Just a 5 percent increase in employee loyalty can increase profits by as much as 50 percent. From The Carrot Principle: How the Best Managers Use Recognition to Engage Their People, Retain Talent, and Accelerate Performance by Adrian Gostick and Chester Elton
Like a black hole in space, corporate turnover absorbs resources at an astonishing rate. It is far and away the most significant uncalculated expense in corporate America. Some estimates to replace a departing employee range up to a stunning 250 percent of that person’s annual salary. In this case, a little prevention is definitely worth a pound of cure. According to author Fred Reichheld, just a 5 percent increase in employee loyalty can increase profits by as much as 50 percent.
The reason turnover has such a high cost has to do with the type of people who are leaving. If most of the people who left were poor performers, turnover would be a good thing. But it’s not. Organizations that fail to effectively recognize their employees are losing the very workers they wish they could keep to meet their goals.
Turnover is an estimated $5 trillion annual drain on the U.S. economy, making it the most significant cost to its economy and one of the most ignored economic factors in business history. Compounding the problem is the fact that with the global economic meltdown, the shortage of skilled, talented workers is even more acute. We are all in a race for talent, and the best place to find talent is under our noses. We must retain our solid and our outstanding performers by keeping them engaged. And yet some 75 percent of the U.S. workforce is not fully engaged on the job. The United States is not alone in this predicament. In the United Kingdom, surveys show that more than 80 percent of workers lack real commitment to their jobs. Estimates of the cost of disengaged workers on the British economy range between 37 and 39 billion pounds sterling per year.
An insidious result of turnover is the psychological damage to the employees who stay. Turnover decimates the remaining workplace because many employees mentally follow their departing colleagues: they worry about their futures, passively wait for things to get better, or actively look for new positions. It is becoming increasingly difficult for leaders to ignore the destructive impact of turnover. In our travels, a majority of the CEOs and senior leaders we work with cite retention of key employees as the most important factor to their success — not one of but the key factor.
In response to the slow bleed, many leaders and organizations have sought to remedy matters. The Society for Human Resource Management periodically surveys employers on retention initiatives. Common initiatives include tuition reimbursement, competitive vacation and holiday benefits, higher pay, and better employee selection methods. The results of such perks and methods on employee trust levels have been underwhelming at best, to the consternation of the leaders who designed them. “Why isn’t it working?” managers wonder. “After all, we’re giving employees what they want.” And there’s the problem: employers don’t know what employees really want.
A fascinating survey has been conducted three times since 1949, when author Lawrence Lindahl first began studying human behavior at work. Each time the results have been the same. In the survey, managers were asked to name what they thought employees in their organizations wanted. Then management’s list was contrasted with the list prepared by employees. Every time, managers guessed that good wages and job security would top employee lists, but their people always cited “feeling appreciated” and “informed.” While a serious disconnect exists, it’s clear what employees really want.
So what is working? Overwhelming research points the finger at recognition. A Watson Wyatt Reward Plan Survey of 614 employers with 3.5 million employees showed that the average turnover rate of employers with a clear reward strategy is 13 percent lower than that of organizations without one. In addition, Gallup’s study of nearly 5 million employees reveals that an increase in recognition and praise in an organization can lead to lower turnover, higher customer loyalty and satisfaction scores, and increases in overall productivity. And U.S. Department of Labor statistics show the number one reason people leave organizations is that they “don’t feel appreciated.”
Perks like tuition reimbursement can never take the place of a frontline supervisor who sets clear goals, communicates, builds trust, holds employees accountable, and then recognizes in an effective manner.
That’s what KPMG LLP, the U.S. audit, tax, and advisory firm, discovered when it implemented its national recognition program, Encore. By providing managers with a formal way to recognize their employees and teams, the firm has improved overall employee survey scores.
On its annual work environment survey, KPMG asks, “Taking everything into account, this a great place to work.” In the three years since the introduction of an effective recognition system, positive employee scores on that question have increased more than 20 points. Now, it’s important to note that the three years in question were also a time of tremendous scrutiny and pressure for the accounting industry, with employee satisfaction in most of these firms nearing all-time lows.
Sylvia Brandes, director of compensation for KPMG’s 19,000 U.S. employees says, “Recognition has become a fever.” She adds that KPMG has done its homework through analysis of the effectiveness of its recognition efforts. “What we found is that groups that do not present a lot of Encores [awards] in their organizations tend to have greater turnover. We also found turnover among people who received an award was half that of those who hadn’t received an award. And we found a correlation between functions or organizations that had higher scores for recognition and the number of Encore awards that were given within that group.”
ABOUT THE AUTHORS
New York Times bestselling author Adrian Gostick is the leader of O.C. Tanner Company’s recognition training and publishing practice. His books The 24-Carrot Manager and A Carrot a Day are sold in more than fifty countries around the world. Chester Elton is coauthor of the bestselling Carrot books, a popular lecturer on motivation, and an influential voice in global workplace trends. He is O.C. Tanner’s lead recognition consultant and researcher and works with numerous Fortune 100 clients. They are the authors of The Carrot Principle: How the Best Managers Use Recognition to Engage Their People, Retain Talent, and Accelerate Performance (Copyright © 2007, 2009 by O.C. Tanner Company).
- Read the Introduction to The Carrot Principle: How the Best Managers Use Recognition to Engage Their People, Retain Talent, and Accelerate Performance
- Read Chapter 1
- See the book’s Table of Contents