How to Rein in Runaway Turnover Costs with Corporate Culture
By Candace Coleman, CultureWise Content Manager
There are viable reasons that people leave their jobs, including retirement, a change in personal circumstances, or an irresistible opportunity to climb the career ladder. These factors are a natural part of the working world and largely unpreventable. Every company will always undergo some attrition.
But when an organization experiences a pattern of people quitting because they simply aren’t happy, that kind of exodus isn’t business as usual.
The Impact of Culture on Retention
Over 77% of the reasons that employees quit could have been prevented by the employer according to the Work Institute’s 2019 Retention Report. Only 9.6% of that number relates to compensation, so what causes the most turnover?
Over 67% of retention problems relate to preventable issues involving organizational culture.
When employees hit the road in droves, negative behaviors are probably in routine play within the workforce. Even organizations that proudly display inspirational values can harbor a weak culture. Formal company values are concepts that business owners want their people to embody, but behaviors tell the real story.
The staff’s everyday actions and attitudes form the corporate culture. If they’re detrimental, turnover is inevitable.
Turnover Pain Points
High turnover is stressful for managers forced to regularly reconfigure their teams and a strain on employees repeatedly asked to pick up the slack. The loss of long-term staff also depletes institutional knowledge and experience.
Rapid turnover of newer team members robs a company of fresh ideas and energy—and retaining recruits is a bigger challenge than many realize. A 2018 Zogby Analytics survey of 1,509 US recruiters shows 30% of job seekers left a job within the first 90 days.
Within that group:
- 34% report bad experiences that drove them away
- 32% specifically call company culture a reason for leaving
When you factor in the drain on morale as people who stick it out watch coworkers depart, all the interpersonal costs take a significant toll on the staff.
And a company doesn’t just lose people and team enthusiasm when it has a retention problem; it loses money.
Business owners experiencing high turnover know it’s a costly problem, but they often have difficulty pinpointing why it’s happening. Many try adding attractive benefits to keep people on board, but extra perks are typically insufficient to sway unhappy people.
For a long-term fix, leaders need to take a hard look at how their employees work together every day. High turnover is a red flag that something’s wrong with the company’s culture.
Warning Signs that Drive Turnover
A dysfunctional corporate culture can manifest itself in numerous ways; two notable aspects of poor culture that drive turnover are a lack of engagement and ongoing internal conflict.
Low Employee Engagement
Employee engagement is a complex subject that has been studied at length, but its definition is straightforward. Essentially, it’s the commitment an employee has to the organization and its goals.
The level of that commitment can be nuanced, but people tend to fall into three broad groups:
- Actively Engaged: Great performers who enjoy their jobs and are strong role models.
- Actively Disengaged. Unhappy, substandard contributors with poor attitudes.
- Not Engaged. People who do a reasonably good job, but without much commitment or enthusiasm.
Actively engaged people typically aren’t looking for alternative jobs, and those who are actively disengaged are often disruptive and better off elsewhere.
The demographic that should worry employers is the group of people who simply don’t feel connected to their organization. A 2019 Gallup poll revealed that more than half of all employees fall into this subset.
An employee survey is one way that leaders can take the pulse of a company’s culture; another is to assess the workplace for behaviors that signal employee discontent.
Clues that employees aren’t engaged:
- Withdrawal: doing the minimum to get by and not participating in non-essential conversations and activities.
- Poor Communication: lack of sharing information and not following up to make sure things get done.
- Silence and Apathy: people who used to be willing to speak up are now quiet and show no interest in presenting ideas or engaging in healthy debate.
- A Decline in Quality: slipping standards, missing deadlines, showing up late.
Engagement is driven largely by a sense of purpose and personal alignment with a company’s overall goals. Leaders who don’t make an effort to foster that kind of connection with employees may wind up with bored, uninspired workers who feel inconsequential.
People who are not engaged with their jobs function on a low-frequency level of discontent. They will always have an eye out for what they consider to be greener pastures.
A strong culture that operates with clearly defined behaviors makes work much more meaningful and rewarding. People feel more in tune with their employer and understand what it takes to excel as individuals and as an organization. The culture builds a feeling of unity and creates an environment where workers can derive that sense of purpose that makes them engaged.
Another sub-category of an unhealthy culture is workplace conflict. It includes an array of poor behaviors that can lead to absenteeism and departures. Some telltale signs are:
- Clashing egos
- Ongoing drama
These and other types of poor behavior generate an atmosphere of conflict and mistrust that seeps into every area of operation.
Even exemplary employees who try to stay out of the crossfire are affected by all the adversity. One study shows that high performers surrounded by negativity are thirteen times more likely to leave an organization than average and below-average performers.
When employees feel that a stressful work climate affects how they do their jobs, the way they feel, and the company’s performance, they begin to update their resumes and scan job listings. If the situation doesn’t improve, anyplace else starts to look better.
Sticker Shock: The Price Tag on Turnover
According to the Bureau of Labor Statistics, the median wage for 40-hour-per-week workers in the US is $51,168 per year, and SHRM estimates the average turnover rate for a company is 19%.
Using that yardstick, The Predictive Index calculates that a 200-person company will rack up an annual turnover cost of over $638,000. That’s a big bite out of a year’s budget.
The main reason behind the astronomical price of turnover is the amount of money it takes to replace people.
An index of monetary and time costs to hire an employee include:
- Recruiting Fees
- Advertising costs
- Travel costs for your staff to attend recruiting fairs
- Time spent in the interview process
- Time to check references
- Pre-employment skills testing and screenings
- Training time (for specific job and company practices)
- Training materials
- Benefit enrollment
- Admin processing (payroll, IT inclusion, etc.)
- Payouts for accrued vacation time and sick days
- Contributions to a health care plan
There’s also a financial loss embedded in the time it takes to get new employees to the same level of productivity as the people they replace. According to business consultant William G. Bliss, the productivity scale can be broken into four periods.
A new employee is:
- 25% productive for the first four weeks
- 50% productive for weeks 5 – 8
- 75% productive for weeks 9 – 12
- fully productivity after week twelve
Bliss points out that the new employee is still receiving a full salary throughout the time they are working up to complete productivity.
Additional costly damage from turnover is likely to surface in lost business.
A gap in service and continuity happens for several reasons when a company undergoes high turnover:
- Disengaged workers on the verge of leaving no longer have a vested interest in a company’s clientele. They’re more inclined to “mail in” their performance.
- Operating with a shorthanded staff can lead to uneven customer interactions and lost sales opportunities.
It only takes one lackluster service encounter to make a customer shop around. And compromised performance isn’t a short-term problem; it takes time to fill holes in the workforce with competent, knowledgeable people.
Customers who follow a departing staff member to their new workplace are another potential source of revenue loss.
The bottom line is that the concrete and hidden expenses of replacing employees are significant. When you factor in that an average of one in three hires leaves a company within two years, the annual turnover cost for a business can soar.
What’s the Remedy?
The best way to stem turnover is to initiate an effective culture initiative. This might entail a “reset” on a problematic culture or an improvement process designed to make a satisfactory one exemplary.
When a company prioritizes a healthy culture, it creates an enriching, supportive environment where people want to stay.
For programs like this to be effective, the ownership of the project has got to start at the top. Business owners and CEOs must demonstrate their passion and commitment to building a great organizational culture and remain involved throughout the process. To achieve the most success, the effort shouldn’t be haphazard or occasional.
Leaders should initiate a change in culture the same way they would any other area of their business that affects revenue—with a plan.
As CultureWise CEO David Friedman explains,
“Since culture is such an enormous factor in any organization’s success, it can’t be something we just leave to chance. Instead, as leaders, we should be purposeful and intentional, and even systematic, in our approach to culture. We should create the culture we want, rather than live with the culture that emerges by default.”
Friedman outlines a practical, eight-step plan to create a high performing culture in the second edition of Culture by Design. He describes how to build a strong culture that increases enthusiasm within a workforce, reinforces shared goals and expectations, and reduces the stress points that can lead people to walk away.
A free, two-chapter download of this insightful book is currently available.
How CultureWise Can Help
For those interested in an ongoing program to transform their company culture, the process that Friedman developed in Culture by Design is incorporated into CultureWise, an operating system for culture.
Two versions of the program are designed to meet the needs of most small to mid-sized companies with different budgets.
Given the high cost of losing and hiring people—and the positive impact that a strong culture has on retention—a program like CultureWise will pay for itself in a short period of time.
The competition for skilled workers is higher than ever; now is the time to build a culture that makes good employees put down roots. Business leaders who want to maintain an engaged, high performing team should take advantage of the culture assistance option on the market that fits their company best.