Thus retention reflects the underlying philosophy of a company’s total human capital management approach to a much greater extent than other metrics do.

And it is possible for two successful organizations to have quite different management philosophies with respect to people management, producing two very different, but perfectly defensible, sets of retention numbers.

• COMPANY A has grown very successful and profitable by creating a rigorous meritocracy based on universal performance evaluations designed, among other things, to cull out the bottom 10% of its employees each year at all job levels. This “up or out” performance philosophy, coupled with incessant poaching of its deep management bench by competitors, and layoffs due to frequent internal restructurings of its large and diverse portfolio of businesses, consistently produces higher than average employee turnover.

• COMPANY B has enjoyed equal success with a talent management philosophy grounded in careful hiring, extensive employee training and development, internal promotion, and a flat, democratic, team-based operating structure. It appears regularly on FORTUNE’s list of “best companies to work for.” Its intensely loyal employees often recruit friends and family into the firm, and turnover is dramatically below the industry average in both good times and bad.

Is There a Meaningful Retention Benchmark?

Yes, the one that’s relevant to your specific circumstances.  But it takes work to put together, beginning with answers to a set of questions:

• Which employees don’t we mind losing (poor performer, poor cultural fit, hard to manage, disruptive)?  This is Group A.
• Which employees will we inevitably lose (sickness, relocation, retirement)? This is Group B.
• Which employees would we hate to lose (high performer/key contributor, critical position, hard to replace, hired by competitor)? This is Group C.

Having identified these groups you then ask a second set of questions:

• Group A – Is our hiring process too lenient? Are we not screening carefully enough? Are we always rushing the hiring process for lack of advance planning? Are we defining jobs and job requirements poorly? Do we partner well enough with hiring managers?

• Group B – Do we have forecasts for pending retirements and reliable estimates for other types of separations? Do we have succession/replacement plans for these jobs? Do we have knowledge transfer plans in place? Would any of our most experienced senior workers consider part-time or mentoring assignments instead of full retirement?

• Group C – Why have these people left us in the past? How do we create greater loyalty in the future?

The answers to these questions will enable you to answer, at least preliminarily, where you stand and what your challenges are. Is the current state acceptable? Can it be improved? If so, how? If we spend time and money on improvements, what benefit will we receive?

Calculating ROI

Whether your company elects to operate with high turnover or prefers to strive for low turnover, turnover is an expense, often a large one. Because the calculation is detailed and requires recordkeeping, it is often fudged. Because it can also make managers look bad, it is often buried. This is unfortunate. In a large company the difference between average and superior retention metrics easily adds up to millions of dollars. If HR wants to capture the attention of a CFO, COO or CEO, improving retention is one of the best ways to do it.

Next week we’ll look at how these millions add up and how to calculate them.

 

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