The days when people would spend decades at one company are long gone. These days, the average time a worker stays at one organization is four years, according to the U.S. Bureau of Labor Statistics — and it is even shorter in the tech sector. Though high turnover rates are becoming the norm, it is costing companies a pretty penny: Employee Benefit News reports that, when a worker leaves, it costs employers 33% of a worker’s annual salary to hire a replacement.
This type of hit can make or break a business — and it is especially damaging for startups. Equally detrimental is when companies lose great employees by hiring them at starting salaries that are too high, levels that don’t leave enough room for regular increases. Either the organizations wind up paying too much for one person’s output, or the employee leaves because there’s no room to advance, regardless of performance.
As a veteran of building and running growth businesses, I have seen these situations many times. Fortunately, there are several ways to mitigate the problems, including offering reasonable salaries with room for incremental, merit-based raises.
Planning for each person’s full “employee life cycle” means coming up with the right starting package; setting and clearly communicating the goals that employees are expected to meet; and, ultimately, preparing well in advance for the person’s eventual exit.
Starting off on the right foot
When hiring new staff, employers frequently try to offer attractive starting salaries to attract the best and the brightest. But hiring managers often mistakenly focus on recruiting a person in the short-term without considering a given employee’s longer-term prospects at the company and whether the initial salary offers room and incentive to grow.
Let’s say a software company offers a programmer $90,000 per year to start, but the maximum it can afford to pay someone in the position is $100,000. This gives the company only two long-term options: offering the employee a disappointing raise each year, to the point where the person moves on, or bumping up the person’s salary until the company can no longer afford it.
I have personally made this mistake multiple times. I’ve witnessed employees hit their salary cap early in their tenures and leave in frustration, or I eventually had to let them go because I couldn’t keep paying them more. It was not only embarrassing, but my poor planning cost the company.
Hiring managers should determine in advance the maximum they can pay someone in a given role, based on the candidate’s experience and geographic location. A starting package should leave room to increase with regular raises during the life cycle of the employee’s estimated time in the role — be it two years, three years, or five. And any increases should be tied to reaching the goals necessary to make the employee a profitable contributor.
Align employees’ performance with company metrics
Workers tend to be more engaged when they understand what’s required of them to advance. This is especially true for people aged 20 to 35, according to a report by strategy firm Department 26 about Millennials’ workplace satisfaction.