Early new-hire turnover is one of the most frustrating (40 percent of new hires leave within six months) and expensive (the cost of losing a new hire is at least three times their salary) aspects of recruiting.
Yes, it’s true that all forms of turnover are now a major business issue. In fact, a recent Bersin by Deloitte global executive survey found that employee retention is now the No. 1 global talent problem that company’s face. Recent U.S. Department of Labor statistics further reveals that the voluntary job “quit rate” in the U.S. is at its highest level since December 2006. But recent hire turnover before six months have elapsed is often maddening because most hiring managers simply assume that once they go through all the hard work of landing a new hire, they will have them for at least four years (the average employee tenure is now 4.6 years).
But before you can solve the recent hire turnover problem, you need to know its basic causes. My research has found that the primary reason why firms experience a high rate of new-hire turnover is because they mistakenly assume that new hires are committed to their firm. They make this assumption at least in part because of all the time and effort that the new hire invested in getting the job. And as a result of this assumption of loyalty and engagement, most firms literally take no proactive actions to first identify and then to keep those recent hires who might become “flight risks” or what some call “early turnover.”
Realize that if you hired the best, that these new hires are still in great demand, so if you don’t take proactive retention and engagement actions, you can’t be surprised when they soon walk out the door
Why Retention is the No. 1 Issue
Retention is becoming a permanent talent issue because so many employees in all generations now have a reduced sense of loyalty to their current employer. And the retention problem is further exacerbated due to the fact that it’s now amazingly quick and easy for a disgruntled new hire to instantly apply for their next job. Retention is also a larger issue today because, with the spread of social media and especially LinkedIn, it is now amazingly easy for a recruiter to find the best talent that works at your firm. So you should begin assuming that every employee who works in a key job or who is an above average performer is being contacted by a recruiter at least once a month.
Taken together, this means that executives should be considered as being negligent if they’re not constantly trying to identify those who are at risk of leaving (whether they are long-term employees or recent hires), while there is still time to do something about it.
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First, Build the Business Case by Quantifying the Cost of Early New-Hire Turnover
You can’t expect your firm’s executives to fund or support a new-hire retention effort unless they have been convinced of the dollar damage associated with early new-hire turnover. Making the business case is critical in this situation because many executives initially think that new-hire turnover is no more than a minor issue. They think that way at least until they discover that the Wynhurst Group estimated that the cost of losing an employee in their first year was “at least three times salary.” I have found that this 3x cost number is actually quite low when the new hire was in a critical job, a revenue-generating job, or if the replacement hire is a poorer performer.
Rather than trying to do the cost and the ROI calculations on your own, work with the CFO’s office to first identify the cost factors resulting from new-hire turnover and then to quantify in dollars the average cost of each factor. The cost factors related to new-hire turnover generally occur in these 10 areas.
- Productivity loss when the position is vacant — calculate the loss in position productivity during the time between when the new hire quits and when they are finally replaced (these costs are especially high when the new-hire turnover involves a revenue-generating job).
- Wasted salary dollars — also remember that new hires are not very productive during their first few weeks or months. Underperforming new-hires produce significantly less, while they are being paid a full salary. So you must include in your cost calculation the fact that there will be a “salary waste” (the percentage below the minimum standard that they are producing, multiplied by their total compensation costs) for both the initial and the replacement hire.
- Recruiting costs — count the recruiting costs associated with the replacement hire. The value of the recruiter’s time for the replacement hire should also be considered.
- Training costs — calculate the added investment in training costs that must be spent on the replacement new hire.
- Manager time — the time that managers and team members spend coaching and guiding the replacement new hire must be included in the cost calculation. Add to the total costs the additional time that a manager must spend recruiting and interviewing the replacement hire, and the lost opportunity costs because they could’ve spent that time doing something more strategic.
- Customer impacts — if the job in question involves direct contact with customers, the cost will be dramatically higher. For example, the quick loss of a new salesperson or customer service rep, who the customer is just beginning to get comfortable with, will be frustrating to many customers. The fact that they must learn to trust a new replacement might actually cause your firm to lose some of its customers.
- Do they take others with them? — new hires who are leaders, managers, and top performers often bring 2 to 5 coworkers with them when they leave. The costs associated with colleagues following them must be calculated. They frequently include their lost knowledge, ideas, and experience, as well as their recruiting replacement costs. If most of the departing “followers” work in the same team, you need to calculate the loss as a result of the team’s degraded performance (because multiple employees left the team at the same time, performance will fall off). Obviously, if the new hire was an executive or manager, the team disruptions would be much greater.
- Replacement hire failure — all hiring involves risks, so you have to consider the possibility that you won’t be able to find a suitable replacement hire at all. And even if you do, you have to consider the probability and the added costs if the new hire is a poorer performer than the one that they replaced. Also, add the tremendously higher costs if the replacement hire, unfortunately, turns out to be a complete failure.
- Employer Brand damage — if those new hires who prematurely leave actively complain on social media, the possible economic damage to your employer brand and future recruiting must also be estimated.
- The value gained by your competitor — some new hires leave and go to a major product competitor. In these cases, you must include the value that your competitor gains along with the new hire’s competencies, including some of your firm’s best practices, customers, and ideas.
Develop a New-Hire Retention Process
Drop any laissez-faire approach to new-hire retention and to take a more structured and strategic approach. First, develop a corporate-wide new-hire retention process. An effective approach for creating this process starts with the building of a compelling business case (which was covered in the last section). The remaining two to eight steps should be:
- Assign new-hire turnover responsibility — few corporate recruiters, hiring managers, or those who run onboarding will accept any blame for an early new-hire turnover. Individually they either argue that they don’t have total control or that they don’t have retention capabilities. And HR generalists don’t assume responsibility either because they usually feel that with a recent hire, they simply haven’t had time to institute their normal retention procedures. Until someone is assigned direct accountability, it is unlikely that any comprehensive retention process will be developed.
- Stop assuming new-hire loyalty — it’s antiquated 20th-century thinking to assume that after all of the work that a new hire put into getting a new job, that they will automatically be committed to the firm for at least a year. A more modern approach is to assume that three bad things are happening. First that the new-hire may not have actually stopped their job search, second that their old boss will be putting pressure on them to return, or third that slow-moving firms will eventually get around to making them a powerful offer that is more enticing than yours. Employee loyalty is disappearing. As a result of how many firms treated their employees poorly during the recent economic downturn, coupled with the current strong job market, means that many in every generation now think little about quitting a job within days, weeks, or months of accepting it.
- Prioritize your jobs and new hires — with limited resources, it’s a mistake to try to reduce retention among new hires in every single job. Instead, prioritize your key jobs and the new hires you can’t afford to lose. And only after you have an effective process that works on these priority jobs/individuals should you expand the retention program to other new-hires.
- Include retention action steps during each phase of onboarding — nearly 5 percent of new hires decide to leave the company literally on their first day, and nearly 25 percent decide to leave within the first week after starting. Tell new-hires immediately after accepting that you expect them to stop their job search. Be sure and add a “preboarding step” during their notice period. During preboarding you proactively engage the newhire and build their connection with the firm and their new team. Once they actually start the job, extend the “onboarding phase” over at least a month and involve the recruiter in new-hire retention. During each of the three steps or phases, periodically ask each new hire to identify their frustrators and then work to minimize each of them.
- Identify precursors that indicate that a typical new hire might leave — once a recent hire leaves the firm, it’s hard to know if there were any precursors or early indicators of their unhappiness. So immediately after a new hire quits, the management and leadership team should get together and brainstorm to try to identify if there were any visible warning signs. If you wait a few months until your former new hire is settled in their new job, you can use a delayed post-exit interview to identify some of the precursors. During this post-exit interview, simply ask them to help out future new hires by providing you with a list of any of the visible indicators that managers could have spotted. With these two combined approaches, it’s possible to put together a general list of “turnover risk indication factors” (e.g. absenteeism and leaving early) that can be included in management and team leader training.
- Measure and reward — because early new-hire turnover means that you squander your initial investment in recruiting and training, put together a set of metrics for analyzing the problem. Unfortunately, in most corporations there is little data-based decision-making on either early or regular employee retention. Start by tracking the number of new hires that quit within the first six months, and quantify the costs of losing each one. Also, develop metrics that identify which individual managers are having the highest rate of new-hire turnover, whether the departing new hires were top performers and whether their turnover was reasonably preventable. Also, reward individual hiring managers and recruiters who successfully limit new-hire turnover.
- Actually, identify the individual new hires whow are currently “flight risks” — many firms have learned how to identify flight risks among their regular employees. Fortunately I have found that it is also possible to identify flight risks among recent new-hires. In next week’s ERE.net article there will be a companion piece entitled “Predicting Which New Hires Will Quit – A Checklist for Spotting Flight Risks” (it will be published on 6/27/16). This follow-up article will include 30 different approaches for identifying individual new-hire “flight risks.”
At a minimum of three times their salary, the loss of every professional new hire will easily exceed $100,000. And since a whopping 40 percent of new hires typically quit within six months, it makes economic sense for major corporations to focus a portion of their retention efforts on new-hires. The three keys to success are first making a strong business case, then building a formal process for managing new-hire retention, and finally creating a checklist that allows individual managers to determine which of their new hires are most likely to quit so that proactive retention actions can be taken.