Don’t Lose Your Best People: Competing in the Labor Market

Episode #159 Don’t Lose Your Best People: Competing in the Labor Market

A few weeks ago, I had an in-depth question from one of our listeners who would prefer to remain anonymous. She said:

“We have some major issues around staff retention, which are being driven by market shifts. Due to closed borders, and not enough skilled professionals in our PR consultancy, salaries are significantly inflated. With workload so heavy and so much work out in the market at the moment, our competitors are tapping our people on the shoulder and head hunting them from us. They’re willing to pay upwards of $25 to $30,000 more for the same roles. Our remuneration constraints and business profitability, limits our ability to match the market, which means we’re losing staff. Getting the executive team and board to understand what the fall-outs might be is proving difficult.

How do you think we should respond, given the constraints we have? If we do decide to pay people more, what happens when the market falls?”

This is a great question and I know that lots of people are facing similar issues in a hot labor market at the moment.

• I’m going to open by revisiting an old episode, Episode 101

• I’ll talk about some of the considerations you need to think through when making decisions on who to keep and why

• I’ll finish with a few do’s and don’ts how to minimise your undesirable turnover without stunting your desirable turnover

Revisiting Episode 101: Keeping the Ones You’ve Got

A little over a year ago, I did an episode on talent retention, Episode 101: Keeping the Ones You’ve Got. I covered some fairly key concepts on staff turnover. I wanted to give you a few excerpts to get you up to speed in case you haven’t listened to that episode for a while.

The first key concept is the cost of turnover. We often underestimate how much it costs when we lose someone and need to replace them. Even the direct tangible costs that we can see are really high. Then on top of that, there’s the loss productivity, the uncertainty of direction for the team, the lag in delivery of key initiatives, and the hesitation of waiting for a potential change in direction, because let’s face it, every new leader wants to stamp her own authority on the role. Here’s a cut from Episode 101:

Let’s look at the phenomenon of staff turnover. Turning other people is extremely costly. No matter what source you look at, they’ll tell you it’s about 30 to 40% of the annual salary of the role that it costs you every time you turn someone over. So for a $100,000 employee, that’s around $40,000 when they turn over. But at the high end of the market, it’s easily upwards of 60% of the annual cost of the role.

So in my experience, let’s just have a look at what a $500,000 base role looks like. If you have to change someone in that role, there are some very tangible costs that you have. Often, you’ll have to pay out the contractual entitlements of the outgoing executive, which can be in the range between a $100,000 to $200,000 easily.

Executive search fees to start looking for the new person can be 30% of year one remuneration and reward. So there’s another $200,000 there.

And sometimes to secure the right person that you want for the role, you’ve got to pay a sign-on bonus to entice them to come across from their existing organization. There’s a huge amount of money, right there just in, changing out the person, that’s not even counting the intangibles.

Some of these intangibles include things like disruptive to the business, loss of productivity, the cost of bringing the new executive up to speed, because they’re not going to go and hit the ground running straight away. You’ve got to spend time educating them and bring them into the culture. Then of course they like to change direction once they have their feet under the desk, because every exec wants to make a mark and put their own stamp on things. The cost of turning over a senior executive role is enormous.

This tells us that obviously, due to cost and productivity factors, we want to get our turnover pretty right, but it doesn’t mean we should be trying to achieve zero turnover. That’s not good either. Let’s go back to the episode to hear why.

It’s really important when we think about turnover, that we realise there are two types. There’s desirable turnover and there’s undesirable turnover. Despite the cost of turnover, you do want to have a healthy level and you should be prepared to pay for it. And this is in desirable turnover. This is when people leave the organization who can’t do their job, who don’t fit the culture, or for some other reason, you would prefer to replace. If this desirable turnover isn’t between 5 to 10% in your organization, chances are, that you’re not setting high enough standards for behavior and performance.

Undesirable turnover on the other hand, is when people you really want to keep decide that they want to leave the organization. This is the type of turnover that you want to be as low as possible or even non-existent. But you have to think about turnover in this way. It’s misleading if you don’t categorize it. Sometimes the best way to improve your organizational performance is to increase staff turnover, and that’s of course, the desirable staff turnover. I’ve led portfolios on several occasions across my career where the turnover in some parts was way too low. And our ratio of undesirable turnover to desirable turnover was way too high. The moral of the story here is target a healthy level of turnover and know why you’re doing it.

The guidance I have later on in this episode is all geared towards how to minimise your undesirable turnover. In other words, how to avoid losing your best people. Now let’s think about the role that money plays in people’s decision to either join or remain employed in any particular organization.

Although a lot of people are driven by money, this is almost never their main reason for staying in an organization once they’ve accepted a role.

Here’s a rule of thumb: you have to pay people enough money that you take it off the table as an issue. This is what we call a hygiene factor. It has to get to an acceptable level and then beyond that, it’s not really the main driver. In my experience when people become dissatisfied with what they’re paid, this is usually for non-financial reasons.

For example, in the hiring process you may have misrepresented the role in some ways, and you’re actually asking a lot more of them than you’d indicated at interview. For example, someone turns up in your organization for new role and suddenly discovers, “Oh, hang on a minute this organization, we always come into the office on Saturdays and work for half the day.”

Now if they didn’t know this beforehand, that could be a source of some level of dissatisfaction. Or maybe they see someone who’s a passenger getting paid more than they are. Why should I work my butt off when you’re paying Jethro more than me to surf the internet all day, really? Or maybe perhaps in some way, you’ve broken the psychological contract with that employee, and their immediate reaction is to go to the salary issue. I’m not getting paid enough for this shit. This is what happens when they have a bad boss. And there’s this cliche that says people join organisations, but they leave bosses. I’m sure you’ve heard that. So to take money off the table as an issue, all you really have to do, is ensure that your people feel as though the expectations that you put on them are consistent with the money you’re paying them. Don’t be unrealistic about what you can get people to do for the amount of money you’re willing to pay.

In the case of today’s question, taking money off the table as an issue isn’t just about starting salary. It’s about the relativity of people’s current salary with what the market is currently paying.

In many companies, particularly larger ones, annual salary reviews tend to explore how a role has moved in the market. And people’s salaries are adjusted to keep them within a certain band, compared to where the market currently sits.

For example, if your company’s rem policy is to pay people within the second quartile, of the market range of salaries for that role, then a whole salary band can shift, to accommodate that market relativity as supply and demand forces work themselves out. But this is much harder in small businesses where you might be heavily constrained by your ability to pay, and also you don’t have as much market intelligence to work on, to know what’s happening around you.

making decisions on who to keep and why

I want us to think really hard about who we need to keep and why. This isn’t everyone, as we heard a few minutes ago. We need to be really deliberate in our approach.

Let’s start with anyone who is an exceptional individual. But be careful here. Exceptional means they produce exceptional results, create innovation and opportunity, and lead others to be better, therefore delivering a multiplier effect.

It’s not just the person who everyone likes or who knows the most, or who’s been here the longest. I see leaders all the time completely misreading the concept of who is an exceptional individual, because they allow the halo effect to dominate, particularly, with a knowledgeable individual. They know so much how could we possibly be without them? Or even a really well liked and popular person, who’s a team player. Don’t be misled here. Performance is the yardstick and it has to be assessed dispassionately.

How should you treat these people if you’re fortunate enough to have one or two of them? In Episode 101, I said that if I ever came across a really exceptional person, I’d be happy to pay them at 20% or more above the going market rate. Why? Because people like that don’t outperform the average person by 20%, they outperform them by 200%. It’s always worth spending money to get that really exceptional person on board.

Next, think about the critical roles that are really hard to replace. Some skills are difficult to find, and that’s just the way it is. Your judgement, as a leader, is to think about how critical a role actually is. Not everything that’s done in your organisation is critical, even though we sometimes feel as though it is. I used to use a simple acid test here with two questions.

Question one, does the long-term health of the business rely on this function being performed consistently well over time?

And two, if I remove that role tomorrow, how long would it be before I could see material degradation to the performance of the business?

This normally helps you to identify a critical role, and then it’s just a matter of having a plan for who populates that role and how easily they can be replaced.

Finally, think about anything that’s core to your strategy and the fundamentals of doing business. These are typically things that you should be doing in house. They can’t be easily outsourced. We outsource for various reasons, but mainly we either:

a) Want to get economies of scale from external providers who specialize in a particular service

b) Want to take advantage of a specialist’s company’s process, maturity and efficiency, or

c) Want flexibility of service volume to be able to ramp demand up and down, depending on our requirements.

The rule of thumb is that you should never outsource anything that’s core to your business or provide’s you with competitive advantage. This should give you a little guidance on who you should be trying to keep based upon the role they perform and how valuable they are individually.

The Do’s and Don’ts for Retaining your best people

Once you’ve established who the key people are, focus on them. Don’t get caught up in the others leaving, that happens. And whereas you’d always like to hold onto good people, the reality is, you can’t always do so for a range of reasons. So here’s how to attack it.

First of all, get proactive. Don’t wait for your critical people to leave and then play a game of catch-up, where you counter-offer another company’s bid to hire them. That’s not good for anyone and certainly not a methodical way to run your business. You need to do everything you can to lock your critical people in, so you don’t lose them in the first place. Being reactive is a big problem when the market is like this. Imagine losing one of your best performers. You’re then in the unenviable position of having to pay 20 to 30% more for someone who is mediocre, just because they’re the only ones available in a hot market. So get on the front foot and pay your critical people more, right now, before they think about leaving.

I know some businesses are really cash constrained around this stuff, but have a think about it. If you can’t afford to keep the people there, who are making the business work, then you’re going to end up in deep shit no matter what.

There is a solution though. If you’re really cash constrained, you can take a slightly different approach that achieves the same outcome. For your really good people, you can put a retention bonus in place for them, if they stay for a certain period of time, say for 12 months. It’s got to be a significant and meaningful amount of money, and something you think will deter them, from taking an extra bunch of cash by switching jobs right now. What this means, is you don’t incur any immediate costs, but if this person stays for the agreed time period, then you’ve staved off the threat of them leaving.

At the end of the 12 months, they’ve kept the company running smoothly, and they deserve to be rewarded for doing so. Everyone’s a winner. So whatever you do get on the front foot and don’t wait until a key person becomes a retention problem.

There are two problems with option one. The first problem is that paying people more now, can create historical anomalies in the future. You see this in businesses all the time. Depending on when you hire someone, you may have to pay them either more or less. You often end up in the perverse situation of someone who isn’t a particularly great performer being paid more than one of your outstanding people. So handle with care, when you make decisions about paying people more, relative to market conditions, at any point in time.

The second problem is that some organizations simply don’t have the financial capacity to compete for talent in a hot market.

If this is the case, I have a suggestion. Think carefully about all of your operations and initiatives. You can always shrink your business to remain profitable in the short-term. Don’t just blindly keep doing what you’ve always done. Challenge your board and the executive team to ruthlessly consider which customers and which services generate the highest profits and direct your people there.

This means you may have to give up some stuff that’s not as profitable, but in times of extreme stress, we have to do the smartest things we can to ensure the long-term survival of the business.

Here’s the rub, if we take that concept to its natural conclusion. Would you have the commitment to make decisions, in the long-term interest of the business, that mean you have to close down work programmes, and let some people go, so that you can afford to pay more to lock in your critical people, and ensure the ongoing viability of the business?

No one said leadership was easy, right? And these are the types of really tough decisions that you have to think about in times of financial stress, when you need to put a laser-like focus on running a profitable business.

Finally, just because the job market is hot, doesn’t mean you should pay over the odds just to get someone into a seat. The good people you have working there will see less capable people coming into jobs where they’re being paid more.

This can result in a serious double whammy effect. First, in the short-term, when they realise what’s going on, your best people become disgruntled and they leave. And second, in the long-term, you could lift your head up in a year or so only to find that your best people are gone, and your cost base has been reset to a much higher level. At the same time as you’re losing business, because the quality of your people has declined and your clients start drifting away to your competitors.

That’s something to think through before you make any snap decisions on your hiring and retention strategies.

When you break this all down, not everyone you have is equal. Do what you need to do to keep your best people, no matter what. Work out what has to be done to keep the company running profitably and do this decisively and fearlessly. Otherwise, you could find that you, and your team, are all looking for new jobs.