Employee Turnover: 6 Rules to Deal With It

Sept. 1, 2004
Have you ever sat back and thought about what it costs your company every time an employee leaves? I never considered that there was a monetary value

Have you ever sat back and thought about what it costs your company every time an employee leaves?

I never considered that there was a monetary value that could be placed on employee turnover. It wasn't until I attended a management seminar a few years ago that I learned just how expensive it is. And it doesn't matter if the employees quits or is asked to leave. The cost is high either way.

You can never completely "cure" turnover. It's a part of every business. However, you can use these six rules to help you minimize and effectively deal with employee turnover at your company.

Rule #1: Know Your Cost of Turnover.
The first step to understanding the cost of employee turnover is to determine your total annual cost for an employee. As a rough rule-of-thumb, you take the employee's annual wages and add 30% to include benefits and payroll taxes. Then, multiply that number by 25%. This is the estimated cost of losing the employee. The 25% includes hiring costs, orientation and training costs, uniforms, benefit set up and administration, wages, etc.

Here's an example: This is a startling number, and it only accounts for one employee. If this money isn't in your budget, it's coming straight from your bottom line.

Rule #2: Budget for Turnover.
An important number to know and track is turnover rate, or the percentage of your employees you lose in a year. As an owner/manager, you need this number as a benchmark. Are you getting better or worse? In addition, you need this number to accurately budget.

To calculate your turnover rate, take the number of employees who left the company in the year (for whatever reason) and divide that by your average number of employees for the year. The result is your turnover rate.

For example, if you have 10 employees, and two quit or were fired last year, your turnover rate is 20%.

Now you can budget for turnover. If you're planning to stay at 10 employees, budget for two lost employees. If you're planning to add employees, budget that you'll lose 25% of your new total. If you're planning to add two employees for a total of 12, budget three employees lost (12 x 25% = 3).

Now that you know your turnover rate, you don't have to accept it. At my company, our goal is 20% or lower. When I started tracking it in 1998, it was 35%. Today it's 15%.

The first step in dealing with turnover is to understand what causes it. You can't fix something if you don't know what's broken.

Here are the most common reasons why employees leave companies. Have you heard any of them before?

  • Low compensation
  • Inadequate benefits
  • Low perceived job security or room for advancement
  • Lack of appreciation
  • Lack of training
  • Poor leadership/management
  • Bad hire.

It's appropriate to ask one very important question: What's the one thing your company has that your competitors don't have? It's not your trucks, your computer system, your marketing, or your equipment line. All those can be copied. The one thing your company has that your competitors don't is your people. This is your greatest competitive advantage. Now, with that in mind, take another look at the list above. Does that list reflect our willingness as owners and managers to care for, nurture, and respect a valuable asset?

Take a look at some past issues of Contracting Business and look for Contractor of the Year articles. You'll see some common themes. They offer top pay and benefits. The winning companies provide training and development, show appreciation, have high ethics, have created a corporate culture that makes employees feel like they're part of a family, and they know how to have fun. All of these are signs that management recognizes that the people in the organization are a vital asset and the foundation of the company's success.

Rule #3: Offer the best compensation and benefits in your market.
I can already hear some of you wailing, "My market's pricing doesn't allow me to pay more to our employees. We just can't afford it."

The truth is, you can't afford not to. Offering the best compensation and benefits is critical. Determine what it is, pay it, and charge the correct selling price. You determine your selling price. Of course, a higher selling price means you're now faced with the challenge of delivering such great service and value to your customers that they'll happily pay. Is there are a reason you can't do this? If so, maybe you shouldn't be in business.

The bottom line is the market doesn't have to determine your pricing. You determine your pricing. I can tell you that we don't offer the cheapest price in our market. We know our costs of business and charge the appropriate price, period.

Rule #4: Recognize that the biggest problem in your company may be you, the leader/manager/owner.
As a leader in your company, you send a message with every action you take, or don't take. Are you afraid to raise your prices? Do you even know your costs of doing business?

Do you have a clear vision and purpose that is understood and agreed upon by all? Do your employees understand the purpose of their work? Do they have a sense of security at your company? Or are they afraid for their jobs?

Take a look at your management style. Do you manage by fear and intimidation? Do you have high standards and encourage, train, and coach people to meet those standards? Or do you drain the life out of people?

The answers to these questions may upset you. Many owners and managers were promoted from the field to be managers. The skill sets for these jobs are very different. Don't despair! The skills of leadership and management can be learned, just as technical skills can be learned.

At Frank & Lindy, our guiding vision and purpose is what we call WX3. This stands for Win, Win, Win. Our customers, our employees, and the company all must win. Our philosophy is that if we take care of our employees, deliver great value to our customers, price our products and services correctly, and achieve our production goals, the company will win. WX3 gives every employee a purpose every single day.

Rule #5: Continually train employees in operations, sales and customer service, and technical skills.
Human nature causes us to feel uncertain when we don't know what to do and how to do it. When we put employees in situations where they're uncertain, they usually don't perform well. If you've ever said, "Anyone with any common sense would be able to do that," it's most likely an indication that the individual has not been properly trained.

There are three areas where employees need ongoing training: company procedures, customer service and sales, and technical. I view them each as separate tool belts. Our job as managers is to fill each of those tool belts with as many useable tools as we can.

At Frank and Lindy, new hires go through two to three weeks of training before they're ready to work on their own. In addition, we have two paid training meetings each week.

We have reached into the Star Wars realm for some of our training ideas. Wednesday is our "Obi Wan" technical training, where our wise senior tech covers safety, callbacks, and other miscellaneous seasonal topics. We often bring in manufacturers' reps to these sessions to keep us up to date on the latest technologies.

Thursday is our "Yoda" customer service and sales meeting. Yoda is Star Wars' all-powerful Jedi Master. One of his famous lines is, "Try not. Do, or do not. There is no try." The word try has been abolished at Frank and Lindy. In addition, Yoda stands for "You Oughta Do Add-ons." In our Yoda meetings we do exercises and role plays to continually develop our customer service and sales skills. This enables us to best serve each customer and maximize each opportunity for the company.

Let's not forget leadership and management training. As I mentioned earlier, these are skills that are learned. Go to a seminar, find a mentor, join a contractor organization such as ACCA, Nexstar, AirTime500, ISL, etc. Network with other contractors. Make a decision to invest in yourself and, if necessary, to do things differently.

Rule #6: Add a line item in your budget for fun.
Find a way to have fun. Fun is essential for employee retention. Have a summer picnic or holiday party. Cook breakfast for your employees. Sponsor a paintball game for employees. There are lots of ideas out there in the management section of your closest bookstore.

My philosophy is to look at business as a game. It's a very serious game, but it's a game. Games are meant to be fun.

A ‘To Do" List
Here's a quick list of "to do" items. Start on them today.

  • Do accept that your employees are the greatest competitive asset you have..
  • Do know your cost of turnover and your turnover rate.
  • Do find a way to offer the best compensation and benefits in your market and include them in your selling prices.
  • Do make a decision to improve your management and leadership skills.
  • Do invest in your people.
  • Do find a way to have fun.

While employee turnover is a part of any and all businesses, what you choose to do about it at your company may the key to your success — or failure. It's up to you.

William B. Raymond, a licensed master plumber, is co-owner of Frank & Lindy Plumbing & Heating Service Co., Peekskill, NY. He is a senior trainer with Nexstar Network and a member of Nexstar's Board of Directors. He can be reached at 914/737-7000, or braymond@ frankandlindy.com. For more information about Nexstar, visit www.nexstarnetwork.com

This article is based on the presentation, "Reduce Employee Turnover," that Bill Raymond gave at HVAC Comfortech 2004 in St. Louis, MO, Sept. 15-18. For information about HVAC Comfortech 2005, which will be held in Nashville, TN, Sept, 14-17, 2005, call 216/931-9550.

Learn from the leaders: This year HVAC Comfortech presented more than 30 speakers providing educational seminars. All the sessions were recorded and are available for purchase. For pricing and ordering information,visit the show website: www.hvaccomfortech.com