Your Retention Strategy is Really a Cost Containment Strategy

Replacing departing employees is much more expensive than you think.

While the labor market has calmed down a bit in recent months, it's likely that departure rates will remain above historical averages for quite some time.

For years now, employers have been operating in an environment of higher-than-average job openings, record-low unemployment, and a workforce participation rate that remains below its pre-pandemic level. Demographic changes are making this labor shortage even worse: Americans are having fewer children, over 10,000 baby boomers are turning 65 every day, and the population of working-age Americans has been in decline for more than two decades.

Savvy business leaders understand that this shortage of qualified workers is not going away anytime soon. They also understand that it represents an acute financial burden for their organizations. Most employers equate the cost of turnover with the cost of hiring a replacement, which is commonly quoted as 30-50% of salary. However, this figure grossly underestimates the true cost of replacing a seasoned performer with someone new. In professional roles, new hires can take months or years to reach the productivity and contribution levels of those they replace. Taking this into account, organizations like Gallup estimate that the actual cost of turnover is closer to 50-200% of salary.

Cultivating a high-retention atmosphere is one of the most surefire ways for employers to contain costs.

Because of all this, cultivating a high-retention atmosphere is one of the most surefire ways for employers to contain costs. However, there is a lot of misinformation and myth-making on this topic that has led well-meaning managers astray. For example, the simplest and most common step many leaders take to boost retention is also one of the least understood: they raise pay.

While below-market compensation has been shown to drive employees away, decades of research show that high pay alone does not prompt the type of extreme satisfaction that causes employees to stay with an organization long-term. What’s worse, pay raises have little or no lasting impact on productivity or effectiveness.

So what practices can employers cost-effectively implement that act as strong satisfiers? These three principles are a great place to start:

1. Prioritize Job Clarity

Articulate what the role is, what responsibilities it has, and how performance is measured. Ambiguity about these things causes stress and frustration.

2. Connect Daily Work to a Greater Purpose

It is critical for employees to understand how their efforts contribute to a larger mission or goal and to make sure that this is compatible with their own “why.”

3. Focus on Growth

Provide the people you manage with a path forward in their professional lives and actively work to help them advance.

Retention is a natural byproduct of organizations getting these things right. This isn’t a reluctant, I-guess-I’ll-stay-another-year retention, but a true and enduring satisfaction and enthusiasm that boosts productivity and turns employees into brand ambassadors. Focusing on these three satisfiers, and especially on growth, is an effective strategy that secures real savings by way of preventing turnover.

So instead of advising managers to retain their people, insist that they grow their people. Instead of “if we pay, they’ll stay”, think “if they’re not growing, they’ll be going.” When it comes to clarity, focus on what, how, how much, and why. Spell out exactly what great performance looks like, naming the skills and behaviors you are looking for. Create measurable goals and indicators, especially for non-sales roles that rarely experience such clarity.

Helping people to grow is low-cost, high-impact, and rewarding in its own right.

Take the time to understand what makes each employee feel a sense of purpose. Encourage them to share their “why”, not the company’s why, and map their role and responsibilities to this. Pursue moments of intentionality and have clarifying conversations about what interests them and how they would like to see their role evolve and change.

Finally, don’t assume that people know where and how they should grow. Collaborate with them on a growth plan, tie measurable development goals to it, and put these in writing. Once this is done, revisit the plan in your recurring check-ins and progress updates. Be relentless in your guidance and encouragement and prove to them that your organization cares about its people.

These practices not only work to contain recruiting and hiring costs, but also increase productivity and morale. Helping people grow is low-cost, high-impact, and rewarding in its own right. Development is about progress over perfection – if you can make everyone in the organization feel like they are growing, retention issues will begin to melt away.

For more tips from Travis on navigating an era of high turnover, check out his post on 5 Surprising Mistakes in the War for Talent.