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Compensation & Benefits Review 45(3) 171 –175 © 2013 SAGE Publications Reprints and permissions: sagepub.com/journalsPermissions.nav DOI: 10.1177/0886368713494342 cbr.sagepub.com

Talent Management

Introduction

How can compensation and benefits managers and HR professionals effectively and strategically manage employee turnover and retention? That is the thrust of this article. Retaining talent is important to managers in all types of organizations. The costs associated with losing employees and recruiting, selecting and training new employees often exceed 100% of the annual compensa- tion for the position.1 In addition to these direct financial costs, losing employees can also lead to work disruptions, loss of organizational memory along with tacit or strate- gic knowledge, losses in productivity or customer ser- vice, loss of mentors, diminished diversity and even turnover contagion where other valued employees follow the leavers out the door.2 Even when tough labor markets prevent many employees from moving, there is the pos- sibility of “pent-up” turnover. When job markets improve, many employees may start looking for new alternatives.

Despite the importance of successfully managing turn- over, many retention efforts are based on managerial gut instinct rather than research evidence. In this article, we synthesize the research on employee turnover into practi- cal strategies for HR managers.

Compensation, Benefits and Employee Retention

When we ask our clients why people quit jobs, pay is almost always the first or second reason provided. Some

people do quit because they are unhappy with their pay. Also true is that people often quit to take higher paying jobs elsewhere. You already know that competing for top talent on price alone (through compensation and benefits) is a no-win proposition, and in the next section we will provide several employee retention strategies beyond compensation and benefits.

That said, however, there are ways to strategically manage compensation and benefits that are consistent with strategic employee retention management as well. In this section, we discuss several aspects of compensation and benefits in relation to their effects on employee turn- over: (a) compensation structure, (b) compensation pro- cedures, (c) types of compensation, (d) the perceived fairness and equity in compensation and (e) linking com- pensation and benefits vesting schedules to tenure requirements.

•• Compensation structure, the amount of pay disper- sion across organizational levels, matters in employee turnover. Bloom and Michel3 have shown that wide gaps between an organization’s lowest paid and highest paid employees increase the likelihood that managers and other employees will voluntarily leave the organization.

494342CBRXXX10.1177/0886368713494342Compensation & Benefits ReviewBryant and Allen research-article2013

Corresponding Author: Phil C. Bryant, Department of Management and Marketing, Columbus State University, 4225 University Avenue, Columbus, GA 31907, USA. Email: [email protected]

Compensation, Benefits and Employee Turnover: HR Strategies for Retaining Top Talent

Phil C. Bryant, Assistant Professor of Management and Marketing, Columbus State University; and David G. Allen, Distinguished Professor of Management, University of Memphis

Abstract Employee turnover is recognized as costly and disruptive. The costs of employee turnover often exceed 100% of the annual salary for the vacated position. Yet managers are often unaware of the full range of tools and tactics available for effectively managing employee turnover. Based on award-winning research and professional experience, the article offers managers several strategies for effectively managing employee turnover. Strategies offered include both compensation and benefits–based solutions and solutions beyond compensation and benefits.

Keywords turnover, retention, rewards, compensation, talent

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•• Williams, Brower, Ford, Williams, and Carraher4 found that procedures such as determination and administration of pay raises can affect employee turnover through their perceptions of organiza- tional support. Employees’ higher levels of satis- faction with pay procedures are associated with higher perceptions of organizational support, which in turn reduces their likelihood to voluntarily leave.

•• Type of compensation also has an effect on employee turnover. Beyond pay raises and cash bonuses, Dunford, Oler, and Boudreau5 have shown that stock options do have an effect on executive turnover, and Sutton6 has shown that companies with higher levels of insurance and retirement benefits generally experience lower levels of employee turnover.

•• Heshizer7 found that perceptions of pay fairness and equity are significant in managing employee commitment and turnover. Later research8 sup- ported his findings in that reductions in turnover were shown to be a result of compensation and benefits systems that employees perceived as fair in terms of equity theory.9

•• Finally, studies have shown that many different vesting schedules for compensation and benefits can be linked to tenure requirements to have a positive effect on employee retention. Benefits with relatively long-term vesting schedules such as stock options, employee stock ownership plans and retirement plans have been shown to effec- tively manage employee turnover.10 The key is to keep vesting schedules long enough to retain employees for a reasonable period of time and short enough to retain their motivational power.

Summary of Compensation, Benefits and Employee Retention

Although competing on levels of compensation and benefits alone may not be a strong strategic stance, there are a few key takeaways regarding compensation and benefits that can be managed to best retain top employees.

•• Remember the importance of pay dispersion on employee morale.

•• Clearly communicate standards and procedures used for making pay decisions.

•• Go beyond pay raises and cash bonuses for a richer retention management strategy.

•• Determine and administer compensation and ben- efits fairly and equitably.

•• Provide benefits and compensation with reason- ably long-term vesting schedules.

Employee Retention Strategies Beyond Compensation and Benefits

As suggested in the following scenario,11 the bulk of the research evidence suggests that pay may not be nearly as important in managing employee turnover as many man- agers believe. Imagine the following:

Benjamin is troubled. Generally speaking, he likes his job, but lately he’s been feeling like his boss doesn’t appreciate him, and he is worried about his opportunities for advancement. So, he decides to start looking for another job. He currently earns $40,000 per year; so his job search targets only opportunities that make $40,000 or more. He would have to be extremely unhappy to con- sider taking a pay cut. After a few months of searching, Benjamin finds another opportunity that pays $48,000 per year. After weighing the pros and cons of staying and leaving, he decides to take the new job. In the exit inter- view, Benjamin says it is because he has found a new job paying 20% more. Benjamin’s boss approaches the HR manager. She says that a valued employee is leaving because of his compensation; is there anything the orga- nization can do? Now the HR manager is troubled. He would like to keep Benjamin, and the company could probably counteroffer a few thousand dollars. However, Benjamin is already near the top of his pay grade, and the organization is hesitant about setting a precedent encour- aging employees to seek outside offers to leverage a counteroffer. Maybe it is time for a new compensation system. Before jumping to this conclusion, the HR man- ager asks an insightful question: Is Benjamin really leav- ing because of his pay?

Benjamin likely would never have been searching for that higher paying job if he had felt his boss was looking out for his best interests. Results of hundreds of studies of predictors of individual turnover decisions12 demonstrate that out of 35 predictors of individual turnover, level of pay was tied for the 24th strongest relationship with turn- over. Is pay satisfaction or dissatisfaction a better predic- tor of turnover than level of pay? The evidence suggests not. Out of the 35 predictors, pay satisfaction showed the 27th strongest relationship with turnover.

Despite the widespread belief that pay is an important driver of turnover, pay level and pay satisfaction are rela- tively weak predictors of individual turnover decisions. Our research suggests three primary categories of predic- tors that are more strongly related to turnover: (a) the withdrawal process, (b) key job attitudes, and (c) the work environment.

The predictors with the strongest relationships to turn- over are those related to the withdrawal process, notably turnover intentions and job search. Although some indi- viduals may quit jobs quickly and impulsively, most go through one or more steps of psychological or behavioral

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withdrawal first.13 For example, individuals may experi- ence thoughts of quitting, search for alternatives, evaluate possible alternatives against their current job, develop intentions to quit and definitely plan to quit as soon as a preferable opportunity presents itself.

Being aware of the significance of the withdrawal pro- cess is important for managing retention for two reasons. First, it allows managers to intervene in the withdrawal process before it is too late. Discovering that a valued employee is leaving after he or she has already decided to leave is often too late. There are methods of measuring withdrawal process variables that would enable managers to take action before employees decide to quit. Second, there is considerable research evidence about the drivers of turnover intentions and job search, and this research is con- sistent with the ultimate drivers of employee turnover.

Key job attitudes, notably job satisfaction and organi- zational commitment, are also strong predictors of turn- over and the withdrawal process. Job satisfaction is a positive emotional state resulting from the subjective appraisal of one’s job or job experiences.14 Organizational commitment is the employee’s psychological attachment to the organization.15 There are two key improvements many organizations can make in how they assess job sat- isfaction and organizational commitment: (a) be sure to use well-developed measures with substantial validation evidence and (b) measure more frequently and link indi- vidual responses to important outcomes. Many organiza- tions assess attitudes only once a year on anonymous surveys with results analyzed only at the department or business unit level. Although linkage research of this nature has some value, more frequent assessment at the individual level allows for more timely and targeted interventions. This methodology requires building up substantial trust in the workforce or working with outside consultants to collect, analyze and interpret the data.

The next strongest class of turnover predictors includes key variables related to the work environment, notably aspects of leadership, work design and relationships with others. There is considerable evidence to back the state- ment that “people don’t leave companies; people leave bosses.” The strength of the relationship an employee has with his or her immediate supervisor is one of the most consistent predictors of turnover. Research on leader– member exchange16 notes that leaders often treat some subordinates as part of their “in-group” with extensive trust and access to resources and others as part of an “out-group” with a more transactional relationship. Those in the in- group are substantially less likely to leave. When leaders are made aware of these important distinctions, they can better manage their relationships with employees.

In terms of work design, role clarity and role conflict are two of the most consistent predictors of turnover. Role theory17 notes that individuals hold multiple roles

with expectations that influence behavior. When there is a lack of clarity concerning role expectations or when role expectations are in conflict with each other, individu- als can experience stress, burnout and dissatisfaction and are more likely to quit. Leaders need to ensure that expec- tations are clearly communicated and supported. Another element of work design that is directly relevant to manag- ing employee turnover is the opportunity for advance- ment.18 Individuals who believe that there are future opportunities for growth and advancement are more likely to stay—even if they are not completely satisfied with their present circumstances. Organizations would benefit from proactively managing career paths and opportunities, and leaders need to communicate with their employees about these opportunities.

Relationships with others in the workplace, beyond supervisors, are also important for employee retention.19 Satisfaction with coworkers and work group cohesion are two of the more consistent predictors of individual turn- over decisions. Employees can become embedded in a network of relationships at work that make it less likely they will leave. Managers can create opportunities for interaction and design work to foster cohesion. For exam- ple, designing socialization tactics so that newcomers interact with other new hires and have positive interac- tions with experienced organizational members increases the sense of being embedded in the organization, which, in turn, increases retention.20

Summary of Employee Retention Strategies Beyond Compensation and Benefits

In summary, extensive research evidence on individual turnover decisions suggests several strategic insights beyond compensation and benefits that can be instrumen- tal in any organization’s employee retention management efforts.

•• Pay level and pay satisfaction are relatively weak predictors of individual turnover.

•• Indicators of the withdrawal process are the stron- gest predictors of individual turnover decisions. To manage employee turnover effectively, organi- zations should consider assessing and managing employee mobility, job search and turnover intentions.

•• Job satisfaction and organizational commitment are key attitudes and consistent predictors of indi- vidual turnover decisions. Organizations should consider assessing and managing both job satisfac- tion and job commitment.

•• When assessing attitudes and withdrawal, organi- zations should consider using well-developed measures, measure more frequently than annually

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and link individual responses to individual behav- iors and outcomes.

•• The nature of the relationship with one’s immedi- ate supervisor is a consistent predictor of individ- ual turnover decisions. Organizations should consider providing leadership training to all super- visors and managers and should hold leaders accountable for retention.

•• Employees with clear role expectations, minimal role conflict, and opportunities for growth and advancement are less likely to quit. Organizations should consider training managers on the impor- tance of providing clear role expectations, design organizational processes to minimize role conflict and develop and communicate career paths, espe- cially to highly valued employees.

•• Employees linked by positive relationships with others in the organization are less likely to quit. Organizations and managers should consider working to foster positive relationships among coworkers, provide opportunities for interac- tion and help newcomers form and develop relationships.

It should be good news that pay is not the most important driver of turnover. Revamping compensation systems, paying considerably above market and throwing money at valuable employees can be risky and expensive. Many of the recommendations provided in this section are less expensive to implement, more likely to have an impact and thus likely to provide a greater return on investment. Returning to the case of Benjamin at the start of this sec- tion, it might have been more effective and less costly to proactively communicate with Benjamin about future opportunities than to try to come up with a counteroffer or risk losing a valued employee.

Conclusion

Unmanaged employee turnover is costly to organiza- tions, and smart managers know that competing to retain top talent on price alone (higher pay and more benefits) is a losing strategy. Fortunately, there are several approaches managers can take to retain their top talent that do not entail additional costs. Compensation and benefits–related approaches include managing pay dis- persion, using and communicating fair and equitable standards and procedures for making compensation and benefits decisions and having reasonably long vesting periods for some benefits. Approaches to retaining top talent that go beyond compensation and benefits include knowing and assessing the indicators of the withdrawal process, job satisfaction and organizational commit- ment; managing employees’ relationships with their

immediate supervisors and others in the organization; managing role expectations and role conflict and manag- ing and clearly communicating opportunities for growth and advancement with the organization.

Authors’ Note

Significant portions of this article are drawn with permission from Allen, D. G., & Bryant, P. C. (2012). Managing employee turnover: Dispelling myths and fostering evidence-based reten- tion strategies. New York, NY: Business Expert Press.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

Notes

1. Cascio, W. F. (2006). Managing human resources: Productivity, quality of work life, profits (7th ed.). Burr Ridge, IL: Irwin/McGraw-Hill.

2. Allen, D. G., Bryant, P. C., & Vardaman, J. M. (2010). Retaining talent: Replacing misconceptions with evidence- based strategies. Academy of Management Perspectives, 24, 48-64.

3. Bloom, M., & Michel, J. G. (2002). The relationships among organizational context, pay dispersion, and mana- gerial turnover. Academy of Management Journal, 45, 33-42.

4. Williams, M. L., Brower, H. H., Ford, L. R., Williams, L. J., & Carraher, S. M. (2008). A comprehensive model and measure of compensation satisfaction. Journal of Occupational and Organizational Psychology, 81, 639-668.

5. Dunford, B. B., Oler, D. K., & Boudreau, J. W. (2008). Underwater stock options and voluntary executive turn- over: A multidisciplinary perspective integrating behav- ioral and economic theories. Personnel Psychology, 61, 687-726.

6. Sutton, N. (1985). Do employee benefits reduce labor turn- over? Benefits Quarterly, 1, 16-22.

7. Heshizer, B. (1994). The impact of flexible benefits plans on job satisfaction, organizational commitment, and turn- over intentions. Benefits Quarterly, 10, 84-90.

8. Fay, C. H., & Thompson, M. A. (2001). Contextual deter- minants of reward systems’ success: An exploratory study. Human Resource Management, 40, 213-226.

9. Adams, J. S. (1966). Inequity in social exchange. Advances in Experimental Social Psychology, 2, 267-299.

10. Heneman, R. L. (2007). Implementing total rewards strategies: A guide to successfully planning and imple- menting a total rewards system. Alexandria, VA: SHRM Foundation.

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11. Allen, D. G., & Bryant, P. C. (2012). Managing employee turnover: Dispelling myths and fostering evidence-based retention strategies. New York, NY: Business Expert Press.

12. Allen et al. (2010). 13. Mobley, W. H. (1977). Intermediate linkages in the rela-

tionship between job satisfaction and employee turnover. Journal of Applied Psychology, 62, 237-240.

14. Locke, E. A. (1976). The nature and causes of job satisfac- tion. In M. D. Dunnette (Ed.), Handbook of industrial and organizational psychology (pp. 1297-1349). Chicago, IL: Rand-McNally.

15. Meyer, J. P., & Allen, N. J. (1991). A three-component con- ceptualization of organizational commitment: Some meth- odological considerations. Human Resource Management Review, 1, 61-98.

16. Graen, G. B., & Uhl-Bien, M. (1995). The relationship- based approach to leadership: Development of LMX theory of leadership over 25 years: Applying a multi- level, multi-domain perspective. Leadership Quarterly, 6, 219-247.

17. Biddle, B. J. (1986). Recent developments in role theory. Annual Review of Sociology, 12, 67-92.

18. Allen, D. G., Shore, L. M., & Griffeth, R. W. (2003). The role of perceived organizational support and supportive human resource practices in the turnover process. Journal of Management, 29, 99-118.

19. Mossholder, K. W., Settoon, R. P., & Henagan, S. C. (2005). A relational perspective on turnover: Examining structural, attitudinal, and behavioral predictors. Academy of Management Journal, 48, 607-618.

20. Allen, D. G. (2006). Do organizational socialization tactics influence newcomer embeddedness and turnover? Journal of Management, 32, 237-256.

Author Biographies

Phil C. Bryant (PhD, University of Memphis) is an assistant professor of management at Columbus State University. His primary research, teaching and consulting activities are concen- trated in Talent Management and Entrepreneurship. His award- winning writings have been published in the Academy of Management Perspectives (2010) and the Academy of Strategic Management Journal (2012). Bryant is coauthor of the 2012 book titled Managing Employee Turnover: Dispelling Myths and Fostering Evidence-Based Retention Strategies, which is based on the 2010 Academy of Management Perspectives article “Retaining Talent.”

David G. Allen (PhD, Georgia State University) is Distinguished Professor of Management in the Fogelman College of Business and Economics at the University of Memphis. His primary research interests include the flow of people into and out of organizations (e.g., retention/turnover, recruitment and talent management). His research on these topics has been published in Academy of Management Journal, Academy of Management Perspectives, Human Relations, Human Resource Management, Human Resource Management Review, Journal of Applied Psychology, Journal of Management, Journal of Organizational Behavior, Organizational Research Methods, Personnel Psychology and other outlets. He is coauthor of the 2012 book titled Managing Employee Turnover: Dispelling Myths and Fostering Evidence-Based Retention Strategies.

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