January 15, 2020
When employers need to maintain or add to their workforces, an age-old question emerges: Which is better — recruiting or retaining workers? In other words, is it more cost-effective to keep your current talent pool versus accepting turnover as a fact of business and focusing more on attracting, hiring, onboarding and training new employees? Let’s take a closer look at critical factors to consider:
Economic Markets Influence Both Recruiting or Retaining Workers
When it comes to employee compensation, there are two types of economic markets: An “Employer Market” and an “Employee Market”:
- An Employer Market condition exists when there is an abundance of talent or economic downturn, which leads to the employer having more leverage in negotiating compensation and working conditions.
- An Employee Market condition exists when there is a scarcity of talent which leads to employees having more leverage negotiating compensation and working conditions.
In other words, in an employer market, the employer has the upper hand; in an employee market, the opposite is true, with employees having more leverage.
It stands to reason, then, that competitive employee compensation is especially important – and potentially challenging – during an employee market, for both retention and recruitment. Employees who are satisfied with their pay and benefits are more likely to remain in their current jobs (especially if also satisfied with what they do, the work environment, corporate culture and other intangibles). On the other hand, dissatisfied employees are more likely to leave their current employers because attractive external opportunities may be plentiful.
For a sustainable competitive advantage in any marketplace, the best strategy is to always view your employees as an investment and not an expense. Tactically, how can you demonstrate this philosophy?
- Make investments in your employees. These can take many forms, from compensation to benefits to technology improvements to training or career development.
- Make sure your compensation package is competitive. Check the value of jobs in your market; this data will indicate if your company’s compensation programs are on target or need adjustment.
- Upgrade your compensation programs if necessary, especially in an employee To be a marketplace leader who can attract and retain superior talent, position your company at or near the top of your industry’s compensation and rewards programs.
- Consider programs (besides merit) that can help your top performers get ahead. Make sure you can differentiate your total reward programs (both compensation and benefits) from your competitors.
Multiple Generations in the Workforce Make Recruiting or Retaining Workers Tougher, Too
It has become commonplace for as many as five distinct generations (Baby Boomers, Millennials, Gen X, Gen Y and Gen Z) to cohabit the workplace. With Baby Boomers putting off retirement until later in life, this can make it difficult for younger workers to advance. This, in turn, increases the likelihood of employee turnover among younger workers.
Employee Turnover and Recruiting Replacement Workers Are Costly
Deciding whether recruiting or retaining workers is optimal for your organization may ultimately come down to economics. If your business model can withstand frequent employee turnover, adjust your compensation programs accordingly. But remember this: the cost of employee turnover is typically from 1.5 to 3 times the employee’s annual salary but is almost always at least 20% of an employee’s annual salary.
In other words, to replace an employee who was earning $50,000 per year, your cost will likely be at least $10,000 and could reach $150,000 (or even more, especially for highly skilled and specialized workers). From entry-level workers to executives, the cost of constant turnover can be staggering. Consider this example:
- Your organization experiences 50 terminations each year: 35 of those are entry-level employees and 15 are mid-level employees.
- If turnover cost is only 20% for entry-level workers (at an average annual salary of $30,000 per employee), the total annual replacement cost for this segment is $210,000.
- If turnover cost is 150% for highly-skilled workers (at an average annual salary of $65,000 per employee), the total annual replacement cost for this segment is $1,462,500.
Combined, your turnover cost for those 50 employees would be nearly $1.7 million dollars! That money could, in large part (with reduced turnover), be redirected to enhance your compensation and benefit programs.
Bottom Line: The Right Approach is Up to You
When it comes to recruiting or retaining workers, your company, your market and your industry will ultimately determine the best approach. Almost always, however, your best strategy will include ways to keep your best talent on board while replacing poor performers with more productive workers.
Before you can put this strategy in motion, of course, it is essential to know your company’s competitive position in the marketplace. This requires market benchmarking, preferably at least every two years. (It’s not enough to merely increase pay levels a few percent every year, as certain positions may advance in your market more quickly than others.)
If your HR team doesn’t have the resources, expertise or time to perform market benchmarking, contact us today at 317.589.8529. At Total Reward Solutions, we specialize in employee compensation consulting services that can help your organization attract and retain key talent.
Cassandra Faurote
About Total Reward Solutions:
Total Reward Solutions is your trusted partner for compensation services. Led by Cassandra Faurote, professionally certified Compensation and Human Resources expert and author of the book Compensation Sense 101, Total Reward Solutions offers a broad range of compensation and total rewards consulting services to help your organization attract top talent, motivate employees and retain top performers. We can partner with you on a project basis, on retainer, or as your total outsourced solutions provider for compensation services.
Call us today at 317.589.8529 to discuss how we can help your organization develop and implement competitive and effective compensation and total reward programs.