The level of retention of employees differs through out industry sectors, some organisations suffer from internal problems that increases turnover of their key employees. This paper will discus the main areas that organisations can review their policies and practices to decrease the level of key employees leaving.
There are hidden costs involved when there is a high turnover of employees, but each organisation deferrers with what is a normal level. It is not just a low retention rate that can cause problems, too high a rate will stagnate the workforce.
There is no overall “right” level and this is dependant on a number of factors, both internal and external. Pizza Hut has a staff turnover of more than 50% per year; this figure takes into account the vast number of casual workers the company employs. The technology company, 3M, whose has a wide range of career opportunities for employees, retains a high proportion of its staff. (Rigby, R. 2003).
When there is high retention this introduces new problems for the organisation. High retention levels, rather than being a company-wide problem, will often occur in pockets within businesses. For instance, an employee or a team may have become so good at their job(s), that their boss cannot bear too lose them or even promote them, which results in stagnation and de-motivation (Rigby, R. 2003).
If retention levels are in line with the norm for the type of organisation, then the productive employees should be encouraged to stay and the poor performers encouraged to leave. If this were measurable the then organisations would retain employees whose contribution produces a positive risk adjusted profit for the firm. These employees would have a positive influence on the firm. This is not the case, through various factors that will be discussed in this paper they leave, which forces cost onto the organisation. These employees leave an organisation because they become dissatisfied, underpaid or unmotivated (Sigler, K. 1999).
Cost to the organisation
A major factor of a high level of employee turnover that impinges on an organisation is the cost. The costs can be broken down into the costs of leaving, replacements, transition and indirect. The leaving costs are the payroll and the personnel administration of the employee leaving. The replacement costs are spent on recruitment of potential employees, the money and time spent on interviewing and any placement fees involved. Transition costs for a company include the training costs of new employees the unproductive time while the new employee is learning the skills required and any induction costs for the new employee. The indirect cost to a company is the potential loss of revenue because of decreased levels of customer service
Hacker, C.A. (1996) discussed the process of recruitment and advises that employers should consider three areas when they are preparing to employee, these are the cost per hire of an employee; turnover rate; and productivity. The recruiting of an employee contains hidden costs; these include advertising and the time that is employed on screening and interviewing the prospective employee. Therefore, if the recruitment of people is not cost effective option, then high turnover of employees must be avoided. Retention of the current workforce is the most economic solution to an organisation (Hacker, C.A. 1996).
The cost of replacing workers who have left can amount to two and half times a worker’s annual salary. These costs are rarely specifically identified in any accounting records. Therefore turnover cost data should be used to demonstrate the success of retention strategies over time (Risher, H. and Stopper, W. 2002).
Apart from the significant economic impact with an organisation losing any of its critical employees, there is also the knowledge that is lost with the employee’s departure. This is the knowledge that is used to meet the needs and expectations of the customers (Bassi (1997) cited in Ramlall, S. 2004:54). Organisations cannot take a passive attitude toward knowledge management, Instead they should seek to sustain the competitive advantage and develop systems to control the value of knowledge (Stewart, (1997) cited in Ramlall, S. 2004:54).
The Human capital theory suggests that some labour is more productive than other labour simply because more resources have been invested into the training of that labour, in the same manner that a machine that has had more resources invested into it is apt to be more productive (Ramlall, S. 2004).
Employers need to review all the costs involved with employee turnover, not all cost are financial, hidden costs include the reduction in knowledge. These are not tangible, and will not show on the companies accounts, but through a lack of skills can in the long term reduce profit.
Key to retaining the right employees is recruiting them in the first place. This process must given consideration to their long term value to the organisation. The attraction and retention of key talent, is increasingly pivotal to organisational success. The ability to achieve competitive advantage through people depends in large part on the composition of the work force. This, is the function of who is hired, and how they are developed, these factors will lead to who is retained (Sturman, M 2003).
Retention begins at recruitment time, so it is important to select for organisational and cultural fit, not merely against the technical and skills requirements of a given job. Best practice companies have known this for a long time, and ensure that the selection process allows a full assessment of candidates’ abilities, interests, aspirations, and values, and a deliberate review of how well these match their organisational culture (Risher, H. and Stopper, W. 2002).
Organisations are under increasing pressure to recruit the right people for the right job. The economic cost of getting this wrong can be vast, with the resources that have been ploughed into the process. Numerous factors are to be considered during this process including the culture of the organisation, legal implications, attracting and employing the correct candidate and the cost in time and resources. Therefore it is paramount that the process is fair, reliable and valid (Armstrong, M. 2001).
The employer’s requirements relate to the labour process that is the supply side of the labour market. This is simply employing suitable people for the roles that are required. While this is described as the human capital, this is a sterile and limited interpretation of a variety of personal characteristics and dispositions which employees bring to the workplace (Alcorso, C. 2003).
As Beardwell and Holden (1994) emphasise essential to a good HRM practice is recruitment and selection, which must consider correct fit between personnel and job in order to maximise efficiency in terms of retention and HRM strategic planning. The organisation can use the recruitment process to continue, enhance or even change the organisational culture. When a change of strategic direction is required, recruiting the right candidates is a important factor to increase the chance of success (Beardwell, I. & Holden, L. 1994:225).
There are various recruiting sources, but their success rates are not equal. For example, employee referrals will yield higher quality workers than do sources such as newspaper ads or employment agencies. In a survey the top three sources of successful candidates are employee referrals, college recruiting and executive search firms. All these methods should be considered for effective recruitment. Although the best recruiting sources are still dependant on the type of industry and the job skills required by the organisation (Terpstra, D. 1996).
Recruitment of the right candidate is problematic, the skill of the recruiter is vital to appointing a successful candidate. Insufficient information about employees’ performance can result in adverse selection by Managers. This arises from where the manager does not know the information h to ask from the candidate and the candidate does not know what to provide. Therefore, productive workers cannot distinguish themselves from non productive candidates (Sigler, K. 1999)
Reviewing and monitoring recruitment practices can lead to a reduction in key employees leaving. If the first stage of retention is recruitment, then best practice will lead to the correct candidate being selected. In the long term this will increase the retention levels of key employees within the organisation.
Amongst the theorist there a several key areas of management, which affects the retention of key employees, this includes motivation, job satisfaction, reward systems and the psychological contract. The first area reviewed is reward systems; these can be both intrinsic and extrinsic.
Reward systems are one of the four key policies within strategic HR. the organisation can use this tool to raise commitment, competence, and congruence and it is cost effective. With individuals having more control on their reward, at a basic level this can motivate, at a higher level can introduce self esteem and self worth. These values are congruent to the organisations values and principals (Beardwell, I et al 2004). PRP is an individualised form of payment which reflects individual’s performance. These increases may determine the rate of progression through an organisation (Farnham, D. 2002).
The problem of attempting to keep talented members of the work force is further complicated because of bounded rationality. This leaves colleagues who cannot improve their positions within the hierarchy more likely to remain with the organisation. This is often due to inadequate information on outstanding performance, therefore it is not recognises financially. Non-productive and productive workers end up receiving the same or nearly the same compensation and package of perks because of management’s inability to distinguish talented employees from the rest of the labour force in the organisation (Sigler, K. 1999:2)
Incentive pay can be used for employees, setting targets and when they are met rewarding with cash bonuses. Share ownership by the employee is another type of pay incentive. It in essence makes the employee a shareholder of the organisation aligning the interests of the employee with the owners. Employee share ownership can come through restricted share plans where ownership of the share is not transferred to the employee until after a specific period of time has passed or a specific goal has been achieved. This not only provides the employee with the incentive to drive the share price higher through their work effort, but also remain with the organisation until maturity of the plan (Sigler, K. 1999:3)
Motivational theories presume that individuals develop beliefs about what constitutes a fair and equitable return for their contributions to their jobs. The assumption is then made that when an individual believes that their own treatment is not equitable, they will be motivated to take actions they deem appropriate. This concept of equity is most often interpreted in work organisations as a positive association between an employee’s effort or performance on the job and the pay they receive. The challenge therefore for organisations is to develop reward systems that are perceived to be fair and equitable and distributing the reward in accordance with employee beliefs about their own value to the organisation Ramlall, S. (2004).
Today’s issues of motivation are intricate and difficult, the closeness of supervision and in depth of the rules are no longer part of the work place. Employees are becoming self managed which requires them to be committed and demonstrate innovation and initiative in the work place. Since these new work patterns have emerged, new motivational factors have emerged intrinsic rewards, reward from the work. Satisfaction in the employees’ role, pride in the work produced. The work itself fulfils the employees motivation, even with some set backs, they obtain satisfaction from a job well done (Blyton, P & Turnbull, P. 2004).
Apart from using compensation, an effective component to retaining talented employees can be accomplished through improving their job satisfaction. Employees that are satisfied with their job, will have no reason to seek alternative employment.
Management can insure talented employees are given autonomy in their job functions and are given meaningful assignments, allowing them to be involved in the decision making for their area of expertise. Pleasant working conditions can entice productive workers to stay in their organisation and not look elsewhere. In addition, offering these employees training to keep them current on their job functions and allowing them to learn new skills can also be utilised to improve employee satisfaction with the organisation (Sigler, K.1999:3).
To help retain current employees it is useful to find out why individuals have left. This can highlight areas within management practice that can be reviewed, to prevent further wastage of employees. .
Voluntary employee turnover can be either dysfunctional or functional for the organisation; this is dependant on who leaves. Both low and high performers are generally more likely to leave an organisation than are average performers. Therefore, organisations will often shed poor employees (functional turnover), but will also fail to retain star employees (dysfunctional turnover). Therefore organisations need to monitor their turnover of employees (Sturman, M 2003).
There are various ways in which labour turnover or wastage of employees can be measured. The Labour Turnover Index is the traditional method of measurement this is the most common method of measurement as it is easy to calculate and to understand. This Labour turnover rates provide a valuable means to benchmarking the effectiveness of HR policies and practices in organisations (Armstrong, M. 2001).
An exit interviews are a wide spread tool for gathering information on reasons that employees leave. There is dispute on how much information can be gathered from exit interviews. Although for the organisation some information is better that none. This information can be reviewed for the interview stage, to reduce further turnover problems (Mullins, L 2005).
According to Armstrong (2001) ‘The analysis of the number of leavers and the reasons why they leave provides information which will indicate whether any action is required to improve retention rates’. Most companies conduct exit interviews. However are they used to their full potential? They could highlight the reasons why existing employees may also leave or why some may be come unmotivated and dissatisfied with their role (Armstrong, M. 2001).
Organisations that run mentoring and induction schemes lose fewer employees shortly after appointment. Employees who have just started can feel alienated from new colleagues, with little work load to occupy their minds. This can lead to the feeling of making a mistake. By inducting the new employee will know about the organisation, structure and goals. Mentoring will introduce the employees to the organisational networks, giving them a point of contact when there is a problem (Mullins, L 2005).
Although there are advantages to monitoring leavers, the information given must be honest and reliable. It is just as important to induct new employees into the organisation, to prevent early turnover of employees.
Changing nature of work
The rigidity of classical organisations forced employees to look for protection, this came from the unions. The bargaining process concentrated on wages, working hours, benefits, job security, and health and safety. Representatives of management and unions would participate in these discussions (Blyton, P & Turnbull 2004). The union’s powers started to decline in 1979 when conservative leader Margaret Thatcher came to power (Wheen, F 2004).
The unions were replaced with HR practices, the reduction in collective bargaining allowed for individualism to enter the employment relationship. There were no more rigid pay scales to reward employees by. It is argued that this non intervention allowed management to control the reward system, and to gain control over the effort side of the wage bargain. (Beardwell, I. et al. 2004)
The changing workforce and the “free agent movement” which accounts for a quarter of the workforce are contract workers. That proportion is projected to grow to 40 percent or more by the end of the decade. Employee commitment and appointment remain central to building high-performance organisations. Building employment policies and practices around the “free agent” concept alone may undermine whatever chances the organisation has of holding top performers. The top businesses understand the need for differentiated policy frameworks. They understand that commitment and reciprocity are the basis for retaining high-value employees (Risher, H. and Stopper, W. 2002).
In the past employees hung on for their pensions. This has been described as like handcuffs to commitment. Retention of employees was high they couldn’t afford to leave. This led to a stagnant workforce (Rigby, R. 2003). With the current turbulent business environment, arguably the traditional psychological contract, long-term job security in return for hard work and loyalty, has come under pressure (Sims, 1994) cited in Pate el al 2003: 557).
Over the past few decades the Psychological Contract between employee and employer has changed. With the speed on change there are more violations to this contract, leading in the worst cases to employees leaving.
Organisations no longer offer a job for life there is no longer guaranteed employment, with a pension as a reward for loyalty and compliance. The “psychological contract” between employer and employee has shifted. Employees are increasingly mobile, changing employment for promotion, reward and job satisfaction; top employees have more choice as to where to work. To retain these key employees the organisations culture needs to allow an environment of personal growth (Thomas, K. 2000). With less job security, the best reward an organisation can give an employee is transferable skills (Marchington, M and Wilkinson, A. 1997).
Workers have been forced to take more responsibility for their own careers, going where the work is rewarding and where they can develop skills that will guarantee their employability in whatever organisation. This mobility and “free agency” has created greater competition for skilled workers between organisations. Good workers have more choices than before, and are more likely to use them (Thomas, K. 2000).
Rousseau, (1989) discussed the psychological contract has being defined as “an individuals’ beliefs regarding the terms and conditions of a reciprocal exchange agreement … key issues here include the belief that a promise is been made and a consideration offered in exchange for it” (Rousseau, (1989) cite in, Pate. J. et al 2003:558). In today’s turbulent climate it is often it unclear to what the employee and employer, actually owe each other, therefore this makes fulfilling the obligations difficult (Pate,J. et al 2003).
From the turbulent climate there is an increased possibility of misinterpretation and violation of the psychological contract. This violation frequently relates to training and development, compensation and promotion, employees feel that the organisation has gone back on its promises (Pate,J. et al 2003). Robinson and Rousseau, (1994) discussed the psychological contract violation as a failure of the organisation to fulfil one or more obligations of an individual’s psychological contract (Robinson and Rousseau, (1994) cited in Pate,J. et al 2003 :559).
However Morrison and Robinson (1997) have argued that this definition focuses on the rational, mental calculation of what individuals have or have not received and downplays the emotional aspect of violation, they make the distinction between psychological contract breach and violation. The perceived breach is “the cognition that one’s organisation has failed to meet one or more obligations within one’s psychological contract”. Therefore breach is the identification of perceived unmet obligations; consequently it may be relatively short-term phenomenon and may result in individuals returning to their relatively “stable” psychological contract state, or alternatively it may develop into full violation (Morrison and Robinson (1997) cited in Pate,J. et al 2003:558).
This Psychological contract violation is multi-faceted, Morrison and Robinson, (1997) believe it incorporates a wide range of responses. At one level, a violation invokes responses of disappointment, frustration and distress. At another level it will arouse more extreme emotional responses include anger, resentment, bitterness and indignation. As a result when an individual’s psychological contract is violated the relationship becomes more calculated and transactional, but how far it moves along the continuum is dependent on the strength of the perceived violation In addition to the above mentioned, the employee could simply withdraw from the situation entirely, that is, quit the job and seek employment elsewhere (Morrison, E and Robinson, S 1997).
There are four main categories that the theories of motivation are classified (1) Economic needs of man, money motivates, Taylorism (2) Social concept of motivation, from the Hawthorne studies (3) Self actualisation this took the findings from the Hawthorne studies further, psychological issues were studied (4) the contingency approach, large number of variables that influence a persons motivation. These theories all have factors that relate to the work place (Mullins L. 2005).
Motivation is an individual’s perception of their worth, role and work environment within an organisation. There are common motivational factors that employees share, although when satisfied will lead to different levels of motivation. Both Intrinsic and extrinsic rewards add to the motivation level of employees, if managed correctly. Although the perceived equitable reward varies amongst employees, those who receive less than their perceived value will feel undervalued, and not motivated. This will impinge on job satisfaction, with employees feeling dissatisfied with their award (Mullins, L. 2005).
Mitchell (1982) described motivation as the “psychological process that cause the arousal, direction, and persistence of voluntary actions that are goal oriented (Mitchell (1982) cited in Ramlall, S. 2004:55). Motivation defined by Robbins (1993):55) is the “willingness to exert high levels of effort toward organisational goals, conditioned by the effort’s ability to satisfy some individual need.” The need in this framework is an internal state that makes certain outcomes appears attractive. An unsatisfied need creates tension that stimulates drives within the individual. These drives then generate search behaviour to find particular goals that, if attained, will satisfy the need and lead to the reduction of tension (Robbins, (1993) cited in Ramlall, S. 2004:55).
When Maslow’s hierarchy theory is applied to organisations, the implications for managerial actions become obvious. “Managers have the responsibility to create a proper climate in which employees can develop to their fullest potential. Failure to provide such a climate, would increase employee frustration and result in poorer performance, lower job satisfaction, and increased withdrawal from the organisation” (Steers & Porter, (1983) cited in Ramlall, S. 2004:55).
There is research into stress at work, forcing some employees to leave. French and Caplan (1973) differentiated overload in terms of quantitative and qualitative. Quantitative refers to having “too much to do”, whilst Qualitative means work that is “too difficult”. Employees at all levels occasionally find themselves faced with excessive work demands, and will leave it if is the only course of action (French and Caplan 1973).
Recent research validates factors such as stimulating and challenging work, career growth, learning, and development are keys to retention. This research challenges conventional HR perception in several aspects. The most notable disparity of views emerges when comparing the importance of “boss reputation,” the perceived quality of the immediate manager. The CLC research concluded that high-value employees rate this as the single most important consideration in staying with an organisation, that 80 percent of turnover is related to unsatisfactory relationships with their boss (CLC (2001) Report accessed in Risher, H. and Stopper, W. 2002)
Management has a direct effect on retention, the behaviour and their skills all contribute to how an employee feels valued. Buckingham (2000) argued that employees are more likely to remain with an organisation if they believe that their managers show interest and concern for them. Buckinham added that They are know what is expected of them, if they are given a role that fits their capabilities and they receive regular positive feedback and recognition (Buckingham (2000) in Beardwell, I. et al 2004:177).
Over 4,000 studios have been done since 1945 on why people resign; the most common reason is their line managers. The most important factor in retaining key employees is good leadership, if your boss is inspiring; you’re likely to stay (Rigby, R. 2003).
Organisations that have management training schemes retain a higher percentage of graduate recruits, than the average in their industry sector. This process builds ensure mutuality in career development, with both party’s knowing what is expected of them. The most successful of these programs are when the employee plans their own career development (Mullins, L. 2005).
Retention plans are vital for organisations. Kets de Vries stated that today’s high performers are like frogs in a wheel barrow, they can jump out at any time (Kets de Vries cited in Beardwell, I. et al 2004:176). It is increasing important that organisations recognise this and react upon it. When formulating a retention plan it should be based on the outcomes of labour turnover analysis and risk assessment. Retention plans can include all or some of the following, pay and benefits, recruitment and selection, training and development, job design and management (Beardwell, I. et al 2004).
Although with uncertain economic prospects it complicates retention strategies. In times of downsizing, the risks of losing top talent are especially high, in the long run intellectual capital remains the key competitive advantage for organisations that want to succeed in a global economy (Risher, H. and Stopper, W. 2002).
When recruiting graduates on fast track schemes a number of them would leave as soon as they qualified. The reason for this is life style change Rigby (2003) discussed this stating ‘By the time they qualified they would be thinking about buying property and settling down. But prices might have boon very high - or long hours might have made it very difficult to actually look for flats or houses’ (Rigby, R. 2003:30)
Another key issue with recruiting graduates is the organisation’s size. In large organisations there are often a number of routes for career progression, but in a small or medium-sized business this may not be the case. There are a lot of organisations with comfortable but somewhat de-motivated employees. They will never get the top job until the boss leaves, but there are several other employees in the same position (Rigby, R. 2003).
Retaining talented productive employees and eliminating poor performing employees is essential to the long run success of an organisation. But there are problems such as adverse selection, costs associated with turnover and skills gap. So many of the costs are hidden, which makes it vary easy not to acknowledge poor retention as a problem.
Reward payment, share schemes and increasing employee job satisfaction may be useful in addressing the challenges surrounding employee retention. These if implemented successfully will lead to a motivated workforce that is happy to remain in their current position.
The Psychological Contract is the vital link between employer and employee, with the changing work patterns this is being violates, leaving employees not feeling valued, thus increasing turnover.
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