in companies that focus on knowledge-based
competition, top management recognizes that it can obtain sustainable
competitive advantage by routinely recruiting people who are a little
bit more skilled, motivated, or intelligent than the pool their
competitor attracts. In essence, they become passionate collectors
of people.1
Sumantra Ghoshal and Chris Bartlett/The Individualized Corporation
Recently, the emphasis placed on attracting and
retaining high-performing employees has witnessed monumental attention
not only by HR professionals but by line managements as well. Historically,
most companies have under invested in employee attraction and commitment-building
or retention strategies. There are many reasons why organizations
under invest in these strategies. One obviously pertains to knowing
their cost but not the value-enhancing potential. The ongoing cash-flow
implications of increased employee turnover, as a function of, for
example, inappropriately designed and implemented employee satisfaction
or retention strategies are not immediately apparent. HR professionals
have attempted to quantify the cost of employee turnover by identifying
and measuring various cost metrics. Some have even attempted to
add in the cost of less effective customer satisfaction that results
from inadequate levels of employee satisfaction and retention. However,
in most cases, these numbers have failed to convince line managements,
because they are not meaningfully linked to cash flows or accounting
measures.
The critical measurement strategy associated with
quantifying the cash-flow and accounting measure consequences of
sky-high, voluntary employee turnover or inadequate performance
involves recognizing that employee retention and commitment is not
only critical to cost efficiency but a critical element in top-line,
revenue growth as well. This is because of its undeviating connection
to customer satisfaction and financial performance. Sears, for example,
has determined that if a given store increases its employee-satisfaction
scores by five measuring units in a given quarter, its customer
satisfaction scores will advance two units in the following quarter.
In turn, revenue growth will exceed its stores national average
by 0.5% in the next subsequent quarter.2
Value-Adding Recruitment, Selection, & Retention
Strategies
Many companies are looking for proven ways to further
enhance and measure either on a pro forma or actual
basis the value of their recruitment, selection, and retention
strategies. These initiatives, in turn, serve to reduce voluntary
employee turnover, enhance employee commitment and satisfaction,
improve job performance, and yield positive cash-flows to the organization.
Certainly, the cost associated with voluntary turnover, for example,
depends on many factors such as the relative supply and cost of
replacements either internally or externally, the amount
of development invested in the employee, the employees level
in the organization, and the performance level of the employee.
Indeed, turnover of top performers in higher level
leadership roles can result in the loss of future leadership capability
for a company, implying that the importance of top performer turnover
in the incentive ranks extends well beyond the short term performance
losses and transaction costs related to turnover. Top performers
are of value not only for their present and short-term performance
value but also for the talent pool from which the companys
future leaders are drawn from. Precisely because there are
so few indispensable firm members or franchise players
that can affect the success of the entire organization, it is important
to maximize selection pool quality not only to increase future leader
quality but also to minimize the probability of finding an exceptional,
difference-making executive.3 Retention strategies such as
deferred incentive plans or salary growth, as well as promotions,
can impact turnover, depending upon the performance level and organizational
level of the employee.
Determining the Financial Value of Attraction
and Commitment-Building Strategies
The financial value connected with specific
process and outcome metrics associated with recruitment, selection,
staffing, and retention practices can be determined by constructing
custom measurement and data models that build on the businesss
value chain, and the value links within the chain. One measurement
or generalized approach, therefore, will not serve to effectively
evaluate and fit all attraction and commitment-building strategies
from a financial assessment base.
For example, in the context of selection, financial
gains are a function of four parameters: 1) the number of employees
selected; 2) the validity coefficient between ratings on the predictor
and ratings on a measure of job performance; 3) the standard deviation
of a dollar-valued measure of job performance; and 4) the average
rating on the predictor of those employees selected. Investment
costs are a function of the number of applicants times the fully
loaded cost of recruiting, processing, and evaluating each applicant.
Capital budgeting analysis, in turn, can be used to evaluate the
investment and returns associated with an improved recruitment and
selection process.
Cases In Point
Recently, we assisted an organization in determining
the causes and cost associated with voluntary turnover, and, in
turn, identifying, implementing, and measuring the specific retention
strategies that are building higher levels of employee commitment
and job performance. For another client, we devised a process for
measuring the effect of culture values on employee retention across
a number of its operating units and, more importantly, the financial
impact of these defined culture values as a function of employee
commitment and retention. And finally, we completed a strategic
recruitment and staffing audit for a global company to determine
the impact of various recruitment and staffing components and processes
on employee retention, commitment and satisfaction, and job performance.
We are currently assisting the organization in reinventing several
of these recruitment and selection practices, and have made financial
projections using financial budgeting techniques as
to the likely payoff associated with these new investments.
In summary, keeping high performers longer can,
in fact, demonstrate substantial financial impact to a company.
One recent net present value analysis found that employee
net present value increased from $12,800 per employee to $32,700
per employee, or an increase of 155% between a retention rate of
80% and that of 90%. In this case, an investment initiative of approximately
$10,000 per employee aimed at enhancing retention 10% would yield
an ROI ratio of approximately 1:2, on a discounted basis.
1 The Individualized Corporation:
A Fundamentally New Approach to Management. Harper Business, 1997.
2 Bringing Sears into the
New World. Fortune, October 13, 1997, pp. 183-184.
3 Trevor, C. et. al., Voluntary
Turnover and Job Performance. Journal of Applied Psychology, 1997,
Vol. 82, No. 1, pp. 44-61.
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