“…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 employee’s 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 company’s 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 business’s 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.