We often discuss how people are worth more than the cost of their hands. Their brains contain knowledge, creativity, and ideas which, leveraged well, can drive incredible value. Some companies are beginning to recognize that recognizing and retaining that knowledge is a key component of effective leadership.
A small but growing number of companies are grading — and paying — top managers on their ability to hang on to employees. A study by management consultancy Hay Group suggests that the practice is gaining popularity. In the 2007 survey of 182 organizations, 8.2% of respondents said they use turnover as a performance measure in executive-incentive plans, more than three times the 2.3% who responded similarly in 2005.
And it’s not just at the executive level.
Other companies hold middle managers accountable for turnover, reasoning that front-line attrition is beyond the control of top executives. ExlService Holdings Inc. ties as much as 30% of lower managers’ compensation to specific targets for employee turnover. But executives at the New York outsourcing company are judged on its financial performance and a wider set of employee-based goals, including retention.
No, the irony of an "outsourcing company" judging its managers on employee retention isn’t lost on me. Which indicates that the fundamental value of employees is still being lost.
"It is a recognition, on the one hand, of people as a driver of business success," says Hay Group consultant Mark Royal. "It also reflects a recognition that turnover is costly." Recruiting and training a replacement employee can cost the equivalent of six to 18 months’ pay, he says. Moreover, attrition can hamper customer service, product development and employee morale.
The "value" is apparently driven by replacement cost, not leverageable knowledge. Oh well, at least this is a start. And there’s at least one other nuance that should be discussed:
Ira Kay, director of compensation consulting at Watson Wyatt, says companies should distinguish between voluntary and involuntary turnover. "You don’t pay more to have your bad employees stay," says Mr. Kay. For instance, technology vendor Extreme Networks based 15% to 20% of several top executives’ bonuses on "undesirable attrition" during the 2007 fiscal year.
Although you don’t want to pay for retaining "bad" employees, I believe there’s still a question of leadership. There are very, very few "bad" people. Generally poor performance is the result of a flawed hiring process, flawed training, flawed support, and/or flawed feedback. Perhaps managers should be incented to keep "bad" employees… in order to also incent working to improve the various processes that created the situation.