By: Abhay Padgaonkar

Article Summary:

How to gain a deeper insight into employee retention and engagment issues.

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. This transition to a knowledge-based, service-oriented economy has raised the importance of human capital. It 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 shows the real business impact of employee commitment: “By increasing employees’ engagement levels, organizations can expect an increase in performance of up to 20 percentile points and an 87% reduction in employees’ probability of departure.”  In other words, engaged employees perform better and stay longer.

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.

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). 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.

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 or isolate 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.”

Companies erroneously believe that by outsourcing the jobs they can 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

• Reality: Exit instruments often collect subjective, superficial, and unreliable results. It is very difficult to ensure the reliability and validity of the information gathered in exit surveys/interviews because people don’t want to burn the bridge.  

Myth #2: If employees are satisfied they will stay

• Reality: Satisfaction surveys can produce misleading results because 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

• Reality: Many times, HR reports are like driving forward by looking through the rear window. The reports show overall averages and thereby mask pockets of severe and recurrent “hot spots.”

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.

Gaining Deeper Insights
So where does one start? 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 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 so they can zero in on turnover “hot spots.”

One such technique called CHAID (Chi-square Automatic Interaction Detector) is used to study the relationship between a dependent variable (e.g.  employee status as active or terminated) and a series of predictor variables (e.g., gender, race, salary, tenure, education, etc.). A tree diagram is created by splitting the overall data to gain insights into sub-segments of the population. This kind of an analysis creates sharper profiles of employees who have left and are likely to continue to leave at a rate much higher than the overall average.

With this useful 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, compensation, 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.

When insightful information is lacking, companies resort to mindless imitation of others’ best practices without understanding the logic, culture, or context under which they may or may not have worked. 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.

Abhay Padgaonkar, a management consultant, author, and speaker, is the founder and president of Innovative Solutions Consulting, LLC, which provides advice on formulating strategy and turning it into meaningful actions and measurable results for major clients such as American Express. For more information, visit Innovative Solutions.org.

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