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Turning round employee turnover: recognizing that employee turnover directly impacts financial results, companies are searching for strategies to confront the problem. Two consultants discuss turnover's costs, causes and cures.

Personnel turnover in organizations is a normal and expected phenomenon, something that all organizations experience at some level and something that is seldom problematic. Consider, however, if a manager has five employees and one of them quits during the year, he or she has to replace and retrain 20 percent of his or her staff. Multiply that cost for a larger firm, and such an event would create huge costs and disruption for the entire company.


Indeed, turnover turns toxic when it affects financial results. In addition to all the usual costs of replacing departed employees--recruiting fees, etc.--companies inevitably incur indirect expenses such as lost productivity, capacity and even customers. Obviously an issue for growing organizations, turnover is also a common problem for those that are downsizing as they fight the exodus of their best people.

With the recognition of turnover as a financial issue increasing, companies are searching for strategies to confront the problem in ways that generate a good return on investment (ROI). Successfully managing turnover is a matter of understanding its costs, causes and cures.

A poor diagnosis of an organization's true turnover costs and causes can lead to misguided cures that do little. Traditional solutions may be applied carte blanche without targeting specific causes or segments. Or even worse, turnover may become an accepted fact of life, an expensive, ongoing talent drain that saps the company of its momentum and viability.


Turnover becomes a problem when a talent gap hits those roles that are critical to the organization's ability to execute its business strategy and chronic vacancies begin to erode revenue. For example, turnover in key roles for developing innovations and bringing them to market would have a great impact on the top-line results of innovation-based companies, which would forgo revenue as a result of a lack of new products.

Managing the problem requires understanding how the company's turnover varies by population segment and which segments have the greatest impact on its ability to deliver its core business services and products and drive its long-term strategic success. Segmentation involves identifying the population and turnover rate by:

* Work units: Which are critical tothe business? Which contain business-critical roles that are hard to fill?

* Critical skills: Does the organization have an adequate supply of the right critcal skills? Most companies have "mission critical" skill sets (such as nurses in health care, programmers in high technology). Broad skill sets may be more closely segmented (such as emergency, critical care and operating room nurses).

* Performance: Who exceeds, meets or performs below expectations? While logic suggests that companies should be more concerned about why high performers are leaving, not all organizations can define who their "best" performers are.

* Potential: Who are the individuals with the most potential? These are usually the people named in succession plans. No organization wants to lose its identified successors.

* Tenure: How long have employees been with the organization? Typical segments are: 0-2 years, 2-5, years, 5-10 years, 10-20 years and more than 20 years.
Considerations and Implications for Various Cures

 Potential Impact

Affiliation Culture change High
 Employee branding Moderate

Work Content Job design High
 Supervisor training High

Career Implement career plans Moderate

 Training opportunities to advance Moderate

Benefits More vacation High
 Improved retirement Moderate

Compensation Pay for performance High
 More competitive pay High

 Intrusion on Time/Resource
 Employees Investment

Affiliation Culture change Moderate High
 Employee branding Low Moderate

Work Content Job design High High
 Supervisor training Moderate High

Career Implement career plans Low Low

 Training opportunities Low Low
 to advance

Benefits More vacation Low Low
 Improved retirement Low Low

Compensation Pay for performance Low Moderate
 More competitive pay Low Moderate

 Cost to Horizon of
 Organization Cure

Affiliation Culture change High Long
 Employee branding Moderate Long

Work Content Job design High Long
 Supervisor training High Short

Career Implement career plans LOW Short

 Training opportunities Moderate Short
 to advance

Benefits More vacation High Moderate
 Improved retirement Moderate Long

Compensation Pay for performance High High
 More competitive pay High High

Source: Sibson Consulting

Once the company has an understanding of its populations and their turnover rates, the next step is to look at the costs associated with thatturnover and determine whether they differ by population. Direct costs are fairly well known and easy to measure. They include recruiting fees and hiring costs, as well as the expenses generated by hiring temporary workers, training replacements and paying overtime to the remaining staff.

Indirect costs, which are not as well understood, can be much harder to quantify, yet they can have a greater impact. They include loss of productivity and capacity, misallocation of resources, reduced bench strength, lost customers, increased training time and lost work hours.

Many organizations have an incomplete view of their turnover rates and typically underestimate their costs. Most fail to dig deep enough to understand what segments are generating the most costs so they can focus their resources on identifying and curing the causes of turnover in those particular areas.


In assessing the causes of turnover, companies must consider factors that are relevant to the targeted populations. Organizations can usually tie turnover to their employee valueproposition (EVP), which explains why employees should want to work for the organization and why it should want them to work there. The EVP consists of five components: affiliation, work content, career, benefits and compensation. Organizations seeking the real reasons they are losing talent in critical roles usually can find it by exploring what is occurring inside these five elements. Sibson Consulting has identified the four main causes of turnover as work content, career, compensation and affiliation, in that order.

The real causes will differ by organization and, often, by employee segment. While the EVP provides a place to start, companies must investigate the true causes of turnover for their critical populations.

Three ways to get at the truth about why employees are leaving include:

* EVP surveys with current employees. These are a valuable tool for identifying perceptions and vulnerabilities around the EVP elements. Asking about intention to leave is critical, enabling the organization to compare the views of employees who are primed for an exit with those

who plan to stay.

* Focus groups with recent hires. Those who joined within past two years may be the most vulnerable to leaving; it's valuable to find out how reality matches their expectations.

* Phone interviews with alumni who have been gone six months to a year. Open-ended, confidential interviews yield insights not available through traditional exit interviews.Most organizations conduct exit interviews, yet the real reasons people leave are generally very different from what they say in these interviews. Distance and anonymity can bring out the truth. Although many employees will say they're leaving for "better opportunities," six months later they'll probably admit that the new job is not a significant improvement; something else drove their decision. Frequently cited reasons for leaving include scheduling problems, a poor relationship with their manager, lack understanding about career opportunities and misunderstandings about compensation.


Once the root causes of undesirable turnover in critical roles are revealed, organizations must decide what actions to take and investments to make to address the problem. This requires careful review of the cost and causes analyses.

The next step is to determine how much time, energy and money it will take to fix the problems and the potential ROI for each possible solution. Some problems are relatively easy and inexpensive to fix.

An analysis of turnover cures should look at the potential impact of implementing a solution, the intrusion on employees, the time and resource investment, the cost to the organization and the horizon for the cure (see chart on previous page).

The final step is to develop a business case for increased investment in retention initiatives. Working out the potential ROI will demonstrate whether a proposed solution is worth the expense.

Organizations are learning thatthe first years on the job have a significant impact on affiliation and retention. As a consequence, on-boarding that spans two or more years is becoming more common. An extended orientation and acclimatization period can help a company keep tabs on talented and valuable hires and address issues before they become employment breakers. Eliminating undesirable aspects of job design can go a long way towards proving that an organization wants to invest in its people.

Responding to employees' needs for more career progression, many organizations are upgrading their succession plans, starting conversations with "high potentials" sooner in their careers.

If all else fails and a talented employee is ready to walk, there is always the counteroffer. Counteroffers should be made sparingly and should be based on an individual's reason for leaving and the criticality of the person or the role. If counteroffers become common, employees will soon view resigning as a way to move their careers ahead.

Organizations also must recognize that in high-volume jobs, especially "hot" jobs, turnover may be inevitable, so a well-oiled staffing function becomes a necessity. Companies that always need a class of critical skills (such as accountants or engineers), can't afford to react each time someone leaves. Predictive recruiting can be a cure. If the organization employs 1,000 network engineers and turnover is 12 percent, then 120 replacements are needed each year. If it takes 90 days to recruit them, the organization must be searching for 30 engineers at all times.

All organizations experience turnover. Although many know their overall turnover rate, or even their overall cost of turnover, they often do not know whether their turnover is acceptable or undesirable, which can hurt both the bottom and the top line.

Steps to uncover Top Talent Turnover

The following process is not easy; however, the returns can be significant: Develop a solid database on turnover levels and costs, by segment:

(1) Develop a solid database on turnover levels and costs, by segment

(2) Locate high cost-of-turnover areas to diagnose causes

(3) Quantify the total cost to make the business case for change

(4) Diagnose the root causes by segment

(5) Examine the employee value proposition (EVP)

(6) Develop creative solutions to address the root causes

(7) Estimate the return on investment (ROI) of the solution to guide investment decisions


* Personnel turnover is something all organizations experience at some level and is not necessarily problematic.

* Sibson Consulting has identified four main causes of turnover: work content, career, compensation and affiliation (in that order).

* Managing the problem requires understanding how the company's turnover varies by population segment and which segments have the greatest impact on its ability to deliver its core business services and products and drive its long-term strategic success.

* Segments involve identifying: work units, critical skills, performance, potential and tenure.

* Poor diagnosis of an organization's true turnover costs and causes can lead to misguided cures that are ineffective.

JIM KOCHANSKI ( is a Senior Vice President in Raleigh, N.C., and AARON SORENSEN ( is a Senior Consultant in Chicago. Both are with Sibson Consulting, a division of The Segal Co. that provides strategic HR solutions related to the planning, implementation and operation of total rewards, compensation, retirement and health benefit programs.
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Author:Kochanski, Jim; Sorensen, Aaron
Publication:Financial Executive
Geographic Code:1USA
Date:Jun 1, 2008
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