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Business Journal
Watch Out: The Economy Is Improving
Business Journal

Watch Out: The Economy Is Improving

Is it time to worry about turnover -- or time to recruit?

by Benson Smith
Coauthor of Discover Your Sales Strengths

For those of you who always need something to worry about, we've got a rich new source of anxiety for you. What is it? Believe it or not, it's an improving economy.

That's right -- things are looking up. The Wall Street Journal reported last week that the economy clocked a 4.4% increase in growth in 2004, its best performance in five years. What's more, the Federal Reserve said that the labor market is gradually improving, and inflation remains well-contained.

Historically, when the economy gets better, turnover increases. That observation is the main thrust of a number of recently published articles, which also warn companies about the damage that turnover may cause to their long-awaited growth spurts. Accordingly, business scribes urge, managers must do something now to prevent "economic growth turnover syndrome." But just how real of a threat is this?

QUOTE: What causes turnover is more important than its cost. Bad managers cause turnover.


More opportunities to jump ship

In a weak economy, sales representatives and other employees are less likely to leave; fewer opportunities, coupled with general economic insecurity, keep people from moving on. As the economy gets better, though, more opportunities crop up, and some employees become more willing to jump ship. Unfortunately, each jump can cost your company money.

Just how much turnover actually costs is a subject of considerable debate. One recent research article pegged turnover costs at $5 trillion per year for U.S. companies, but that number seems incredibly high. The Gallup Organization's estimate is $187 billion. Whether you accept the high or low figure, they're both still big numbers. Nevertheless, worrying about turnover costs might actually steer you in the wrong direction.

Indeed, what causes turnover is more important than simply how much it costs. This seemingly complex issue can actually be boiled down to four words: Bad managers cause turnover. Employees may leave their jobs for a variety of reasons, but when Gallup looked specifically at why top performers left their companies, we found that in most cases, it was because of a breakdown in their relationships with their direct managers.

This finding should be a disturbing wake-up call for sales executives. What's more, relationship breakdowns rarely happen instantaneously. They occur over a period of months or even years. As this breakdown occurs, good performers become less engaged in their jobs, and their productivity slumps. This slide in engagement, and its effects, can be damaging to sales forces even before turnover occurs.

The costs of turnover aren't limited to the money spent to rehire and retrain replacements. In fact, greater costs come from the loss of productivity and key customer relationships that result when a top-performing sales rep walks out the door. One company executive with a relatively small sales force told me that his organization lost nearly 20% of its revenue when three of its best people left to work for a competitor. Ouch!

Conversely, when a company loses a poor performer, it may actually derive an economic benefit. Yes, businesses still have to bear the costs of rehiring and retraining. But if they replace a poor performer with a good one, they'll be ahead of the game. That's why thinking only about the costs of turnover can be very misleading.

Bad approaches, mixed results

Equally misleading are some of the suggestions that business articles offer to stem turnover -- from being "nicer" to employees or revamping compensation plans to providing more competitive perks or even "stay bonuses."

These approaches may slow the turnover tide, but in doing so, they can actually work against sales organizations. As an illustration, think about the kinds of programs that cell phone companies typically offer to attract new customers. Sure, free phones or service gimmicks may get you to sign an extended contract, but eventually that initial incentive feels more like handcuffs. And customers who feel trapped are rarely engaged or even satisfied.

Similarly, you may find ways to keep your employees, but if you don't keep them engaged, you won't be doing much to grow your business. If the only reason your sales reps stay is because you've spiffed up your commission plan, they'll begin to feel trapped. Ultimately, this negatively affects their performance. Your company then falls victim to that trap as well -- and you'll end up paying more while getting less.

One vice president at a sales seminar recently told attendees that over time, average compensation for his company's reps had crept above $350,000. But in spite of these sky-high averages, their engagement levels were quite low -- and getting lower. Enticements may boost morale temporarily, but they won't create long-term employee engagement.

That's one reason why company-wide programs aren't always effective. Another goes back to our four-word sentence: Bad managers cause turnover. Great managers, on the other hand, may prevent turnover. What's more, they can have a big influence on productivity -- especially the productivity of top performers.

You see, great managers have a direct impact on employee engagement, and high engagement levels can generate productivity gains and lower turnover rates. Consequently, if managers have been focusing on improving employee engagement and have seen their engagement scores rise, it's unlikely that they'll confront the kind of exodus that many experts are predicting. Engaged employees are less likely to leave good managers, even when they're tempted by lucrative job offers.

Shedding poor performers

Rather than fretting about turnover as the economy improves, world-class sales organizations will take advantage of the opportunities resulting from a better climate. One of those opportunities is to strengthen the sales team by shedding poor performers. And anyone who thinks their sales force doesn't have any laggards should take some truth serum and consider these numbers: On average, in most organizations Gallup has studied, 35% of the salespeople lacked talents to succeed on a consistent basis. And we found that up to 17% of reps are consistently ranked in the bottom third of their sales forces.

But beware: Getting rid of poor performers is only half the battle. Hiring talented replacements is the other, more important half. If companies use validated hiring tools that can assess a new recruit's potential for success based on talent, then they are likely to benefit from pruning poor producers. However, organizations that lack a good recruiting and selection program should actually consider upgrading their selection systems before letting poor performers go. There's really no advantage to getting rid of them only to hire other laggards in their place.

Experts have been writing that in many cases, companies will be scrambling to hire new employees to fill the vacancies created by increased turnover. But most of these companies will use the same old hiring practices they've used in the past. They'll overvalue education, experience, and candidates' personal charm, instead of probing more deeply into candidates' talents. Conversely, companies that practice talent-based hiring often have a conspicuous advantage over their competitors.

Rather than being concerned about the likely upsurge in turnover, the best companies will see this as an opportunity to shed some poor performers and recruit highly talented individuals in their places. They will also reinforce the message that sales managers should focus on increasing the engagement levels of their sales representatives. This last step is vital in good times and bad.

Benson Smith is coauthor of Discover Your Sales Strengths.

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