Extremely High Turnover Rates - Essay Example

Introduction Employee turnover is a challenging issue for many types of businesses. The retail industry, in particular, wrestles with the implications of extremely high turnover rates. "The retail industry employs nearly one-in-five Americans and routinely faces 70 percent to nearly triple digit turnover" (Retailers can improve workforce commitment, 2002). Many retailers have resigned themselves to accepting this kind of turnover rate as a "cost of doing business" (Joinson, 1999). The costs associated with recruiting, retraining, diminished customer loyalty, and many other consequences of high turnover rates can be staggering. Galvin (2004) asserts that turnover is "a modern business dilemma that is costing companies billions of dollars annually, yet surprisingly little is done about it." For businesses seeking to optimize their bottom line, particularly in the retail industry, getting this problem under control can translate into dramatic improvement in profitability and competitiveness. Understanding the particular costs of turnover to each business is an essential first step in determining the extent to which it is even a problem that needs to be addressed, and if so what is the appropriate approach to addressing the problem. This paper examines the reasons for higher rates of turnover in retail generally as compared to many other industries. It goes on to propose solutions and strategies retailers can adopt to decrease employee turnover and improve their bottom line. Costs of Turnover The direct costs of turnover are easy to quantify, according to Galvin. These are recruitment expenses such as classified ads and headhunter fees, training expenses, "travel or relocation expenses, interviewing, overtime for employees who take on departing employees' tasks, and all the related administrative functions that go into the grand exit and entrance." These costs are merely the "tip of the iceberg," however, as there are numerous indirect costs that are often not even considered. These include lost business from unhappy customers who are driven away by compromised service quantity and quality, resulting in lost business. Also, there is usually some lost productivity resulting from the need for other employees to pick up the slack in addition to their own jobs. Finally, the diversion of management attention from strategic planning to devising ways to make up the shortfall left by departing workers yields an opportunity cost for the business (Galvin, 2004). What strategic and competitive strides could have been made had management not been preoccupied with filling gaps from employee turnover An additional indirect cost of turnover in a retail environment is missed sales due to inexperience of new staff or due to the lack of adequate available staff to take care of all customers efficiently. Kal Lifson (1996) asserts that an "inexperienced sales associate loses 10% of the sales dollars that a veteran associate would have made." That is an enormous impact that is often not even accounted for by companies concerned with the financial impact of turnover. "Turnover takes a huge bite from the bottom line. Large merchants spend an average of $77 million a year in severance and other departure related costs, and lose another $161 million in potential revenue due to such factors as new employee mistakes," maintains Leigh Dyer (2002). The story on turnover is not all bad. Businesses arguably need some fresh blood in order to remain dynamic. New people bring fresh ideas and approaches to the business. Companies with zero turnover risk being stagnant and stodgy in a very competitive industry that is largely based on a clientele attracted to the young, the hip and the trendy. "New employees do bring in new ideas and keep the organization fresh and current" (Zografos, 2006). In addition, some level of turnover helps businesses to understand the driving factors behind employee retention, enabling them to respond more effectively when the inevitable departure does take place. Low-turnover businesses can "focus on why employees stay with [the] company and continue to strengthen and improve them" (Zografos, 2006). Another interesting cost of turnover that may not be immediately evident is the link between higher rates of turnover with higher rates of theft (Joinson , 1999). Studies seem to substantiate that there is a direct correlation. Certainly, this is an additional cost that should be taken into consideration by any business seeking to understand and analyze the impact of turnover on its costs. Reasons for Turnover There are numerous causes of employee turnover in general. These include employee satisfaction and morale, compensation, motivation, hiring practices, and training, just to name a few. That being said, in reality there are nearly as many different reasons for employee turnover as there are employees who quit their jobs. Each person's individual circumstances are unique; and so the best a human resources department can do is to categorize these unique reasons as effectively and accurately as possible. In a study of workforce commitment in the retail sector, twenty-eight percent of respondents "feel the company does not communicate career opportunities, 21 percent indicate the orientation program did not prepare them for the job and 25 percent are not satisfied with the ongoing training they receive" (Retailers can improve workforce commitment, 2002). These statistics indicate that retail management needs to do a better job with training and communication of expectations. Disillusionment among new hires who discover the job is not what they though it would be appears to be a significant factor in diminishing job satisfaction and promoting turnover. The study also indicated that a large percentage of retail workers have no management aspirations within their companies; and less than half would "recommend their organization as one of the best places to work in their community". Unless businesses focus on hiring people who can see themselves on a career track within the organization, it is unlikely they will be able to hold on to a large percentage of the staff. Part of the problem in this regard seems to be the widespread hiring of very young employees who merely use the position to offset expenses during a transitional period in their lives, such as college or temporary loss of work in their chosen field. Perhaps a recruitment initiative aimed at targeting young workers who see the position as entry level, and who see themselves growing their careers within the company, would go a long way toward promoting employee retention. Most turnover in retail occurs within the first three to four months of employment (Lifson, 1996). In the retail environment, hours that interfere with family and leisure time, second jobs and other commitments are likely to cause issues for many employees. Pay is often not generous enough to foster employee loyalty and retention. Personality issues such as feelings of inadequacy to do the work, not fitting in with coworkers, or distaste for waiting on customers or doing physical work also come into play frequently in a retail environment. In many cases, overqualified workers may be hired who possess greater, more valuable skills to do other types of work, and are simply waiting for a better opportunity to arise (Lifson, 1996). Another factor contributing to turnover in retail is a failure of management to acquire employee buy-in and sense of having a stake in the success of the organization. "Employees who feel detached from the organization's decision-making process find it very easy to just show up for a paycheck, give minimal effort, and, finally, not show up at all" (Skabelund, 2005). In a retail environment it is arguably easier for management to fall into this trap than it perhaps would be any many other industries. Often retail management structures are set up divisionally and regionally so that most key decision-making happens at levels that rarely find themselves present in stores along side front line workers. Solutions Clearly, turnover is a substantial and costly problem for the retail industry. The good news is that its reasons, as discussed in the previous section, are well understood. This understanding can be used to devise effective ways to address the problem. Given the enormous costs of failing to do so, retail businesses would be wise to adopt some of the following measures. John Skabelund (2005) asserts that there are several strategies that can reduce employee turnover. First, clearly communicating the connection between the employee's work and the success of the business is essential. "Most frontline employees, when they understand how necessary excellent customer service is to keep the organization running, will respond positively." Store managers could encourage a sense among employees that the organization's success depends on them. Although large scale strategic decision-making is not likely to be an option, managers can allow employees some level of control over creative displays, and can afford employees the opportunity to run the shop for at least brief periods. Also, asking employees for their opinions about how things are run and assuring them that those opinions will be represented to senior management would likely go a long way toward making employees feel like they really make a difference in the organization. "Invest some time and involve your staff in the decision-making process whenever possible, and you'll see the payoff; they will in turn invest in you and you company with their time, energy, skills, and loyalty" (Skabelund, 2005). Devising a rewards system that is relevant can also be an effective way to retain good employees, according to Skabelund. Verbal praise only goes so far. Employees should be rewarded when they excel and when they achieve certain seniority milestones. Rewards need not necessarily be monetary. Sometimes a flexible schedule, a coveted parking spot, a premium work assignment, or some other incentive might be at least as effective as money in driving desired behavior, boosting satisfaction and morale, and ultimately suppressing turnover. Effective hiring is another approach to minimizing turnover. This essentially involves training hiring managers to screen out applicants who are least likely to stick around if hired. First, being open and honest with applicants regarding the nature of the work and expectations can screen out many of those who would have otherwise taken the job and quit after a short time. Honestly informing applicants about the "challenging and less pleasant aspects of the position as well as its advantages, will typically screen out about 15% of the applicants, often those who would work less than three months if hired" (Lifson, 1996). During the initial interview and application process, questions can be standardized and their responses scored in a way that matches the attributes of the position with the attitudes of the applicants (Lifson, 1996). Those who are least suited to the work or who are most likely to leave the job after a short period would become evident by their score. "Experience has shown the scored applications have been the single strongest predictor of retention," screening out about a third of the initial applicants (Lifson 1996). This approach also facilitates the process of objectively ranking the remaining applicants based on their scores. Utilizing a behavioral-based interview approach can also be a powerful tool for weeding out applicants who would not be appropriate for the job. The behavioral approach asks applicants to recall a situation from their own prior experience and state how they handled it. For example, "tell me about a time when you were able to calm down a customer, a friend, or a co-worker who was upset" (Lifson, 1996). This is as opposed to the traditional interview approach of asking applicants to say hypothetically what they would do in certain situations (e.g., "how would you calm down an upset customer"). Past behavior is a powerful indicator of future performance. This approach also tests the ability of applicants to think on their feet, as they need to think quickly about a situation they have been in that is appropriate to the question. Personality screening is another effective tool that can be used during the hiring process to minimize turnover. According to Lifson, "there are available proven personality tests that do a reasonable job of measuring the match between requirements of retail sales positions and the personality of applicants." They test for such factors as willingness to accommodate others, to accept diversity, ability to handle disappointment and rejection by difficult customers, self confidence, and an applicant's concept of success and appropriate ways to achieve it. Understanding applicants' perception of success is important because an employee who sees that they are becoming successful during the first two months on the job is significantly less likely to quit. Managers need to know whether an applicant's perception of success fits with the reality of the position, and hire accordingly. Lifson maintains that this type of personal screening is a "close second to the scored application in strength of predicting retention." Other uses of screening recommended by Lifson include reliability screening that would speak to an applicant's likelihood of removal for absenteeism or misconduct; and learning ability measures that would determine the extent to which an applicant has the capacity to learn the skills and procedures necessary for the job. Lifson also discusses the importance of nurturing new employees, as up to twenty-five percent of "avoidable turnover is basically caused by the new hires feeling uncomfortable, unwanted, and unsure of their abilities on the first few weeks on the job." Training managers to work with new hires to get them "over the hump" early in their employment can be a very effective way of reducing turnover. Case Studies in Reducing Turnover This sort of emphasis on hiring right in the first place in order to keep turnover to a minimum has been put into practice at America's largest retailer, Wal-Mart. Struggling with a steadily rising turnover rate during the 1990s, Wal-Mart decided to take a three-pronged approach to addressing the problem. Part one of this approach involved reevaluating hiring practices. There was a realization that "turnover starts when we hire and is affected by who we hire. In other words, many of us do a great job of hiring our own turnover" (Peterson, 2005). Internal analysis of employees who had left their jobs with the company "showed that an associate leaves within the first 90 days because there is a conflict in their schedule or they prefer to work in another area." This appeared to be an avoidable situation if the hiring manager would have gathered these facts as part of the applicant review process, just as they ask about references, education and experience. Wal-Mart decided to make a full fledged effort to restructure and standardize its hiring procedures in a way that makes it most likely the right people get hired, implementing such measures as selection training classes for hiring managers and training on interviewing techniques. The second part of Wal-Mart's approach to reducing turnover involved keeping good people. The decision-makers realized that "the sense of connectivity with the organization and what future it holds for the individual is key" (Peterson, 2005). Fred Smith of Federal Express maintained that "if a company could answer these three questions well, it was on its way to establishing a long-term relationship with its employees: (1) Do you care about me (2) What do I need to do to get ahead (3) Where can I go to get justice" (Peterson, 2005). This credo significantly influenced the decision-makers at Wal-Mart, who have mandated the active involvement of store managers in the on boarding of new employees so that new associates knew their leaders right from the beginning. The theory was that "an employee's feelings about 'where they can go to get justice' correlate highly with the comfort level and trust they have with their supervisors" (Peterson, 2005). The final prong of Wal-Mart's strategy to reduce turnover involved growing its people - in other words, showing associates where there is opportunity and how to get there. Management outlined two critical factors: first, identifying and communicating the opportunities that exist; and second, "clarifying the process that gives an even playing field to all who have interest in those opportunities" (Peterson, 2005). Wal-Mart has had great success in this regard, as seventy percent of current managers started as hourly employees. There is even a story about a telephone operator from a California Wal-Mart store who went on to become Vice President of Recruitment for the entire company. These types of anecdotes and statistics hold the promise of genuine opportunity for new employees, and are an integral part of Wal-Mart's successful efforts to promote employee retention. All of these efforts resulted in a total turnover reduction at Wal-Mart of seventy percent in 1999 to forty-four percent in 2003. During that same, industry average turnover increased from 63% to 65%. Obviously Wal-Mart's formula enabled them to buck the trend of rising turnover in the retail industry. The enormous reduction they achieved is a remarkable testament to the tremendous impact a coordinated and well considered employee retention campaign can have. "Wal-Mart and Sam's Club stores also enjoy a reputation for strong employee benefits such as profit-sharing" (Dyer, 2002). Wal-Mart is not alone in its successful implementation of a turnover reduction program. Nordstrom, Inc. has sought to establish an environment that attracts people who want to earn good money, and works to make sure they can (Joinson, 1999). The company has leveraged its pay-for-performance commission system and an approach to scheduling that rewards those who rate highly in sales and customer service with the busiest hours. These efforts have enabled Nordstrom to hold its turnover rate at an industry low 35%. The company has reaped financial rewards from this success, as "people who are around longer sell more." Other large retailers such as Kinko's, Radio Shack, Starbuck's Coffee, and Whole Foods have also seen great success with efforts to minimize turnover (Joinson, 1999). Considering this level of success, it may be surprising that more companies have not done more to address the problem. Galvin (2004) asserts that "few companies have declared an all-out war against turnover for several reasons. Many managers do not know how much turnover really costs, particularly in areas like lost revenue and productivity. Others have not figured out the root causes, so they simply don't know what actions to take. Still others mistakenly believe that turnover is inevitable in their industry." Still, with a colossal company like Wal-Mart making such great strides on turnover, these types of obstacles relating to ignorance of the nature and ramifications of turnover are likely to become less obtrusive in the near future. As corporations seek to turn over every stone to ensure the highest levels of profitability possible, turnover seems to be a ripe target that can produce substantial results if it is tackled correctly. Conclusion The retail industry struggles more so than any other with high turnover rates. Several characteristics of the retail industry make it more prone to turnover. The nature of retail employment makes it a convenient option for people who are not willing or able to commit to the company long-term. Further, management of retail companies has tended to ignore hiring practices and retention strategies that have long been in practice in other industries. Although retail turnover rates are substantially higher than most other industries, they need not be accepted as just a cost of doing business. On the contrary, something can be done as long as companies are willing to do the legwork and expend the resources to understand the costs and causes of the turnover. The costs associated with unchecked turnover are numerous and substantial. Many of those costs are not obvious, yet they exist. A close examination reveals astronomical potential savings for companies willing to take on the problem. There are many examples of companies that have achieved great results with well-devised initiatives to promote employee retention. Wal-Mart arguably represents the most notable such example, as it is the largest retailer. Nevertheless, most companies have yet to rise to the challenge of turnover in any meaningful way. Certainly it is only a matter of time before dealing with turnover in an aggressive way becomes a normal business practice for most companies. After all, doing nothing about the problem simply leaves too much money on the table. Retail, with its superlative turnover rates, also stands to gain the most by getting turnover under control. Works Cited Dyer, L. (2002, April 15). Retailers continue to deal with high turnover. The Charlotte Observer Galvin, T. (2004, January). The tip of the iceberg. Training, 41(1). Joinson, C. (1999, December). The cost of doing business (Employee turnover and retention in the retail sector). HR Magazine, 44(13), 87. Lifson, K. (1996, November). Turn down turnover to turn up profit. Chain Store Age, 72(11). Peterson, C. (2005, Spring). Employee retention: The secrets behind Wal-Mart's successful hiring policies. Human Resource Management, 44(1), 85-88. Retailers can improve workforce commitment. (2002, July 29). Fairfield County Business Journal, 9,19. Skabelund, J. (2005, November). "I just work here": Creating a front line that improves your bottom line. The Receivables Report, 9-10. Zografos, G. (2006, January). Employee turnover statistics remain a great tool. Franchising World, 38(1), 5-9. Read More