Good vs. Bad Employee Turnover

Introduction

Not all employee turnover is bad, or unhealthy. The financial impact of bad turnover is often hidden, but the ripples are keenly felt throughout an organization. Conversely, the financial impact of good, or healthy, turnover is difficult to hide, and every bit as keenly felt.

The Cost of Bad Employee Turnover

?The cost of bad, or unhealthy, turnover can be staggering. Bradford Smart, the critically acclaimed author of Topgrading and the man to whom Jack Welch attributes much of his success at GE, researched 100 companies and found the cost of a mis-hire to be 5-27 times the person’s actual compensation. In addition to compensation, this range considers things like hiring cost, productivity ramp cost, job vacancy cost, job coverage cost, loss of business, loss of production due to lower employee morale, reputation damage, and employee disengagement costs.

That we are likely so skeptical about Smart’s cost estimate suggests we don’t understand the far-reaching impact of losing people – belying the claim that “people are our most important asset.” Admittedly, part of the dilemma stems from the difficulty of trying to calculate opportunity costs associated with turnover. This dynamic led Ed Deming, the father of Total Quality Management (TQM), to famously say, “Some things are unknown and unknowable.”

Deming used the example of a business that stocks out of an inexpensive part, forcing one of their best customers to source it from a competitor. As a result, that customer ends up moving all their business to that competitor. Imagine that they then influence other customers of the company to do the same. So, what was the cost exactly? Was it the lost gross profit on a part worth a couple of dollars? Hardly! There are manifold downstream impacts as a result.

Even the low end of Smart’s range, cut in half, and then by half again, is still a staggering number. These are profits organizations forego to excessive turnover – profits that could be reinvested to strengthen vital competitive advantages, as well as distributed to employees.

Because numbers always tell a story, quantitative analysis is an important analytical tool for business leaders. To cite Deming again, “To measure is to know.” Considering the magnitude of its impact, it is mystifying why more companies do not measure employee turnover. Even among those that do, most stop at differentiating between voluntary turnover (resignations and retirement) and involuntary turnover (terminations). High voluntary turnover can point to managerial deficiencies (based on thousands of hours of Gallup exit interview data, the most common reason people leave companies is their boss). High voluntary turnover can also point to a weak or toxic culture that breeds employee disengagement. On the other hand, high involuntary turnover can point to poor planning (e.g. hiring a person when long-term demand is not sufficient to warrant keeping them). More frequently, however, it points to deficiencies in both a company’s hiring process and mindset concerning talent. While helpful, this differentiation is insufficient.

To bring the turnover story into better focus, it is vital to further differentiate between types of employee turnover. Turnover of “A Players” (employees with ‘A’ capabilities or ‘A’ potential) should be measured and contrasted with ‘B,’ ‘C’ and ‘D’ Player turnover. “A Players” are the driving force of a company’s productivity. They exist in every role, from janitor to CEO.

In his book, The A Player, Rick Crossland provides helpful definitions, which can be summarized:

·????they represent the top 10% of their respective talent pool

·????they anticipate and fill in the gaps before the need arises

·????they would be enthusiastically rehired

·????they exhibit great attitudes and work ethics

·????they align with the company’s culture and exemplify its values

·????they achieve 2-3 times more results than their counterparts

·????they drive additional efficiency

·????they don’t need to be closely managed

·????they regularly wow the team with their incites

“A Players” like to work with other “A Players." Besides the obvious trade-offs associated with settling for less than the “A Player” attributes listed above, non-A Players serve to demotivate “A Players,” often leading to excessive “A Player” turnover.

According to Smart, most businesses average a 25% “A Player” hire rate. While there is no substitute for sanctified wisdom when it comes to hiring people, that wisdom is precisely what calls for a more robust hiring process that nets a greater percentage of “A Players.”

Once a person is hired, it is their leader’s responsibility to develop them in such a way as to ensure their potential is fully realized. If a person proves not to be an “A Player” or lacks ‘A’ potential in their role, then they need to be given a different role (if available) where they can perform at an “A Player” level. Otherwise, they need to work somewhere where they can.

Business leaders who knowingly hire and/or tolerate ‘B,’ ‘C’ and ‘D’ players are acquiescing to mediocrity. Gen. Colin Powell speaks from beyond the grave to the systemic mindsets of such people when he says, “If you are going to achieve excellence in big things, you develop the habit in little matters. Excellence is not an exception; it is a prevailing attitude.” And hiring is no “little matter.”

No company is for everybody, but for everybody a company does employ it has the duty to enrich. Your company has a duty to leave each employee better off at the end of a year than they were at the beginning (financially, personally, professionally – and not necessarily at the same time or in the same order).

Conclusion

When I started Stalwart – the company I was blessed to lead – we were, like most companies, mediocre in this area. After reading Smart’s book, I decided to measure turnover and discovered that our “A Player” hire rate was ~25%! That is when our leadership team became far more intentional about talent acquisition and retention and went to work improving the inputs.

While we never intentionally hired anyone we did not think was an “A Player” (at least intuitively), this new focus led to the development of a world-class process that reduced our hiring mistakes to 15%. Additionally, our leadership team got more comfortable making the hard decision to off-board someone as soon as it was discovered that they were not – and would never be – an “A Player” at our company.

At the time we sold the company, using a 36-month average, we had achieved an “A Player” hire rate of 85%. Our “A Player” voluntary turnover rate was 3%, our ‘B’ and ‘C’ Player involuntary turnover rate was 15% and our “A Player” (including ‘A’ potential) mix was 98%.

What can a company achieve with this kind of team? Based on Sageworks’ benchmark data and competitive intelligence, our financial results were consistently in the top 10% of our industry. As measured by top-drawer customer loyalty firm, Walker Information, our customer loyalty ratings were 100% for our last 12 years in business. And after attending one of our monthly “All-Hands” meetings, our acquiring company’s seasoned organizational development expert remarked: “I have never seen that level of employee engagement.”

Counter intuitive as it may seem, some turnover is good. We should want our involuntary 'B' and ‘C’ Player turnover rate to mirror the inverse of our “A Player” hire rate. This reflects a leadership team’s resolve to develop and keep only “A Players” and that resolve is where the process improvement journey must begin.

Healthy turnover reflects high “A Player” hire and retention rates that result from a robust hiring process, a great corporate culture, and strong leadership. All three of these components are crucial and must be intentionally developed and integrated. On the other hand, high “A Player” turnover, high voluntary turnover, excessive involuntary turnover, and high ‘B,’ ‘C’ and ‘D’ Player mixes are all unhealthy and indicative of systemic problems within the organization’s leadership.

Everyone can be an “A Player” at something – for your company or for someone else’s. Since people spend most of their waking hours at work, making sure that the work they do is meaningful and fulfilling is important. Placing them in roles not suited for their giftedness, or failing to develop their potential in those roles, ensures they will never be “A Players” under your leadership. This is bad for you and your organization, but for them it is undignified.

I write with the settled conviction that all people are made in the image of the triune God and, as a result, have inestimable value. We should treat them commensurately. I’m also convinced – because I’ve seen it firsthand – that when employees are treated that way, they give their all to be an “A Player” in return. ?