Just as employees can no longer rely on paternalistic management structures to shield them from the effects of market cycles, technological change, or international competition, employers can no longer assume that employees will stay if circumstances—and these can be push or pull factors—encourage them to leave.
This has demanded the attention of employers because the ability to attract and retain the best talent represents a decisive competitive advantage, one that will determine the current and future profitability of most companies. So, it is not surprising that increasing thought is being paid to issues of employee retention and to the costs of high employee turnover.
There are two propositions here. The first involves the retention of key employees. Employment may be insecure for a large portion of the American workforce, but for those with critical skills and talents, the reverse is true. The transformation of corporate employees from corporate benevolence to a talent market has granted employees an advantage that gives every indication of being permanent. While this issue involves far fewer employees, its effects are magnified by the increasingly specialized nature of skills within the knowledge economy. Often, employees lost to one company will find a place with their direct competitors. And when it comes to innovators, the benefits lost with their resignation can be immense; Dr. John Sullivan suggests that it could be 5 to 300 times that of an average employee.
The second proposition, which this discussion will concentrate on, involves the ongoing costs of turnover in lost productivity, lower morale, damaged corporate reputation, compromised customer service, and employee defections—not an exhaustive list, but a representative one. The last item, the "self-reinforcing cycle," in which turnover breeds turnover, is particularly important: higher turnover has a direct, negative effect on the competitive advantage that is independent of any consideration of staffing levels; a company may achieve savings by transforming labor from a fixed to a variable cost, but this comes at a cost. The higher turnover this leads to will diminish its ability to innovate and compete, as well as have a direct effect on its bottom line. According to a 2007 PwC Saratoga Institute study, which explored retention rates across 11 major employment sectors in the United States, turnover-related costs can be significant, with a range of up to 40 percent of pre-tax income in some industries.
2. What will be the cost of staff turnover, financial and non-financial?