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April 09, 2009
King's Corner

Employee Retention is Critical in a Down Economy

Huh? That title doesn’t seem to make sense at first blush. One would think that some attrition would be a good thing during a down economy. And if it’s the right kind of attrition, i.e. under performing employees, that’s true. Unfortunately, however, under performing employees rarely leave employment voluntarily. So, let’s dig a bit deeper into my rationale for employee retention being critical in a down economy.

If you think of the typical company’s employee base, you can probably determine that most companies are comprised of “A Players”, “B Players” and “C Players”. (For purposes of this argument, I’m not going to get into D’s and F’s (I’ll include those in the “C” category), and I’m definitely not going to get into the minutiae of +’s and -‘s.) By and large, companies can rather easily determine who the A’s are and who the C’s are, and the rest sort of fall into the B category. Makes sense so far, right?

In order to retain your A Players, and one would probably assume that would be a goal for most companies, companies need to make them feel as though they are being rewarded for their exemplary performance, and not being lumped in with the B’s and C’s. During “normal” or “strong” economic conditions, this can easily be done through higher performance bonuses and/or a greater differentiation of salary percentage increases. Makes sense, right? B Players are still satisfied in these economic conditions as they are seeing modest performance bonuses and salary increases, but there is enough differentiation between the A’s and the B’s that they feel adequately rewarded.

OK. So, when the economy has a recession like the one we currently are enduring, companies do very strange things. Obvious things need to happen. Spending needs to be curtailed. Check. Hiring needs to slow. Check. Layoffs may need to happen (see C Players above). Check. Quality needs to improve. Hmm. Is that always considered in a recession? It ought to be. How do you improve quality? Well, at a basic level, if you incent your best and brightest and actually REWARD them despite economic downturns, employee satisfaction results which leads to improved retention (of the A Players) and in effect, improved or at least sustained quality.

How do you go about rewarding A Players during a recession? The same way that you would during an economic boom. The principle is the same. Show them differentiation in the reward structure. During economic booms, money is more readily available, so it can be used as the main driver for differentiation in the reward structure. During recessions, creativity needs to come into play. Here are some examples of how to maintain your A Players during a recession:

  1. Your division needs to cut costs by 15%. Leadership has conveyed that in order to do so, 15% of the division is going to need to be laid off. My solution? Lay off 20%, and utilize the remaining 5% of the cost reduction towards modest performance bonuses to the A Player community. It may not result in much monetarily. But it will be an extremely powerful message to the A Players that they are appreciated.
  2. Management has communicated that there will be no aggregate salary increases this year due to the economic conditions. Management has an aversion to layoffs, and does not want to consider that as an option. My solution? Negotiate 10% pay cuts with the C Players and 5% pay cuts with the B Players. If they balk, they may resign. Utilize the money from the pay cuts to increase the salaries of the A Players. The C Players will be incented to leave. The B Players may be as well. The A Players will feel rewarded and valued.
  3. Management has concluded that all people are going to be able to be retained. However, everyone needs to accept a 10% paycut. My solution? Negotiate 20% pay cuts with the C Players, 10% pay cuts with B Players, and have zero net change to the A Players. As with examples 1 and 2, there is differentiation. And differentiation leads to incentivizing ALL employees. They will ALL seek to be A Players.

Consider the “normal” course of action for the 3 examples above.

In example 1, the normal course of action is the lowest 15% get laid off. But the very top 1% gets treated the exact same way as the 85th percentile. What do you think will happen? The top 1% will no longer be incented to be the top 1%. Why work so hard? Why work the extra hours? Why go the extra mile to help a teammate?

In example 2, the normal course of action is “no change”. What do you think will happen? Same as above. Some people refer to it as a “middling” effect. The best are no longer incented, so people think of that as a middling. The reality is that there is no middling. It’s actually a full-scale “lowering” effect. If there is no differentiation in a reward structure, nobody is incented.

And finally, in example 3, the normal course of action is 10% pay cuts for everyone. This one is easy. Even in this terrible economy, unemployment is still less than 9%, which means that 91% of people who want to work are working. Trust me. Your best and your brightest can find work elsewhere. And that’s exactly what they will do if you cut their wages by the same percentage as you do the C Players at the bottom of the ladder.

In conclusion, retention of your best performers is a goal in any economy. However, it is in the way you treat them during these economic conditions that will instill the loyalty you desire. Without differentiation, they will either leave OR they will become complacent. In either scenario, the lowering of your skill base is the result.

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