Gaining Deeper Insights into Employee Retention
and Engagement

by Abhay Padgaonkar

Dilbert: If the employees get this volume of calls per day they will wish they were dead. But they won't be dead, just too beaten-down to look for better jobs. I don't know how to make it any more inhumane.

Pointy-Haired Boss: We can punish them for not being cheerful.
United Feature Syndicate, Inc.

There has been a gradual but unmistakable transformation of the economy. With manufacturing slipping, services are playing a principal role. Increased globalization, outsourcing, and the Internet have only hastened the trend. In the United States, close to 90% of the jobs created have been in service-related areas. This transition to a knowledge-based, service-oriented economy has raised the importance of human capital.

There is a strange irony here though. We, as a society, are at the most technologically advanced stage of the human evolution. Things that were unimaginable before have been made possible-even commonplace-by technology and automation. Yet the service-oriented economy is forcing companies to rely on the employees, not technology to deliver on the promises they make to their customers and shareholders.

Where There's Smoke, There's Fire

Corporate Leadership Council's research (1.)shows the real business impact of employee commitment: "Highly committed employees perform up to 20% better than less-engaged employees and are 87% less likely to leave the organization than employees with low levels of commitment." Engaged employees consistently go the extra mile. They also make a commitment to stay with the employer for a longer period of time.

Progressive companies have recognized that to enter the top echelons of most admired companies, they need to move beyond employee satisfaction. They need employees who are inspired and engaged. So now that engaged employees are more vital to the economy than ever before, does it mean that they are more highly valued? Does it translate into better treatment for them?

Not always. According to a Gallup survey, 19% of employees are actively disengaged. By active disengagement they mean that these employees are actually trying to sabotage the performance of their organization. Despite all the chest-thumping by leaders proclaiming that "employees are our most important asset," the reality is that very little real investment trickles down to the frontline employees. Leaders make all kinds of promises that employees are expected to keep. Yet very few leaders know how to engage employees to deliver on these promises. Instead, they reward frontline employees with layoffs, decreased levels of management support, curtailed benefits, and fewer bonuses - all because of decisions they had nothing to do with.

Being on the lookout for disengagement is like manning a fire tower. You scan the horizon for smoke (employee turnover) because it's more visible, and where there's smoke there's fire (disengagement). But what about a fire that's not smoky? In today's economy, the unemployment rate is fairly low by historical standards, but that's not to suggest the disengagement isn't there as the Gallup survey suggests.

High Cost of Low Trust

According to recent Watson Wyatt research employee trust in corporate leaders - especially senior managers - strongly influences turnover, productivity, and profitability. That's the good news. The bad news, according to the study, is that although 72% of employees believe their immediate bosses act with honesty and integrity in their business activities, only 56% believe the same about top management!

One of the easiest ways to destroy trust is layoffs. In his book, The Disposable American, Louis Uchitelle makes the case that corporate responsibility should entail more than good accounting. He suggests that after taking into account the economic and psychological damage, layoffs hardly provide long-term payoffs.

When loyalty is repaid with layoffs, it is not possible to build trust. It is not the words, but the actions of senior management that build trust.

Lack of trust inevitably manifests itself into higher employee turnover. The cost of an employee "checking out" (physically present but emotionally bankrupt) or actually leaving the company is very high. Unfortunately, there are no expense lines in the general ledger that directly capture this enormous expense. As a result, this cost almost always goes unnoticed. Fred Reichheld, author of The Loyalty Effect, claims that "the turnover tax on most corporate earnings, although invisible in most accounting systems, is larger than any state or federal tax."

Cost per hire is a relatively small fraction of the overall cost of turnover. Lost productivity during job vacancy, classroom and on-the-job training, lower productivity and quality during the learning curve can account for a large portion as well. In the long run, however, the cost of a broken virtuous cycle - loyal employees driving customer loyalty - may be the biggest of them all.

Companies erroneously believe that by outsourcing the jobs they can also outsource their HR problems too. Paul Beamish argues in "The High Cost of Cheap Chinese Labor" in the June 2006 Harvard Business Review that offshore or otherwise, the same problems plague any firm with high turnover - higher HR management and training costs, greater quality control problems, increased chances of competitive disruption, and more difficulty establishing a stable corporate culture.

Watson Wyatt's 2005 research identified several correlations between profitability and components of integrity. For example, organizations with high levels of employee commitment generated financial returns (in excess of the cost of capital investments) six times greater than those of companies with low employee commitment levels. And companies with a clear line of sight between employee performance and strategic objectives generated financial returns (in excess of capital investments) three times as high as those of companies with weak transparency between strategy and employee performance.

One Size Doesn't Fit All

One size rarely fits all. Most employees don't stop caring about their jobs, or decide to quit overnight. It's a complex decision spurred by months or even years of not-so-benign neglect. There are three myths that get in the way of finding out the reality on the ground:

Myth # 1: Employees are Honest in Exit Interviews

Exit instruments often collect superficial and unreliable results. It is very difficult to ensure the reliability and validity of the information gathered in exit surveys/interviews because of one or more of the following reasons:

  • The interviews are typically conducted and interpreted by subjective, internal HR departments.
  • At the same time, the employee leaving the organization may not want to burn bridges by telling the truth.
  • The data is rarely conducted through dynamic interactive interviews after a "cooling off period" to drill down to the specific events.
  • The response rate is fairly low because employees self-select themselves making it difficult to generalize the results.

Myth #2: If Employees Are Satisfied They Will Stay

Satisfaction surveys can produce misleading results for many reasons:

  • Satisfaction surveys are conducted only once a year and represent opinions of employees present at that time - not the ones who have already left.
  • Disgruntled employees may not bother filling out the survey as they have already given up.
  • If managers' bonuses depend on the satisfaction scores, somehow higher satisfaction scores get manufactured.
  • Satisfaction does not necessarily mean loyalty; ultimately, it is not what employees say, it is what they do that really matters.

Myth #3: HR Reports Will Tell You What to Do

  • Retention reporting is typically not timely for management action.
  • Reporting is primarily done to measure the organization's performance rather than with a clear intention to identify key issues causing the problems.
  • Turnover rates are reported as a percentage of the total population rather than within each segment.
  • The reports show overall averages and thereby mask pockets of severe and recurrent "hot spots."
  • HR people themselves are subject to layoffs, and sometimes this fear tempers their willingness to "get tough" with senior management.

The truth is that aggregate statistics (the most common turnover metric) can conceal a host of problems, such as disproportionate departure of top performers and key talent. Identifying employee satisfaction issues is not enough anymore, as there has been increasing evidence that even employees who say they are satisfied leave the organizations anyway. The exit data is not very helpful either as it often tends to be subjective, superficial, and unreliable.

Gaining Deeper Insights

So where does one start? Complexity makes the exact root cause analysis less important. According to Fred Reichheld, author of The Loyalty Effect, "Root-cause analysis is often a less important tool than systematic statistical analysis for isolating useful - that is to say, correctable - insights into employee defections."

The sobering truth is that many organizations simply lack critical information to make sound decisions regarding retention. Without good information, it is impossible to focus on the real issues. As a result, they resort to mindless imitation of others' best practices without understanding the logic, culture, or context under which they may or may not have worked.

The good news is that most organizations already have the needed data in their HR systems. But they need to take deliberate steps to figure out how to analyze the data they do have to create rich and actionable information. With the right business intelligence system, HR organizations can mine their data to create deep, diagnostic insights related to turnover so they can zero in on turnover "hot spots." (See example of data below.)

With this useful and correctable information and specific metrics in hand, HR can take a focused - rather than a shotgun approach - to mitigating the turnover hot spots. HR can now diagnose real problems - whether they are in the job itself, recruiting, orientation, training, performance management, or career management. By transforming employee turnover data into a strategic weapon, HR can keep employee retention and engagement from getting relegated to the status of becoming an "HR issue" and raise it to the top of the priority list.

Companies need to set anecdotal information aside and analyze their own actual data for isolating the few critical variables that really matter. Falling prey to bromides or blindly copying so-called best practices provides, at best, just a band-aid.

Reference
1. Driving Performance and Retention Through Employee Engagement, http://www.corporateleadershipcouncil.com/Images/CLC/PDF/eeexecsum.pdf


Illustration of Analysis of Employee Turnover Data Using Statistical Method

Introduction:

The attached sample illustration of a tree diagram, created by comparing the characteristics of terminated employees with those of the active ones, shows how the employee turnover "hot spots" can be uncovered.

Methodology:

Detailed records for 743 employees were fed into the program. The Red color represents the voluntarily terminated (T) employees while employees with active (A) Status are represented by the Green color.

A tree diagram is created by splitting the overall data to gain insights into segments of the population (see illustration below). By examining all the characteristics in the data (e.g., Gender, Race, Salary, Tenure, etc.), the program finds the characteristic that gives the best prediction by splitting the tree into subgroups or "branches."

The process is then applied repeatedly to further drill down until the tree is finished. Thus, the analysis creates sharper profiles of employees who have departed and are likely to continue to depart at a rate much higher than the overall average. The information is displayed both numerically and graphically.

Explanation:

As you look from the top of the tree to the bottom, each branch represents the next-best predictor. Each node represents a unique segment - enabling you to see the groups in the data.

The overall turnover rate was 32% (180 voluntary terminations over an active base of 563 employees.) RACE emerged as one of the most significant characteristics to explain the overall employee turnover data. Minorities, who represent 50% of the total, were responsible for 67% of the total turnover. More importantly, the rate of turnover among Minorities was more than twice as high as the Caucasians.

In the Minorities subgroup, GENDER was further able to explain the turnover. Minority Females had substantially higher turnover rate of 50% (92 terminations over an active base of 184) compared to Minority Males. Among the Minority Females, EDUCATION was a significant variable. Those with a High School education had a turnover rate of over 67%-more than twice the overall average! More than 90% of them left in the first 4-5 months of the TENURE.

Among Caucasians, those with SALARY below the threshold of $19,500 were several times more likely to leave than those at higher salaries.


A management consultant, author, and speaker, Abhay Padgaonkar is the founder and president of Innovative Solutions Consulting, LLC (www.innovativesolutions.org), which provides strategic advice to major clients such as American Express.

Many more articles in Motivation & Retention in The CEO Refresher Archives

   


Copyright 2006 by Abhay Padgaonkar. All rights reserved.

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