Carrots, Not Sticks

By Michael Hardy | Spring 2015

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There’s nothing more certain to get a laugh in a movie than when a character charges into her boss’s office, flings down a letter of resignation and announces, “I quit!”

But for employers, turnover is no laughing matter.

The cost of replacing an employee is far greater than the expense of advertising for a new one. There’s the time it takes to recruit, interview, hire and train the right candidate. There’s the reality of reduced productivity and lost opportunity costs. Team dynamics might suffer as colleagues adjust to a new person, and a company stands to lose significant institutional knowledge when a seasoned worker walks out the door.

The exact cost to replace a worker varies greatly by industry and level, but most estimates say that replacing entry-level employees costs 30 percent to 50 percent of their annual salary; mid-level, 150 percent-plus; and high-level or highly specialized, more than 400 percent.

A number of Mendoza professors study retention and turnover from different perspectives. They all agree that finding answers to retaining top talent is critical, and that there are pro-active ways companies can address the problem.

The Classic Model

Timothy A. Judge, the Franklin D. Schurz Professor of Management who studies a wide range of issues related to employee satisfaction at work, said that turnover rates vary widely by company and industry, as do the associated costs. In the fast-food industry, for example, turnover (a key factor driving retention that is calculated by dividing the number of exits by the number of employees for a given period) can range well over 100 percent. But the cost is low because it’s relatively easy to hire and train new workers.

That’s not the case for many industries, said Judge. “I work with a company in Notre Dame’s Innovation Park, Stay Metrics, that works with carriers in the transportation industry on turnover. Turnover is a huge issue in trucking; it is generally 100 percent. Yet replacing people is quite expensive, because recruiting and training costs are high (drivers have to be certified). Turnover is the No. 1 issue in the industry.”

Judge identified three primary factors that make turnover a costly problem:

  • Recruitment costs. The more expensive and difficult it is to recruit employees, the higher the cost of their turnover.

  • Training costs. The more training time required, the higher the cost of turnover. Professional and technical jobs, for example, often require substantial investments in training before someone can be productive. In such a case, losing a worker is quite expensive.

  • Performance of those leaving. Judge said this is often a factor that is ignored by organizations, but shouldn’t be. “It’s not only how many are leaving, it’s who is leaving,” he said.

“The literature suggests that poor performers are somewhat more likely to leave than high performers. If that is a case in an organization, then they are profiting from turnover because it is helping them shed their weakest employees. However, that is not always the case. The upshot: A company needs to correlate turnover with who is leaving.”