Our people, our assets.

Somewhere in an office inside your company right now Tim Smith is packing up the photos of his blonde, ringletted twins and boxing up the tattered reference books he brought from home years ago, when he was so full of potential and eagerness he was like a lion eyeing fresh-killed meat. A highly productive employee, Tim is leaving not because he isn't making enough money or even because he has found better work elsewhere (the reasons he just gave at his exit interview), but because he can no longer tolerate working under a supervisor who doesn't give him air to breathe, and who doesn't support his desire to occasionally leave in time to attend his daughters' 7 P.M. ice skating competition - even when Tim himself has performed triple pirouettes for clients since 7 A.M. Almost worse for Tim is the reality that, despite his ranking as one of the top producers in his division, the company beyond his stifling supervisor doesn't seem to even acknowledge his existence.

In the olden days - say, five or 10 years ago - you might not have been aware that your Tim Smiths were moving on. Today, if you're a savvy CEO, you certainly know better, recognizing that every employee in hand is worth 200 in resume form. That in this age not only of full employment but also of companies' increasing role as idea factories, of global competition, and of rapid obsolescence, and in a time when relationships between companies and customers are more fragile than ever, the ability to keep and grow great people is crucial to a company's success. Repeat employees, you are starting to realize, should be viewed as akin to repeat customers, an infinitely more valuable and less expensive alternative to always chasing after the new, new, new.

Eager to shed your own company's retention deficit disorder? You must begin by accepting the notion that it is you, the CEO, who must lead the charge.

TIGHTER TIMES ARE COMING

It's been dubbed "the war for talent," and if it hasn't come to your industry yet, consider yourself fortunate that you have more time to plan.

The most obvious reason for companies' heightened focus on retention is the labor shortage. The crimp originally started in high tech but has since radiated out to nearly every skilled and competent worker. "People today realize that if they're good, they can go anywhere," says Hal Rosenbluth, CEO of a 4,500-employee travel agency, Rosenbluth International. Indeed, studies have found that corporate officers already have insufficient talent to carry out the innovative programs on their drawing boards - let alone to develop that Next Great Idea that might vault your company into the stratosphere.

But according to a yearlong study of 77 companies and nearly 6,000 "top 200" executives from a variety of industries by McKinsey & Co., today's war for talent is actually more akin to a schoolyard brawl, with the full-scale military assault projected to strike in the next few years. That's because the shortage then will have extended to senior executives - the very people you need to run divisions, manage critical functions, and prepare to take the helm when you retire.

This upcoming executive crunch is largely related to the kind of hard numbers many CEOs don't pay enough attention to: demographics. In 15 years, Americans in the prime management range of 35- to 45-year-olds will be some 15 percent fewer than today, an unprecedented shortfall. During the same period, the U.S. economy will likely grow, not shrink. The result, McKinsey warns: Companies will be out to raid your executive suite as never before.

McKinsey's sobering conclusion: "Most companies realize they could improve recruitment and development, [yet] few realize they have a retention problem" largely because CEOs today look around the meeting room and see top people largely staying put. That may soon change for any company not focusing on keeping its talent in-house. And it is likely already changing out in the trenches: In the early to middle ranks of managers three to eight years out of college, the report notes, turnover is often as prevalent as sugar in a bakery; it just happens back in the kitchen, out of sight of the CEO.

BETTING ON PEOPLE, NOT STRATEGIES

If the worker shortage is the reason retention is catching top management's attention, it's the more lasting business changes that are causing the most prescient CEOs to make the substantial, and sustained, alterations that most affect retention - and that will outlast even these good economic times.

Time was when employees felt beholden to the company that fed them. The organization man was signed on for life. No one needs to tell you that that time is gone. Workers have come to see themselves as a brand unto themselves, to be marketed and positioned in any way and to anyone that benefits them. The old carrot-and-stick approach to keeping employees in the fold no longer works, because, especially for the best people, there's always a juicier carrot or a shorter stick somewhere else.

If the social contract is dead, technology is alive and kicking, fueling an employee's ability to go anywhere and work for anyone. An engineer with a computer in Bangladesh can put her talent to use for a top software firm in Seattle or Dublin. So it stands to reason that an accountant in your office can just as easily be wooed by a London-based business happy to accommodate her desire to work from home. People don't even seem to want to toil for one employer anymore. The rise of "portfolio workers," those individuals who were once full-time employees but now happily cart their laptop from one company to another, is a well-documented trend. And the booming number of startups means your employees have more options than ever, some of them dangling the potentially lucrative stock options and the ability to move rapidly up the ladder that larger companies are hard pressed to match.

At the same time that employees feel less compelled to dedicate themselves to one employer, another shift has occurred that makes their allegiance all the more important to their organization. With a global economy, abundant capital, and a half-life for technology shrinking smaller than a snail's ear, companies are increasingly coming to see that their primary asset is in fact their work force, the very thing they have long mistakenly considered their highest cost.

"People really are a company's only differentiation; the use of all the knowledge they possess is what makes an organization succeed," says Jeffrey Pfeifer, professor of organizational behavior at the Stanford Graduate School of Business and author of The Human Equation. This is true whether the company is a professional services firm obviously dependent on quality people or a widget maker less visibly so. Larry Bossidy, CEO of AlliedSignal, and Chief Executive's 1998 Chief Executive of the Year, was recently quoted as saying: "At the end of the day, we bet on people, not strategies." Strategies are transparent, Bossidy notes, and thus easily - and these days, quickly - copied by others. And strategies often fail, necessitating the need for another strategy, and another, and another - all developed by - you guessed it - people.

What's more, companies are coming to realize that it is individuals that customers do business with, not bricks and mortar. "Our global economy is increasingly labor, not machine, driven. So when people leave an organization, what leaves with them are the relationships they have formed with the clients, the knowledge they have, and how they engage that information with their clients and other employees, which cannot be replaced" says Jim Wall, national managing director of human resources at Deloitte & Touche, a Big Five professional services firm with more than 28,000 U.S. employees that has transformed its entire culture to enhance retention, especially of women. That's doubly troubling for global companies, Wall notes, since in some cultures, such as Japan, relationships matter almost more than the product does.

A COSTLY PROPOSITION

As if the employment and demographic numbers weren't reason enough to stem your employee churn, consultants and other experts point to another set of unsettling figures: the cost to replace people who leave an organization.

Factor in recruitment and retraining cost for a replacement employee, and it is estimated that three times a person's salary walks out the door when they say goodbye. Others take a more conservative rate of one-and-a-half or two times salary. But even at that figure, reducing churn by even a few percentage points can mean millions of dollars saved.

The numbers don't even end there. "If revenue minus cost equals earnings, you have to look not only at the cost but at the revenue side as well," says Wall. "Each employee retained generates a certain amount of revenue that they wouldn't generate if we were having to replace them" That's particularly true for those in service industries, where revenue is directly correlated to the number of bodies available to do the work. One large organization, for example, figures that by upping its retention by 2,000 employees within the last year, it was able to generate an additional $66 million in revenue.

Stephen Covey, co-founder/co-chairman of leadership development organization Frankin Covey and author of The Seven Habits of Highly Effective People, believes that excessive turnover, especially at the top levels, is not only costly, it can be devastating to a company's objectives. Not only do you lose such a person's influence with customers and suppliers and his or her institutional memory, Covey says, the person's exit also weakens the morale of those who remain. For these reasons, Covey believes, companies need to stop visiting the issue of retention only when they are in a crisis mode - when a Tim Smith is walking out the door. "It's really significant that companies make a commitment to this subject in the same way they make a commitment to careful selection, because both of those together are far more important than training," he says.

IT'S PAYBACK TIME

So much work, so little time. So why worry about retention? Some would say that, given today's environment, there's no choice. Since, at least in this economy, you need workers almost more than they need you, a company can't view retention as an afterthought. But happily for companies that go the extra 100 miles, the benefits of developing key retention strategies can be massive. For one thing, productivity and profits are intricately linked with the employees who live out a company's business plan. "In a global marketplace, what drives growth are ideas and the people to implement them," says D & T's Jim Wall. "The companies who attract and retain the smartest people grow the most."

Research bears out Wall's experience. San Francisco's Great Places to Work Institute, the group behind Fortune's annual "100 Best Companies to Work for in America" report, recently compared the annual returns to shareholders of the public companies in its 100 Best list with companies in the Russell 3000, an index thought to most closely mirror the firms on the list. The stock of the 55 public companies on its heavenly hundred, the Institute found, had an average annual appreciation of 25 percent. The Russell index gained only 19 percent.

Numerous other studies also bear out the benefits of retention. One report of 771 Sears stores, for example, correlated employee tenure with the results of a survey by the stores' most frequent shoppers. Stores with lower turnover rates had higher customer-satisfaction scores, and vice versa.

IT BEGINS WITH YOU

So how does one keep people in the fold? Top retainers realize it starts with an attitude, and it starts at the top. "The average CEO of a company looks at his people and sees costs" Stanford professor Pfeifer says. "Instead, he needs to see assets, opportunity." Says Jack Brooks, vp of human resources at Sequent Computer Systems, an Oregon-based computer company that keeps turnover down to 18 percent, compared to the 25 percent or higher for typical Silicon Valley high-tech firms: "If you look at people as bodies and know that the average tenure at your company is a certain number of years, you expect each body to be there that many years. Then you start to create that reality by how you treat them, and often they meet or beat your expectation."

Fortunately, more CEOs have begun changing their philosophy. "In the last few years the biggest change is that the issue of retention has moved from being a top priority of human resources to being a top priority of the executive suite," observes Robert Levering, co-founder of the Great Places Institute and co-author of the 100 Best Companies to Work for in America book and Fortune list. "It is no longer being delegated, if not relegated to HR; now it is something the people at the top are concerned about" "Retention is primarily a leadership issue, one that focuses on vision, and creating a high-trust culture that is both challenging and meaningful as well as rewarding economically" says Stephen Covey.

Does Money Matter?

For employees, wanting to stay is
about a lot more than a paycheck.

Relative importance of:

Workplace Support                               10%
(flexibility, culture, respect, etc.)

Job Quality                                     16%
(autonomy, meaningfulness of work,
opportunities for advancement)

Job Demands                                      2%
(hours worked, nights away from
home job pressures, etc.)

Earnings and Access to Benefits                  4%
(assuming wages are competitive
and employees are treated fairly)

Source: Families and Work institute, National Study of the
Changing Workforce

"The role of the CEO cannot be overstated" cautions Robert Levering. "The extent to which CEOs are not willing to get rid of managers who don't treat people the right way communicates volumes throughout the organization." Jim Copeland, CEO of both Deloitte & Touche and its global organization Deloitte Touche Tohmatsu, agrees. "If I choose a managing partner with strong human resource values, who talks about creating a culture in his office that allows people to reach their highest potential, people will say I must be serious about all that," he says. "If, on the other hand, everybody I promote has a hard bottom-line orientation and a don't-bother-me-with-anything-else attitude, people will say, 'Oh, I understand. What's really important is that we make a lot of money; the rest is for show.'"

Of course, some CEOs have long known that the retention buck stops here. Herb Kelleher (Chief Executive's 1999 Chief Executive of the Year) famously made Southwest Airlines into the powerhouse it is by making running the business one of his full-time jobs, and making dealing with employees the other one. And Federal Express Chairman Fred Smith's focus on his workers helped propel his company to the pinnacle of retention: 1997's turnover rate for full-time FedEx employees was just 3 percent. Contrast Smith with another famous airline CEO, Frank Lorenzo of Eastern, says Pfeifer, and you can starkly see the benefits of coddling employees rather than trying to crush them: "Southwest's market share is rising, and Frank Lorenzo is out of the industry."

A CEO's embrace of an employee-focused culture must be genuine, however, Pfeifer warns. As one executive recently confided in Pfeffer, "annual reports today seem to come preprinted with 'our people are our biggest assets' on them." Employees aren't dumb enough to fall for that if it isn't true, Pfeifer says. "They see right through a phony effort. So many retention techniques fail because they are just that: techniques."

HOW TO MAKE A MOSAIC

For CEOs already pulled in all directions, increasingly forced to don the hats not only of operations and financial but also of communications, systems, and real estate, the need to slap on an HR derby may seem wearying at first. And doing it right may require a total commitment to a massive cultural change.

"Retention is an outcome, not a series of activities or programs. It results from everything that happens in an organization, not because the company has 65 programs that do 63 things" says Deloitte & Touche's Jim Wall. You need a business strategy with an HR component, not an HR strategy.

Retention is also the tidy result of a whole host of messy human needs and desires, and thus cannot be easily altered. "Fifteen years ago we tended to manage retention like it was something that could be managed," observes Ed Kangas, chairman of D & T's global organization, Deloitte Touche Tohmatsu. "In fact, retention is a byproduct of a whole scheme of things, some of which come down to programs, some of which are part of the management practices of the organization, and some of which are embedded at a very deep level within the partnership." Copeland notes that when his firm underwent its transformation to a more worker-friendly organization, the changes had to be embraced by the partnership and all the people of Deloitte & Touche. "It was not driven by the HR organization; they supported it, but it was driven by the line organization that ran the firm," Copeland says.

In other words, there's no quick fix for companies with retention woes. In the following pages, we'll take a close look at how the best retainers keep their employees, but for the time being, let's just say that transforming your organization into one that carefully aligns its interests with those of its employees, rather than opposes them, is not far off the mark.

Real Life

CLARK MALCOLM senior editor and writer Herman Miller, Ann Arbor, MI

Say what?

Malcolm likes to speak his mind - from his home office. That's fine with his employer

Some companies might have seen it as an opportunity to evolve Clark Malcolm right out of a job. The outspoken English Ph.D. had joined Herman Miller's freewheeling research and consulting unit in Ann Arbor in 1983, and frequently admitted to a strong distrust of - even disdain for - corporations. But eight years later, when the unit was abandoned by the Zeeland, MI-based company, it not only worked feverishly to keep Malcolm on payroll, it granted his request to remain in Ann Arbor and become the company's first telecommuting employee.

Herman Miller is an admittedly unique breed. It established one of the first corporate gain-sharing plans in 1950 and 30 years later capped executive salaries at 20 times the average wage of factory-line workers. Its voluntary turnover rate is just 8 percent, and most employees say they couldn't imagine working someplace other than the $1.7 billion, 8,000-employee company that has turned making office furniture into something of a religion. But in its eagerness to keep Malcolm as much because of his unique beliefs as in spite of them, Herman Miller is part of the growing rank of companies appreciating people as much for their individuality as for their ability. As company spokesperson Mark Schurman puts it, "We recognize that you can teach skills, but you can't teach values."

It is the company's culture of equality that has largely kept Malcolm in the fold for 16 years. He recalls attending a midday meeting in the chairman's office when the boss called the kitchen staff to have lunch delivered and was told they were too busy to accommodate his request. "The chairman just calmly said, 'Fine. I understand,'" Malcolm says.

When employees understand that everyone matters, CEO and President Mike Volkema believes, they are more likely to speak their minds, which is ultimately where all the company's great ideas are born. "Probably the first thing new employees notice here is the way people participate," Volkema says. "For me, employee participation is both a right and an obligation."

Even when that participation counters his own opinion. When Volkema set about rewriting the company's corporate values, he and Malcolm clashed about whether design should be a central corporate value (Malcolm thought yes). "The two of us had quite a heated disagreement," Malcolm recalls, "but I never felt like I should back down. If you just give in and toe the party line, you become less valuable to the corporation." In the end - on this one at least - Volkema came around to Malcolm's position.

If Malcolm benefits from the pro-employee beliefs of Herman Miller, the company is equally pleased to be able to retain intelligent and creative employees like Malcolm. By letting him stay in Ann Arbor, it gains from his exposure to ideas and cultures different from those of the department's other employees. By embracing a person who, as Malcolm puts it, "fits in and doesn't fit in," it is able to attract other creative types who might not otherwise think to join a large corporation.

"I'm surprised I'm still here, but the company has earned all of my respect," Malcolm says. "I not only work here, I'm committed."

Real Life

ROSA VONCINA software engineer manager Sequent Computer Systems, Beaverton, OR

Young at heart

Don't worry. Be happy. For at Sequent, if the family's OK, the company's OK.

Rosa Voncina has a problem, and had it been a different kind of organization, Oregon's largest computer company might have suffered right along with her.

Voncina was recently divorced, and the strain of her separation has caused her five-year-old son, Christopher, recently diag- nosed with attention deficit hyperactivity disorder, to lash out violently at school. Fortunately, that school is a two-minute walk from her office, located on Sequent's campus and operated and subsidized by the company. Voncina was able to e-mail and call the staff at the "Learning Center" throughout the day, and even to drop by for lunch. When she had to duck out for frequent conferences with the school to discuss the matter, the convenient location meant she was away from work for only a short time. "Coping with all this has been hard, but it's made so much easier knowing that the Learning Center is so supportive and on top of things," Voncina says.

Reducing employee worry was one of the reasons Chairman and CEO Casey Powell set up the day-care center nine years ago, which now includes some 117 kids from birth to first grade. "Is it expensive?" Powell ponders, answering a question he has undoubtedly fielded many times. "Here's what's expensive: every time you have to bring in a new person and train them. I want to make it easy for people to stay here." The other reason, Powell says, is that "we try whenever possible to embrace the notion that employees have families. We don't want the company to be seen as that family's enemy"

Powell knows firsthand from his prior jobs the pull employees feel between their loved ones and their work. "Many times we had to reschedule my daughters' birthdays so I could be there to celebrate," he recalls. When he was helping create his firm's culture, he hoped to call a truce in the war. "You can't say family comes first or the company comes first; you have to make judgments" he says. "Sometimes, you have to have people working on Christmas. But we are very careful to let employees and their families know we don't think it's okay."

Voncina was struck by the firm's caring culture the minute she first set foot in her office - or rather, her cubicle, since no Sequent staffer, including CEO Powell, has an office - four years ago from a typical Silicon Valley engineering job. Sequent offers some 90 work/life programs in addition to the Learning Center, including parenting classes, a children's summer camp, pet day-care, on-site dry-cleaning, yoga and martial arts classes, and even a four-week paid sabbatical after six years of employment. (Powell recently took one himself, driving an 18-wheeler around the country to watch his race-car-driving daughter compete.)

But now that she sees how much emotional and tactical support Sequent provides employees during their temporary problems, she's sold on staying at Sequent, despite near-weekly calls from Bay area firms dangling a lot more money. (The bulk of the firm's 2,500 employees feel similarly, which is why turnover is only 18 percent.) "Most companies are all about what you can do right now," Voncina says. "Here they want to know how you are."