We can cite various sources that all confirm that the “market power” has shifted from the “buyer” (employer) to “seller” (employee):
- HireRight Employment Screening Benchmark Report, 2015:
76% of respondents predict they will increase their workforce size, with 55% planning significant growth of 3% or more. The majority of respondents said “finding and retaining talent” was their top business challenge – representing the No. 1 concern for businesses of all sizes.
- Payscale, Compensation Best Practices Report, 2015:
“Retention remains a top worry for the third year in a row, as employers feel challenged to keep top performers in an increasingly competitive talent market. Meanwhile, many employees quit their jobs and joined other companies in the pursuit of higher compensation. Finally, employers are struggling to fill positions—particularly for highly trained employees—as they cite a lack of qualified applicants.”
- Visier, Workforce Intelligence, Workforce trends in 2015:
“As the economy continues to improve, the global competition for talent is heightening. Voluntary resignations in the U.S. are now at a five-year high. The number of new hires has almost reached pre-recession levels, and the unemployment rate, as reported by the Labor Department last week, has fallen to the lowest level since July 2008.”
- 2014 WorldatWork survey of HR managers, “Bonus Programs and Practices.”
“Sign-on, spot and retention bonus programs are at an all-time high. The downward trend in program usage for all three bonus programs – which began with the 2009 recession – has been reversed.”
Add to this the macro trend of baby boomers retiring in ever increasing numbers, departing with their knowledge and training acquired over a number of years, and employers are in a difficult position today.
The Cost of Turnover
One obvious issue for employers is the financial and nonfinancial drain that unwanted turnover can have on the company. Research suggests that direct replacement costs can reach as high as 50%-60% of an employee’s annual salary, with total costs associated with turnover ranging from 90% to 200% of annual salary. One study estimated that turnover-related costs represent more than 12% of pre-tax income for the average company. This cost includes both direct and indirect costs, such as:
- HR, hiring manager and staff time (exit interview, payroll administration, benefits)
- Delays in production and customer service; decreases in product or service quality, lost clients
- New hires compensation
- Hiring inducements
- Formal and on-the-job training time and expense
- Productivity loss until the replacement has mastered the job
Upward Pressure on Compensation Levels
LinkedIn’s 2015 US Recruiting Trends report, compiled from a survey of US businesses, landed squarely on compensation as a top issue:
These findings suggested that employee pay will begin to increase at a faster rate than in previous years, which will put pressure on the pay levels of current employees, therefore ratcheting up labor costs. In fact, this is true as merit increase budgets increased in 2015 for the first time in several years. The employee compensation “floor” will also be rising with the broad pressure of the legislated increase to minimum wage levels.
Cost-effective Talent Retention Strategies
Proactive talent retention strategies are increasingly necessary and can be cost-effective. What are companies doing today? According to a recent survey of HR leaders, the top retention incentives combine specific compensation programs with other HR initiatives, including:
|Market adjustment/base salary increase
|Work environment (e.g., flexible schedules, casual dress, telecommuting)
|Promotion and career development opportunities
Action Steps to Take
We can suggest a few proactive steps for you to consider if you have experienced unwanted turnover, can’t hire top talent or just wish to be ahead of the curve:
- Benchmark your compensation levels and pay practices
Nearly one-third of companies doesn’t regularly perform market and compensation analyses to understand the changing dynamics of their respective talent markets. You need to know where you are to cost-effectively address your gaps and risks.
- Review how well you differentiate pay to reflect key talent and top performers
Many companies do not have a planned approach for allocating salary increases and bonuses. Most do not train managers to have honest conversations with employees about compensation or provide them with the means to do so, such as a formalized performance measurement and management programs.
- Consider retention incentives or a variable pay program
There has been a dramatic increase in the use of broad-based incentive plans. Retention incentives can provide a powerful short-term handcuff, while working on broader underlying HR issues that may be causing turnover, and may actually induce higher levels of productivity. A well-constructed variable pay program can help mitigate an increase to fixed compensation costs and effectively motivate employee performance.
The pressure on employers is very high to retain and motivate their top employees, and grow or maintain a skilled workforce. With a scarcity of key skills and rapidly evolving talent demands, companies that don’t adapt will likely be on the losing end when it comes to attracting the talent they need. In particular, small- to mid-sized companies have the greatest risk here, as they don’t possess the depth of talent resident in larger companies.
Contact Donald S. Nemerov
FGMK is a Chicago-based assurance, tax and advisory firm. For more than 40 years, FGMK has recommended strategies that give our clients a competitive edge. As a leader among the top Regional Accounting firms in the Midwest, FGMK is ranked one of the 10 largest accounting firms in Chicago by Crain’s Chicago Business and is amongst the 100 largest accounting firms nationally. Our clients include privately held businesses, global public companies, private equity firms and entrepreneurs. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.
Please visit our website for our complete list of services.