17 July 2014

The Most Expensive Mistake Businesses Make and 5 Ways to Fix It

“If I were running a company today, I would have one priority above all others: to acquire as many of the best people as I could [because] the single biggest constraint on the success of my organization is the ability to get and to hang on to enough of the right people.”
Jim Collins, Good to Great

According to the newest figures released from the U.S. Department of Labor’s Bureau of Labor Statistics, more than 288,000 new jobs were added to the U.S. economy in June, and jobless claims dipped to 6.1%; their lowest point since 2008. This great news also means businesses are on the uptick for hiring, and subsequently, training and retaining employees.

But first, just how much does the hiring process cost?

In an interview with Entrepreneur Magazine, Bill Aulet—managing director of the Martin Trust Center for MIT Entrepreneurship and author of Disciplined Entrepreneurship, said “choosing the wrong team is the single costliest error entrepreneurs make, resulting in not only lost income and time but depleted morale.”

The sticker shock of replacing an employee speaks for itself:

  • 16% of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year). For example, the cost to replace a $10/hour retail employee would be $3,328.
  • 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year). For example, the cost to replace a $40,000 manager would be $8,000.
  • Up to 213% of annual salary for highly educated executive positions. For example, the cost to replace a $100,000 CEO is $213,000.1

That’s a lot of money for any company, especially for small- to medium-sized enterprises, and it’s imperative to make sure that investment will pay off. Here are five things you can do to make sure that your company gets a great return on its biggest investment—its people.

1. Invest in the whole employee

Not only is it important to train and educate employees, it’s imperative to foster an environment that will help them realize their full potential. That means focusing not just on metrics and measurement, deadlines and duties, but also quality of life, enjoyment, and a sense of belonging within the organization.

Dr. Marty Martin calls these “other” characteristics of an employee his or her input factors: “the drivers and drainers in the employees’ lives that affect their job performance.” Input factors include:

  • The employee’s best time of day to get work done;
  • The employee’s family and home life;
  • All aspects of the employee’s health: physical, mental, and emotional;
  • Other stressors the employee has: being a caregiver to aging parents, being pregnant, being the only income-earner in the home, etc.; and
  • What community or hobby events the employee is committed to.

These input factors directly correlate to employee engagement. Think engagement doesn’t matter? Think again. Two-thirds of highly engaged employees reported that they had no plans to leave their company, while only 3% of them were actively looking, compared to 12% and 31%, respectively, for disengaged employees.

2. Encourage employee autonomy

Daniel Pink, author of Drive: The Surprising Truth About What Really Motivates Us, cites the power of autonomy in employee retention and satisfaction: In a study from Cornell University, half of 320 small businesses examined demonstrated command and control management practices, while the other half gave employees autonomy. “Those businesses that gave employees autonomy grew 4 times faster than the businesses using command and control management and experienced only 1/3 the turnover than their command and control counterparts.”

As Pink says,

“Control leads to compliance; autonomy leads to engagement.”

3. Know the risks of high turnover

The hiring process is costly. According to this article, it costs about 38% of an employee’s annual earnings to replace him or her including training and recruitment “as well as the costs of the separation process and losses in productivity because of the disruption in workflow. A revolving door employer doesn’t only lose a single staff member’s productivity; the entire organization suffers. Here’s how:

  • Understaffing: Someone has to pick up the slack when an employee leaves. Employees who are doing their own jobs as well as covering for unfilled positions should only be used in an emergency basis.
  • Knowledge gap: Chances are, the employee(s) who are “filling in” for the vacant job don’t know everything about that job—and they shouldn’t! They’re too busy doing their own! When turnover happens, your organization can lose critical information that can slow it down, or worse, make it more susceptible to embarrassing mistakes because the people who know what’s going on don’t exist.
  • Burnout: When stretched too thin, employees have to do other jobs and can’t do their own jobs well. That’s exhausting, and if done habitually, you’ll risk burning out the remaining staff.
  • Low morale: One of the most obvious and detrimental effects of high turnover is low morale. In “The High Cost of Low Morale”, the author says combatting low morale requires managers to “ensure employees are being effectively utilized through job enrichment. It includes understanding employees’ abilities and ensuring jobs provide a challenge to utilize their full capacity, recognizing achievement and giving employees an opportunity to grow and learn new things.”

By focusing on retention, your organization will limit its exposure to these toxic effects of turnover.

4. Invest in employee education and training

“Recently, I was asked if I was going to fire an employee who made a mistake that cost the company $600,000. No, I replied, I just spent $600,000 training him. Why would I want somebody to hire his experience?”

We love this quote from Thomas J. Watson Sr., former chairman and CEO of International Business Machines—that little company we know as IBM. His quote speaks to the heart of what we help companies do: provide solutions to help companies make their people, and therefore, their companies—better.

It seems obvious, but taking the extra steps involved in training will pay dividends. Tools like call recording make training employees easy and effective. By recording real customer interactions and using them in training, your team members will gain valuable experience without feeling like they are risking potential profit. Be sure you record the training calls, too, and review them for rewards and to troubleshoot problematic areas with your employees.

“If you don’t invest the time to do it correctly today, you will spend more time and money in repairing mistakes tomorrow.”
Don Paullin

5. Tune in to your employees

Pay attention to what is going on in your office when you’re there (and even when you’re not).

  • Keep a pulse on your team members. Take the time to ask individually what is going well for them and what they think could be improved, and then act on their feedback. Your employees will notice whether or not you’re making the changes they suggest.
  • Honor your team’s feedback. Don’t skip annual reviews.
  • Conduct exit surveys and interviews. Turnover is inevitable, so use those instances where an employee leaves to better the company. These interviews are often the least filtered, and they can give you the most accurate idea of what’s going on—and what’s really making your employees want to go elsewhere.
  • Benchmark your employee retention rate so you can do something about it. This is a great article outlining that process.

These five tips for maximizing your biggest business investment won’t guarantee you won’t ever need to replace an employee, but they can help you avoid the turnover that can cost your company.

We’d love to talk with you about how we can work together to simplify the training process for your company, freeing you to develop and sustain a community with your employees and customers. Give us a call or contact us about how we can help.