04.08

Why Employee Retention Strategies Do Not Work

By Gary Perman

Since the technology “bubble” burst earlier this decade, the economy has steadily rebuilt itself. We are enjoying a technology resurgence with unemployment around four percent. Technology is growing steadily and venture capital is cautiously finding its way back into the market. We are seeing innovation continue to grow in the software, hardware and information technology fields.

However, we are, once again starting to see the talent pool begin to dry up, although much more slowly and for vastly different reasons than during the heyday of the tech boom. The causes this time are many — baby boomers are beginning to retire, the population growth rate is slowing, and many IT professionals left the industry when the bubble burst and no longer possess the technical skill sets required for today’s companies.

The long and short of it is that U.S. government, economists and business leaders are predicting that the country is heading for another severe talent shortage. In 2007, technology companies were already experiencing the resurgence of a ‘Candidates market’ with fewer skilled candidates than positions to be filled. We are currently seeing this in the areas of software product development, healthcare, information technology, high technology (i.e. electronics, software, semiconductors), biotechnology, research, engineering and other fields.

To combat this shortage, aggressive companies are constantly searching for new strategies to supply their employee needs. Some companies have outsourced their needs to India, Pakistan, the Czech Republic or Vietnam. As demand increases, many U.S. companies that have resorted to outsourcing in the past are seeing the price of labor in these countries increase and they are now reevaluating their use of offshore labor. Other strategies include hiring former headhunters to supplement corporate recruiting staffs in an attempt to utilize direct recruiting (poaching) methods not normally used by in-house recruiters. New software technology has enabled social and professional networks to flourish and corporate blogs are now being used to attract talented professionals. Some companies are taking proactive measures such as “breeding” their own skilled labor pool by becoming directly involved in universities — teaching and recruiting students to enter engineering, math and science programs. Sharp, Hewlett-Packard and others have found success using this method.

Because recruiting is expensive and time-consuming, and the pool of available talent is shrinking instead of growing, employee retention is fast becoming the most cost-effective strategy for keeping up with business needs. It doesn’t take more than a few keystrokes on Google to find an abundance of information on how to retain your best employees. These sources suggest that you can buy their loyalty with salary, bonuses, perks, patting them on the back and even letting them bring their pets to work. Yet employees still leave. What is an employer to do? For years, I thought employee retention was inherently the responsibility of the manager. I saw part of my responsibility as a recruiter for my client companies as protecting them from being poached by other headhunters as much as possible. Given my commitment to helping clients keep their employees, I was confoundedly confused as to why managers didn’t take my advice about retaining their employees or put into practice some other retention strategies available. There certainly is no shortage of good retention strategies available, some of the best include:

• Having a workplace where people feel respected and valued, where their ideas and efforts are noticed and considered important

• Promoting and celebrating talent

• Leaders listening to their employees

• Providing enhanced opportunities for vacations, club memberships and working from home

• Recognizing the value that the individual brings to the shared success

• Offering stock options or profit sharing programs

• Making available in-company daycare, laundry service or other personal services

• Conducting employee surveys that get employees involved

Do these retention strategies work?

No. If they did, then why do good employees still leave companies that offer these retention strategies? One large American technology company has an interesting method of retaining employees. If one of their team members leaves the company, the team leader is not allowed to hire a replacement. The burden of the current project rests solely on the team and its team leader. The team still has to complete the project before the deadline. I believe this is “accountability by fear,” which may work in a short-sighted way, but in the long run, it could be detrimental to the organization. Six months of team members working overtime in a pressure cooker will drive anyone to accept a “grass is greener at another company” opportunity.

A company can have the best retention strategies known to mankind, but if they miss the main ingredient, they will be unsuccessful. Like flour without yeast, the dough won’t rise.

Medical doctors say “treat the cause, not the symptoms.” When it comes to employee retention strategies in the IT industry, there are many symptoms — mismanagement, lack of contribution availability, low pay, lack of recognition, among others — but they are not the underlying cause. The underlying cause is much bigger.

The chief ingredient missing in employee retention is found at its base — in top down accountability. In other words, the single most significant factor in companies that fail to retain employees begins with the source: the CEO of the company.

In a recent survey among technology managers [1], we asked the question: “Managers and executives know how to retain employees, so why don’t they do it?” We found that the failure to hold executives and managers accountable was the most mentioned response from both executives and managers.

Creating a culture of accountability is the key to employee retention and accountability starts at the top. Without it, the best retention strategies will fail.

Executives and managers polled believe that retaining employees is not a manager’s first responsibility. They believe financial results are, and most do not equate one with the other. Managers and executives do not initiate retention plans because they are not held accountable for it. If a manager posted excellent "numbers" and had horrible turnover, then that manager most likely would not be reprimanded. Whereas, if a manager had excellent retention but horrible "numbers," then he or she would need to look for a new job.

We also found that many managers and executives believe there is a tendency to view personnel as a resource — valuable but expendable. In the survey, employees were viewed as expendable commodities rather than as repositories of intellectual capital. Others believe it is the human resource department’s responsibility to retain employees.

Other studies of employee turnover consistently show that the direct supervisor builds or destroys employee commitment. Yet, how many companies select executives for their ability to manage people, train them in effective people-management skills, and then hold them accountable for retaining those people?

Based on my twelve years of technology recruiting experience, I would venture to say that less than 10 percent of technology executives make employee retention a component of compensation. We have a culture in American business that is driven by short-term results focused on profits, usually quarter to quarter. That measurement does not take into account the impact that employee retention has on the bottom line. Several technology companies have annual turnover rates in excess of 40 percent. I have access to many executives and managers at these companies and, while they recognize the issue, they do nothing to change the culture because there is no impact on their compensation. Many CEOs and presidents give lip service to retention, but don’t back it up with specific performance measures and rewards, such as bonuses, for achieving a specific measurement of retention. Actions do speak louder than words, and such is the case when a leader stands behind his words using accountability.

Most readers will have experienced multiple changes at the vice president and director levels of their company at any given point in their career. Change brings different cultures, expectations and accountabilities. Without a consistent accountability coming from the top, vice presidents and directors can kill a chance of continuity in a retention program unless retention is coming form the top. For example:

• The lifespan of the average CxO at a given company is three years

• Most middle managers are worried about their own longevity, not to mention their direct reports

• If a manager is not going to be rewarded (or punished) for retention efforts, then he or she will not focus on the effort

• It can be argued that very few managers are willing to boost their subordinates into higher roles

Generally, since retention is not in the job description of managers or executives, they simply will not do it. Just because there is a wealth of information out there on how to retain employees does not mean executives and managers are seeking it out and reading it. With all the downsizing that has taken place over the past decade or so, no one, including managers, has time to take on a task that is not clearly in their job description. Odds are that such tasks are not something they are trained to do either.

The good news is that not all companies are ignoring top down accountability.

Telecom equipment vendor, Extreme Networks, has tied the annual bonuses of its top executives in part to how well the company retains its employees. Under the company’s 2007 executive compensation plan approved by its board of directors, 20 percent of the bonuses of Extreme’s top four executives is based on “the amount of undesirable attrition of the company’s employees” during the fiscal year, regulatory filings said. Forty percent is based on a revenue formula and the remaining 40 percent is based on operating profit as a percentage of revenue.

That plan applies to executives like Extreme’s CEO, CFO, COO and Vice President of R&D. Fifty percent of the bonus for Extreme’s senior vice president of worldwide sales is based on retention of sales personnel. His target bonus for fiscal year 2007 was $50,000. Fifteen percent of the bonuses of all other vice presidents are based on employee retention. The CEO’s 2007 base salary was $480,000 and his target bonus for fiscal 2007 was 70 percent of that, or $336,000. The amount tied to employee attrition was $67,200 [2]. Not only does applying retention bonuses to compensation make sense, it also raises the bar of expectations for recruiting and hiring quality employees.

Bottom line

Employee retention is hard work. It requires a dedicated CEO with an executive team endorsing accountability, and an appropriate reward system. Currently, most mid-level managers are not equipped to manage retention because there is no top down incentive to do so. Executives need to move the discussion of employee retention out of the human resources department and into the board rooms of American companies. It is not the job of the human resources department to retain people. It is the responsibility of the managers and executives. Employees rarely leave a company because the human resources department failed to do something. They leave because an executive or supervisor failed to do something.

Until top executives value retaining quality talent as their most precious asset, and commit to that principle wholeheartedly, no retention strategy in the world is going to work. However, for those that do, their reward will be great; companies can experience increased success by initiating top retention strategies, which will result in retaining their top employees and therefore creating additional revenue and profits for their company.

[1] PermanTech conducted an e-mail survey of 200 technology managers by an e-mail poll, and through Linked-In Questions from 15 October 2007 through 1 December 2007.

[2] E. Gubbins, “Canepa sets Extreme course,” Telephony Online Magazine, 22 November 2006, available http://telephonyonline.com/mag/telecom_canepa_sets_extreme/.

Gary Perman is a certified recruiting professional and a twelve-year veteran in the recruiting industry. He owns a national search firm called Perman Technical Group, which specializes in recruiting technology executives, managers and engineers. Gary is also a member of the SAO and IEEE, and hosts a technology blog at www.softwareassociation.org. Contact Gary at gary@permantech.com or visit his Linked-In profile at http://www.linkedin.com/in/perman or his Web site at www.permantech.com.

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