What Does Your Company Smell Like?

You know that the more you like something the more likely you are to eat, drink, smell, wear or buy “it” – the more loyalty you will exhibit towards it.

No surprise, right? Right.

Not just true about what you buy, true of everything including where you work – especially where you work. And, in the pandemic recovery world employers have come to find a growing employee defection rate. According to The Bureau of labor Statistics* most recent data (November 2021)

• The number of people who quit their jobs increased in November to a series high 4.5 million (+370,000).
• The “quits rate” increased to 3.0 percent, matching the series high in September.
• The largest increases in the quits rate were in accommodation and food services (+159,000); health care and social assistance (+52,000), transportation, warehousing, and utilities (+33,000).
• The number of quits increased most in the Northeast, South, and Midwest regions.

As recently as yesterday, Sunday January 23, The New York Times sounded the alarm in an article called, “You Quit, I Quit, We All Quit. It’s Not A Coincidence”**

One might think all of this data has intensified the desire to create working environments and corporate cultures that employees embrace – to create employee loyalty. Yet so few companies have fully committed to that goal and so few companies have truly meaningful differentiating cultures.

So, here is a simple test.

• Randomly ask one of your employees, your co-workers or yourself, “What makes working here special to you?” If the answer is “Nothing” or “I don’t Know”. You have a problem.
• Follow that up with” “Why do you work here?” If the answer is solely “for the money” you have a bigger problem.

Why Haven’t More Companies Made Corporate Culture A Strategic Imperative?

I suspect that the primary reason is because most companies and their CFOs don’t fully grasp the cost of employee defection. When you do, you will understand why investing in creating a culture people want to be part of is such an important strategic investment. You may even come to recognize that corporate culture initiatives are even more important than your product or production R&D initiatives.

To demonstrate, I have pulled together a number of assumptions based on the fine work of the sources noted throughout. Let’s take a close look at these costs. For my example let’s start by assuming the leaving employee is receiving a $78K a year salary / $1.5K a week salary

The costs of this employee’s defection will fall into 2 main buckets:

1. Visible/tangible/ easily quantifiable – cost of the person leaving, as well as the costs associated with hiring, training and loss of productivity
2. Invisible/ intangible / harder to quantify – moral, reputation and ease of attraction costs

Let’s look at these in detail …

Visible/Tangible/Easily Quantifiable Costs are many and can represent anywhere from 70%-95% of an employee yearly salary

Leaving costs include employees who must fill in for the person who leaves before a replacement is found; the lost productivity of the employee while he is still in his position but not fully concentrating on his job; the cost of a manager or other executive having an exit interview with the employee to determine what work remains, how to do the work, why he is leaving, etc.; the cost of training the company has provided this departing employee; the cost of lost knowledge, skills and contacts of the departing employee; the increased cost of unemployment insurance; and the possible cost of lost customers the departing employee is taking with him (or that leave because service is negatively impacted). The sum total of these costs can be as much as 85% of this position’s base salary. Assuming an employee gives you 2 weeks’ notice, you are lucky enough to find a replacement within 2 weeks of the person’s leaving and the new person starts 2 weeks later – that’s 6 weeks at 85% That works out to $78k/52*6*85% = $7,650 or ~9% of the defecting employee’s salary – and that is if you’re really lucky.

Training Costs include any new employee orientation that explains benefits, basic policies, company history, etc.; specific training for the person to do his job, such as computer training, product knowledge, industry knowledge, and the day-to-day duties to get the job done. Even though this may be informal or on-the-job training, the time it takes for various people to impart this knowledge is costing money – especially since people who are knowledgeable enough to train others are probably also highly valuable the company. And according to Training Magazine***, the average cost for training a new employee is significantly higher for small companies than larger ones Set the sum total of these costs at approximately 13% of the positions’ base salary or $10, 500?

Lost Productivity Costs because no employee hits the ground running at full speed. Bill Bliss**** developed the following formula to quantify these costs:

????A new employee is only 25% productive for the first four weeks

????50% productive for weeks 5 – 8

????75% productive for weeks 9 – 12

????And will finally reach full productivity after week twelve.

Since this person is on full salary during this period, there are still more lost productivity costs. Naturally, for more senior-level positions, or those requiring longer periods of time to develop full productivity, the costs will be higher. During this time of lost productivity, the persons’ supervisor is also spending more time instructing, reviewing work and possibly correcting mistakes. (There will be some mistakes that are not caught right away and will cost money to correct down the line such as with a customer who receives an incorrect price, invoice or actual shipment due to the new persons’ error.) Put the sum total of these costs at approximately 32% of the positions’ base salary or $25,500

Adding the subtotals of each major category discussed above gives a total tangible cost of employee defection at $55,650 if an employment agency is not used and $73,650 if one is used (70-95% of our defecting employee’s salary).

Invisible/ intangible / harder to quantify – morale, reputation and ease of attraction costs are conservatively an additional 10% of a defecting employee’s salary

When an employee leaves a company, he/she does so believing he/she going to a “better” place – however he/she defines it. Part of proving to yourself you made the right choice is talking about your decision with others – coworkers, friends, family, etc. And the nature of that conversation always comes around to why the place you are going to is better than the place they’re at now. To coworkers it’s a sign there are better options available; to friends and family it’s a sign that there are better places to work.

The negative impact on internal morale (and therefore productivity and other employee loyalty) is significant One of the first changes you’ll notice after losing an employee is a decrease in employee morale. As more employees leave, the ones remaining may have lost a valuable work friend, which matters more than you might think. According to a study reported by?Office Vibe and conducted by The Gallop Organization*****, 70% of employees say that having a friend at work is?the most?crucial element to a happy work life. What’s more, 50% of employees with a best friend at work reported feeling a stronger connection to their organization than those who don’t.

The negative impact on your company’s reputation (and therefore the ease of attracting new employees) is hard to quantify but it clearly has an impact; the worse your reputation the more you have to pay to attract talent and the longer it takes to do so.

To be conservative let’s say the invisible/intangible/harder to quantify costs represent 10% of the departing employee’s salary. In our example that means $7,800. However, if this employee’s departure starts an increase in defections than this cost will become a much higher percentage of the departing employees’ salaries.

The True All-In Cost of Employee Defection

?So, now if we take all of these costs together, the true cost of employee defection in our example is $63,450 - $71,450 -- ~ 80% - 92% of the defecting employee’s annual salary.

Isn’t it time you made a strategic investment in developing and ever evolving a relevant and differentiating corporate culture your employees embrace? Imagine if you were to deploy 25% of this cost per employee to defining, creating and fostering a meaningfully differentiating corporate culture?

As you begin to think about how to action this take a look at this video by a brilliant professor(, Sumantra Ghoshal), at The London School Of Economics; it is simply referred to as “The Smell of The Place”. While the video is dated because he made these remarks at the World Economic Forum in Davos over 10 years ago, the message is clear and has never been more important than it is today.

https://www.youtube.com/watch?v=YgrD7yJwxAM

How Will You Know If You Are Succeeding?

• You will feel it in C Suite Meetings. – These executives respect and trust each other. Rather than critic or question each other’s ideas, they talk passionately about opportunities to grow the business and build on each other’s ideas?
• You will hear it in team meetings?- These people like working together. They trust each other. They do not merely wait their turn to report out on the status of their projects, they provide feedback, building on each other’s ideas and soliciting input on their efforts. Trusting their colleagues to critique your work is a clear sign that a team respects, trusts and likes working with one another.
• You will see it when you walk the halls?– the next time you walk the halls of your organization what do you see? Do you see people look up and smile or do you see people keep their heads down with an oh so serious, dare I say, worried look on their faces? Do they look cautiously optimistic or recklessly disillusioned?
• You will know it when you hear people say more often than not,?“I Love My Job”?from the top to the bottom of the organization. You can see it in their faces when you ask, “How’s work?” That doesn’t mean they always love the task at hand but fundamentally they like the culture of the company they work for.
• And one day you might just smell it when you walk in the doors.

A few final thoughts

• This is real work to create and sustain a meaningfully differentiating corporate culture and it takes trust and respect to accept advice and criticism from others.?The good news is that there are many tools at your disposal to help you get there.
• I don’t mean this to sound like creating a cult.?But?I do mean that creating and sustaining a culture requires emotional intelligence – you need to be able to use all your senses to create and sustain a meaningful culture you and others can feel and smell.

You will know it when you experience it.?You feel exhilarated; you feel part of a team, a team that is constantly moving forward and moving forward together. And then when you ask folks what’s special about working in your organization you will get an ear full. it doesn’t get much better than that!

Sources:

* ????Bureau Of labor Statistics January 2022: https://www.bls.gov/news.release/pdf/jolts.pdf

**??“You Quit. I Quit. We All Quit. It’s Not A Coincidence”NY Times, January 23, 2022): https://www.nytimes.com/2022/01/21/business/quitting-contagious.html?searchResultPosition=1

*** Training Magazine. "2019 Training Industry Report ." Accessed July 24, 2021.

**** Bliss & Associates. "Who We Are ." https://blissassociates.com/who-we-are/#MeetOurTeam

*****Office Vibe