by Eugene J. Wallace
money_stack“Let me get this straight, Pat,” Jerry asked with a degree of shock and awe, but without rancor, “you are asking for hundreds, no thousands of dollars for executive leadership development, when we have a company-mandated cost-savings directive?” Pat, looking down for a moment, touched the report, which had been worked and re-worked, as if to draw some reassurance from it. With a self-questioning, slight turn of the head and then an involuntary nod, as if the report itself encouraged Pat to respond, “Well, yes actually. When we were asked to cut costs, a question popped into my mind, and I could not shake it.” Jerry was curious about how a question, the answer to which would cost money, might resolve the short-term and long-term financial stability of the company.

“I’ve never been good at Jeopardy, but I would like to know the answer, er, I mean the question.” “Okay, here it is,” Pat began, as Jerry leaned forward to listen, “I started to wonder what would happen if, instead of only looking at how to cut expenses, we started to consider how we can avoid spending money?” A slight furrow formed on Jerry’s forehead as he worked to catch the distinction between the cost-savings mandate and the question Pat laid out.

Pat continued on, “Of course we have fixed expenses, and we can work to minimize those to some degree. We can look at other costs connected to operations, procurement, marketing, sales, etc. We need to continue to improve across all areas, but we can only tighten our belt so far. When I began looking at variable spending and started to dig into the costs connected to recruiting, hiring, training and retaining employees I was amazed.” Pat slid the report across the desk to Jerry. “Take a look at these facts and figures.”

Turnover Considerations

  • 2006 average voluntary turnover rate for all industries was 23.4% [US Dept. of Labor]
  • The industries with the highest turnover were: Service (food, accommodation, entertainment, 45.7%), Retail (34.7%), Construction (28.7%), Professional Services (27.8%) and Trade, Transportation and Utilities (27.4%) [US Dept. of Labor]
  • Estimated costs to replace supervisory, technical and management personnel run from 50% to several hundred percent of their salaries. [Galbreath, 2000]
  • Almost one-third of all employees expect to leave for another job within one year.*
  • Turnover costs the average organization more than 27 million dollars per year.*
  • Almost half of these organizations have no plan to address this concern. *
    *[Bernthal, Wellins, 2004]

Cost Categories of Turnover

  • Processing turnover employees as they leave
  • Recruiting efforts to identify viable candidates
  • Selection process to replace
  • Training systems to prepare
  • Retaining high quality employee efforts
  • Lost business and opportunity costs

Reasons People Stay or Leave
The top five factors affecting an employee’s decision to stay or leave* are:

  1. Quality of relationship with supervisor or manager.
  2. Ability to balance work and home life.
  3. Amount of meaningful work – the feeling of making a difference.
  4. Level of cooperation with coworkers.
  5. Level of trust in the workplace.
    *[Bernthal, Wellins 2004]

“Okay, help me put this together Pat. What is your thinking here? If we find more of the right people and keep them here, we somehow cut costs?” “Close,” Pat’s eyes lit up as Jerry started rubbing his chin, “we find the right people and we work hard to make this a great place to work. The key to this is intentionally developing our leaders, starting at the top, with you, so that we can create and sustain a culture in which people want to stay and where they can thrive. The quality of relationship with supervisor or manager is the number one factor employee’s consider when deciding to stay or leave.

“Jerry, we had five people leave this year. The average salary was fifty-five thousand dollars: one of those was one hundred and twenty thousand dollars and a key player. It took five months to replace her. If we conservatively use a figure of 50%, for replacement and training costs, we are looking at over 137 thousand dollars. When we interview these folks as they were leaving, they confirmed that they were dissatisfied with the quality of leadership as one of the major reasons for going. The lost business and opportunity costs are tough to measure, but you can bet we felt the loss of each of these employees in the revenue column as well.”

Leaning forward and tapping the report, Jerry made a clicking noise with his mouth and then laid his understanding, of what Pat had been suggesting, out on the table. “So, conservatively, we are looking at what, a quarter of a million dollars lost, as a hidden cost, because of turnover?” “This year alone,” added Pat, indicating as well, “we could have used that money for a lot of other things.”

“Pat, you are asking that we spend more money on executive leadership development when we are trying to cut costs. By spending this money you believe that we will decrease our variable spending connected to turnover?” “That’s right, the question turns on the comparison between the cost of executive development versus the cost of not spending money on executive development.”

“Pat, you think this should start at the top with me, huh?” asked Jerry. Tapping the report, and after a quick clearing of the throat, Pat looked at Jerry and responded, “I don’t think that we can afford not to.”

“This is good work, very good work. Let’s get on this immediately,” concluded Jerry, and as Pat rose and began to leave, Jerry added a final comment, “and, I want to thank you very much for being honest and for a job well done Patricia.”