Higher employee retention boosts productivity.
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The working-age population in the United States is not growing, at least not enough to measure. With President Trump’s immigration enforcement, we may even have more people leaving the country than entering. Businesses will increasingly find that employees are hard to hire and even harder to retain. Although some occupations are starting to be hit by artificial intelligence, the vast majority of work will continue to be performed by humans in the next few years. So employees will be critical for most companies’ performance.
Business strategy for this challenge must use three approaches: boost employee productivity, increase employee retention, and improve employee recruiting. Some of these goals can be implemented independently. For example, improved tools (which could be screwdrivers or software) can raise productivity without affecting retention or recruiting. But some efforts will boost all three. Think how great that is: increasing productivity, retention and recruiting from one effort.
The new book Targeting Turnover: Make Managers Accountable, Win the Workforce Crisis emphasizes the connection between employee turnover and productivity. Author Dick Finnegan writes that employee productivity is the most important component of the cost of employee turnover. He notes that human resources calculations often focus on advertising job openings, screening candidates, then on-boarding and training. But Finnegan emphasizes that the greater cost of turnover is low productivity.
For example, the healthcare industry lost many workers in the pandemic. The remaining employees were overworked and soon burned out, leading to more departures. Hospitals and clinics paid up for temporary employees, because light turnover led to heavy turnover.
In most companies, the new employee needs to learn company-specific practices, even if the person is trained and skilled. Low productivity during this period is a real cost to the business. And the supervisor spends a good bit of his or her time coaching and overseeing the new hire, diverting precious time and attention from helping other employees.
Getting the finance department of a company to estimate the cost of turnover usually leads, in Finnegan’s experience, to more accurate cost estimates as well as more credible cost estimates. And most of those costs come not from the HR budget but from the division which has the turnover. This information motivates the line divisions to accept responsibility for turnover. This is a key insight from Targeting Turnover: To get improved turnover, responsibility must lie with the direct managers.
Once a company has accepted the idea that retention responsibility must lie with first-level supervisors, the executive leadership must provide the resources that those managers need to reduce turnover. One key element is time. Many managers are already burdened with many obligations, and they may not respond well to having another duty added to their workload. In fact, another duty may trigger a turnover crisis among the managers themselves. So top-down initiatives should both put turnover responsibility on first-level supervisors and also relieve them of some of their current time-sinks.
One key tool for improving employee retention that Finnegan recommends is the “stay interview.” This discussion helps the manager understand what the employee likes about the job and dislikes about the job. Some of an employee’s dislikes can be solved, though many cannot. But plenty of managers don’t even know what really bugs their people, and some of those irritations could be easily solved. The manager also gets to know the workers better, enabling better assignment of tasks within the team. Finnegan’s nutshell is that stay interviews build trust. And that’s critical, he writes, summarizing substantial research: “The number one reason employees stay or leave … is how much they trust their immediate supervisor.”
Hiring for retention is another important element of employee strategy. Too often hiring managers hurry to get a body in the seat. If the manager knows that responsibility for retention lies with him or her, better hiring decisions will be made.
Other techniques that Finnegan recommends include job previews, asking for length-of-employment commitments, holding internal recruiters accountable for new-hire retention, and improving internal job referrals.
The keys to dealing with a tight labor market, I have argued, are employee productivity, retention and recruiting. Good retention policies also lead to better referrals, and vice versa. In connection with retention, Finnegan suggests more generous employee referrals. That raises an issue that Corey Harlock discussed in a podcast with me. He pointed out that many employers will pay recruiting fees far in excess of the internal referral fee offered to employees. He then asked, who would the boss prefer to pass money to: an employee or an outside contractor?
Employee referrals tend to have better retention that purely-outside hires. The new hires may know more about the job from the referring employee, and perhaps the referring employee has a better idea of who will fit in well.
This brings us to the third leg of the tight-labor market strategy: better recruiting. It turns out that many of the actions that will improve retention also make hiring easier. Happier employees who trust their immediate supervisor are much more likely to refer their friends and family to the company. This becomes a virtuous circle: more satisfied employees lead to easier recruiting of employees who will themselves become highly satisfied with their jobs, leading to even more referrals.
There is no one perfect tactic for business leaders coping with the tight labor market, but improving employee retention is a critical part of business strategy.