When you review the current economic numbers and take into consideration the looming (or confirmed) recession, you will soon see that a fundamental statistic will have a huge impact on every company today and into the future — we're running out of qualified people. By 2010, there will be 161 million jobs and approximately 154 million eligible workers. The numbers get far worse by 2015.

Who's going to be short-handed? Probably the companies that currently have no strategic plan for keeping the employees they currently have. Let's start with a few statistics:

  • 13 percent of employees leave every year, which means on average every company turns over 50 percent of its employees every four years. Through August 2008, the loss was 14.9 percent per year, according to the Bureau of Labor's definitions of “quits.”
  • 67 percent of managers cannot quantify the actual cost to replace their employees.
  • The average time to replace an employee is now 55 days.
  • In 2008, 65 percent of employees said they would leave their company within one year. In 1993 that rate was 39 percent.
  • 50 percent of job satisfaction is the direct relationship an employee has with his or her boss. That means managers trump companies.

The top reasons for employee flight are not necessarily about money. They are work environment; a lack of growth opportunity; a perception that their job is unimportant; a poor match between their job and their natural skills; no relationship between their pay and their performance; and an “abusive” company environment created by their peers or boss or the company's core ethics.

Compensation plans have been created with the goal of wage compression to the point where the annual merit raise of 2 percent to 4 percent creates a compensation-incentive variance of only 1 percent difference between outstanding performers or marginal performers. Despite this fact, companies will often throw 10 percent to 50 percent counter-offers at exiting employees, which means counter-offers actually reward employees for “exiting.”

Counter-offers have historically been a temporary fix, as more than 80 percent of employees that accept a counter-offer leave that company within one year of accepting that offer. Yet in the past year we've seen counter-offers rise to extraordinary levels, and in some areas (primarily, within wholesale distribution) counter-offers have become nearly assumed.

The true cost to replace an employee ranges between 25 percent to over 200 percent of their annual total compensation. Admittedly, that's a huge range, but the range is linearly related to the degree of responsibility and tenure of the lost employee. That range is repeatedly verified in numerous reports and studies and is probably best summarized by William Bliss and Robert Gately in their Bliss-Gately tool. A typical large company can experience hidden, intrinsic costs of up to 50 percent of their annual payroll with no definable expense or balance sheet entries. This makes managing the bottom line take on a new perspective.

Retention represents a huge, hidden reserve of profit protection. The keys to employee retention can be summarized as follows:

  • Be a company people want to work for.
  • Hire right in the first place.
  • Start the employees right.
  • Coach and reward your company's employees.

As a recruiter, my company gets to see plenty of examples of hiring practices and interviewing skills that ultimately lead to losing quality talent, or companies that mis-deploy that talent when they get hired. Most interviewing mistakes can be summarized as follows:

  • Hiring for experience rather than the talent to do the job.
  • Hiring in a hurry.
  • Hiring too slowly (quality talent won't endure protracted hiring processes).
  • Delegating the hiring and selection process to someone else.
  • Searching for a “superman” who is a committee's assessment of what they need.
  • Hiring by “gut feel.”
  • Hiring in your own image — a “little me” doesn't necessarily guarantee success.
  • Hiring the politically correct individual.

Summary

In this next cycle of downsizing, reorganizing, merging and cutting costs, the cheapest, most cost-effective approach to managing your compensation/benefits expense may be to develop your strategy to keep the good ones. I can recommend a good book on the topic: “Keeping the People Who Keep You in Business” by Leigh Branham. It's published by Amacom, the American Management Association's publishing unit. Additionally, my firm has a new white paper on “onboarding,” which provides an insightful look at how to properly hire your new employee and bring them into the company culture faster and more effectively. Write to me for a free copy.

Ted Konnerth is president/CEO of Egret Consulting Group, Mundelein, Ill., a retained search firm with specialties in electrical manufacturing, distribution, consulting services (architectural and engineering) and mergers and acquisitions consulting. Prior to founding Egret Consulting in 1999, Konnerth was with Cooper Industries for 16 years. He was vice president of sales for 4.5 years for a $1 billion division of Cooper before starting his search firm. Contact info: (847) 307-7125; or e-mail: tk@egretconsulting.com; website: www.egretconsulting.com.