Managing Turnover 1. 1 Managing Turnover

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1 Managing Turnover 1 1 Managing Turnover One theme of this text: no one best approach that works for all rms. In the previous 3 chapters we developed an analysis of: recruiting, structuring the job offer (pay, probation, and screening for promotion), investment in skills. Firms differ quite a bit in their overall strategy for to these policies. In some rms, turnover is viewed as healthy; it brings in new blood and facilitates sorting to nd the most talented. In others, turnover is costly; investment in rm-specic employee skills. In the process, we developed several tools for looking at employment: adverse selection,

2 Managing Turnover 2 signaling, relationship-specic investments. Here, we use these tools to analyze some related issues in the management of employee careers. The theme in the chapters 1 and 2 - bringing employees into the organization. The theme of Chapter 3 - developing their talents so that they can be more productive and advance over their careers. The theme here is turnover: under what circumstances is it desirable, how can it be effectively managed. 1.1 Is Turnover Good or Bad? Two different circumstances in dealing with employee turnover. (a) need to lay off workers due to downsizing. (b) need to manage regular workforce ows in/out of the rm. We start with factors that affect rm's optimal turnover when conditions are normal.

3 Managing Turnover 3 Every rm should have some employee turnover as part of its business; question is: how much, and of what kind. In thinking about turnover, what's the appropriate level of analysis? turnover at the organizational level? or should it vary from one job to the next? In general, the answer is the latter. Different jobs have different characteristics. Some jobs may require substantial turnover; for others keep turnover to a minimum. Importance of Sorting One reason to encourage turnover is sorting. Sorting increases workforce quality by screening more candidates per period of time. sorting is only valuable if differences in ability are valuable. e.g., when there is more to be learned about workers abilities. likely to be useful for new hires that are young and have no track record. turnover also desirable for employees who have been promoted (will they t the new job?).

4 Managing Turnover 4 these are ideas we saw in Chapters 1-2. Turnover is important, especially early in the career, in professional service rms and academia. lled with knowledge workers; ideas and creativity matter; small differences in ability can be leveraged effectively; these rms have aggressive probation and up-or-out systems to continually sort for most skilled employees. Technical Change Benet of turnover is it brings new blood into the organization. Thus, turnover should be higher in industries where technology advances more rapidly. Computers and telecommunications are two obvious candidates. Hierarchical Structure Higher turnover may be necessary when rm structure dictates that hierarchy narrows rapidly at some level.

5 Managing Turnover 5 Recall Table 2.1 in Chapter 2. In Acme, hierarchy narrows dramatically between Levels 4 and 5 (roughly speaking, where middle management becomes top management). Some turnover is inevitable here, because of few promotion opportunities for Level 4 managers. Some turnover is also desirable here. otherwise, as Level 4 becomes clogged with managers who go further, promotion slots decline for Level 3 managers. this effect will eventually trickle down the hierarchy to Levels 2 and 1. Result: this will reduce incentives, because promotions are an important form of pay for performance. Acme's best workers may be lost if promotions are not available. A promotion system is like a pipe; need a continuous ow both in and out. Specic Human Capital As in Chapter 3, OTJ training doesn't generate turnover costs if training is general.

6 Managing Turnover 6 By contrast, the more specic training, the higher the turnover costs. Typically, these costs are shared by worker and rm, b/c of sharing of investment. So, rms with unique practices, methods, or cultures may want low turnover. Similarly, for jobs where intellectual property is developed. Also true for workers who develop strong client relationships. 1.2 Retention Strategies A variety of tools can be used to reduce turnover. Most obvious: increase compensation. simple but expensive. for key employees, may have to respond if get outside job offers. For key employees, consider partnerships, stock options, other pay-for-performance measures. key people are most likely to have intellectual property or customer relationships they could take with them. explains why many professional service rms are organized into some form of part-

7 Managing Turnover 7 nership. What other retention strategies can you employ? Retain specic employees by tailoring some benets to worker tastes. e.g., exible working hours (to pursue outside interests or meet family obligations more easily). depending on cost of exibility, it may be protable for you as well. Other options: new training, job enrichment (Chapter 7), or early promotion. new tasks or responsibilities make job more interesting. training increases long-term value of the job. early promotion can signal long term employment at your rm. In hiring, don't create expectations that will be disappointed. employees often leave jobs b/c they feel ripped off. can occur if they believe manager did not evaluate them correctly. might be b/c they believe that certain promises (for training, promotion, etc.) were not fullled.

8 Managing Turnover Reducing Costs of Losing Key Employees Some turnover is inevitable, but rms use strategies to lower turnover costs. Chapter 3 discusses non-compete agreements. But they have limited effectiveness. courts are reluctant to enforce strong clauses in them, also impossible to control some information and ideas that an employee carries to a new rm. But there are a few alternative approaches. First, have workers collaborate on key tasks when key knowledge may be monopolized. Second, cross-train to reduce the risks even further. Third, standardize job design. Finally, have a general knowledge management strategy. e.g., set up databases to document new methods. allows for new applications without having to gure out new solutions from scratch.

9 Managing Turnover 9 allows rms to capture some of the knowledge of employees if they quit. 1.3 Bidding for Employees: Raiding vs. Being Raided. Question: how to respond when an employee receives an outside offer and threatens to quit. Related question: whether you should try to raid employees from competing rms. Both illustrate that rms are engaged in an active auction market: bidding against each other for employees especially for the most talented ones. Raiding Other Firms: Benets and Costs It is the idiosyncratic set of skills that make raiding another rm attractive. If skills that are commonly found, the costs of hiring from another rm may outweigh benets of hiring from general pool. Reason: Winner's Curse problem. worker's current employer usually knows more about a worker than does an outsider.

10 Managing Turnover 10 outsiders in a weaker position to judge quality of a worker. worker's current rm always has option of raising worker's salary to keep employees. hence, outsider bid too much. When to raid? when worker's skills are sufciently rare, when those skills are a good match with an employer other than the current one, when the current rm is aware of that fact, also requires worker's current rm not overvalue and therefore overpay the worker. In which situations are the conditions for raids most likely to be met? when recent changes have occurred, either with worker's skills or the industry in question. Examples: First, workers who have recently completed a schooling program are ripe for picking.

11 Managing Turnover 11 Evidence: schools with part-time MBA programs report the vast majority of their graduates leave within a short time of graduation. Second, workers employed by rms in declining industries are good targets for raiding. expectations that brought the worker to the rm in the rst place are probably not being met. Third, workers in industries undergoing rapid technical change are likely to be good targets. when change is rapid, it is not neutral, so some rms experience more rapid increases than others. capable workers located in a rm behind the leader are good candidates for a raid. explains why there is so much turnover among software and hardware companies. Is it always better to be a raider? If that were the case, nobody would hire unproven talent.

12 Managing Turnover 12 Firms that hire directly from a pool of applicants get a random sample of the population. Some of the workers are able, and some are not. As long as the rm does not pay more than average quality of a worker, it can survive quite well. But average quality of the workers hired from common pool is not as high as average for population as a whole. Raiders steal away a non-random sample of the population. Thus, wage must be low enough so that it can avoid losses after raiding rms have picked off better employees. Example: if average worker is worth $30/hr, that wage will cause the rm to lose money. Reason: with the better workers picked off, those left don't provide an average productivity of $30/hr. Layoffs and Lemons Idea of adverse selection can be applied to workers who have lost their job.

13 Managing Turnover 13 Such employees are not unlike used cars. Prior employment plus lack of specic human capital equals difculty nding new job and/or lower pay than old job. Studies show used cars that come to market because they were leased, but the lease contract expired, are less subject to the lemons problem. Reason: almost all cars that come off lease contract are sold as used, regardless of quality. There is little self selection, so they tend to be of average quality. A similar result applies in the labor market. Evidence: workers who are laid off when all workers lost their jobs were able to nd jobs more quickly, and generally earned higher pay in their new jobs, than workers who were laid off in other situations. workers who suffered from plant closure were able to explain job loss in a way that it did not stigmatize them.