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Retention is the best strategy for your business, and a good worker experience is the key.

Liz Wilke Principal Economist, Gusto 

The talent market remains as tight as ever, with 2.0 open jobs per unemployed person. Despite rising layoffs in some sectors, laid off workers are finding jobs quickly, and quits are still near historic highs. The direct costs of turnover and recruitment are readily apparent. Direct recruitment costs can cost tens of thousands of dollars. But there’s an even bigger cost which doesn’t usually make it into company accounts.  

Employers spend billions of dollars per year on employee benefits, perks, and workplace culture to create engaging work experiences for employees, but it’s difficult to assess the return on this investment. As companies are facing choices about what expenses to keep and where to cut if we face an economic downturn, they need good information about what their programs really cost, and the value they produce to the business. 

This is where good data can help. Gusto surveyed more than 800 HR practitioners and 700 employees from growing companies on its platform of over 200,000 businesses about how employee longevity and engagement translate to corporate impacts. This is what we found.

Key Points

  • Retention yields returns. HR pros believe that time at a company significantly improves the productivity of employees over the first five years. 
    • 73% of HR professionals said that an employee who had been with the firm for three years versus six months was between 25-200% more productive. 
    • 42% of HR professionals assess that an employee who has been with the company five years is 25%-200% more productive 
  • Gains early lead to gains later. Ninety-six percent of HR pros who said that there was no difference in productivity between employees at six months versus one year also said there was no difference in productivity of employees between three years and five years.
    • But, 60% of HR pros who said employees were more productive at three years than six months also said that employees were more productive at five years than three. 
  • A good fit can be better than a good worker. Fifty-three percent of HR pros estimated that a stellar employee is 1.5 – 2 times more valuable to their company than an average employee. 
    • Gusto internal research on workplace expectations has found that great work happens when there is alignment between management and workers about expectations for the work experience and the work product. The closer the alignment between workers and employers, the better the fit. 
  • Employees feel more productive when they are excited and engaged in their work.
    • 85% of employees say they’re at least 50% more productive when they are excited about their work than if they feel neutral about their work.
  • The gains to engagement are high, but the costs of disengagement are also high. Over 60% of employees report that a disengaged worker creates extra work and reduces engagement and enthusiasm for others.

Productivity loss is the hidden cost of attrition

The direct costs of attrition are easy to comprehend – recruitment fees and costs, additional staff burden, and the extra pay you need to give a new worker to entice them to join your company over staying at their old one. 

But, the productivity that’s lost when a good employee leaves is one of the largest costs of attrition. Employers, managers and teams feel this loss in their daily lives, but it’s not easy to quantify. 

This ambiguity can make it hard to know what the real return is on programs and initiatives to improve employee experience, reduce attrition, and facilitate engagement – especially in an environment of economic uncertainty when businesses are becoming more concerned about their cash flow and expenses.

As with many questions, this is one that data can help solve. To help HR professionals and business owners quantify the benefits of their spend on employee culture, engagement and retention, we asked 800 HR professionals and business owners, and 700 employees, about how employee tenure and feelings of engagement affect their productivity at work.

Three-fourths of HR practitioners believe that tenure increases productivity, by a LOT

While on the job, employees gain valuable skills and knowledge that make them more productive at their work, regardless of any formal training. Employees learn about the specific business, and master company-specific processes, as well as how to effectively and efficiently navigate the company culture and drive success. New employees do not have as much of this installed knowledge, and tend to be less productive early in their tenure. 

We asked our respondents how much more productive an employee who had been on the job for three years was relative to an employee who had been on the job for six months. Eighty-eight percent of HR practitioners believe that a tenured employee is more productive than a newer employee. Most HR practitioners, 73%, indicated that longer-tenured employee was between 25% and 200% more productive than the newer employee. More than half indicated that the productivity gain was at least 50% more. In some cases, that productivity gap reached 300% or more. For HR practitioners at these companies, the value to the company of keeping employees longer warrants significant investment in HR practices that keep employees empowered and engaged.

Chart 1: Business owners and HR professionals see longer-term employees as much more productive

Those gains can be sustained over the long term. We also asked HR practitioners to compare the productivity of a five-year tenured employee relative to a similarly skilled three-year tenured employee. Fifty-three percent of respondents said that employees tenured five years were at least 25% more productive than similarly skilled employees who are only tenured for three-years.

Chart 2: About half of companies see productivity gains even after three years

Using these values, we can think through an example of how this affects businesses. A typical worker who sees a 50% productivity gain in the first three years, and a 25% productivity gain over the next two years would be 88% more valuable to the company after five years. Assuming a 5% annual raise each year, compensation costs for the same worker would only increase by 28%.

Early investments lead to long-term gains

Not all companies benefit equally from productivity gains over time, however. We also looked at the cross section of respondents’ answers about productivity to assess how well early gains in productivity correlate to future gains. Three trends emerge. 

First, the largest relative gains appear to concentrate earlier in an employee’s tenure. Companies were more likely across the board to report a smaller productivity gain between a three and five-year employee compared to a three year and six months employee. 

Second, companies that see no improvement in productivity between six months and three months are unlikely to see improvements on a longer time horizon. Ninety-six percent of those who saw no difference in productivity between a six-month employee and a five-year employee also saw no difference between a three-year employee and a five year employee. 

Third, companies that are able to encourage large productivity gains early on in employees’ careers are much more likely to see large productivity gains in subsequent years than companies who see moderate gains early on. Sixty-three percent of companies who saw the highest productivity gains between three and six months also estimated positive gains in years three through five. These companies are those where company- or role-specific knowledge and skills are most valuable, and who are able to effectively foster a culture of learning and development. 

These results point to the importance of professional development, career pathing, and continued upskilling for a company’s workforce. Where company-based knowledge and professional development meaningfully enhance the productivity of the worker, investments in career development, as well as investments in retention and maintaining engagement, yield above-average returns in worker productivity.

Engaged employees make productive contributors

What’s the link between retention and workplace experience? Studies show that workers who find their work meaningful are more likely to stay and to engage in “discretionary behavior” – the sum of all the little things that employees don’t have to do, but which benefit the company. 

From lived experience, HR practitioners know the value of engaged, quality talent regardless of tenure even if this is a difficult measure to quantify. Again, data can help. We asked respondents to indicate how they considered the value of a stellar employee relative to an average employee. 

Ninety percent of respondents valued a stellar employee to be worth at least 50% more to the company than an average employee. Nearly one in five, 18.2%, suggested that such an employee was worth over 200% more to the company than an average employee.

Chart 3: Most HR practitioners believe great employees are worth twice as much

The definition of a stellar employee varies across companies, yet the results strongly support the strategic value of HR practices that attract and secure great candidates, invest in their work satisfaction, and sustain high levels of engagement. Stellar employees are not only productive at their work, they also model desirable behavior for others, share knowledge, and engage in discretionary effort that enhances business performance across the organization. 

Employees also recognize the importance of engagement and feeling a strong, positive connection to their work. When asked how their own productivity changes when they are engaged or excited about their work, 85% say they’re at least 50% more productive than if they feel neutral about their work.

Chart 4: Workers feel more productive when engaged at work

The effects of engagement are keenly felt by workers, with impacts on their motivation and productivity.

Encouraging low performers out is as important as encouraging high performers to stay

Businesses must also build and manage processes for dealing with low performing or disengaged employees. Besides the losses associated with a disengaged worker’s own work product, 60% of respondents say that low-performing, disengaged employees delay project completion times and negatively impact team performance. 

Workers also report the impacts of disengaged, low performers. Employees feel the effects of low performers on their teams. Over 60% of employees report that a disengaged worker creates extra work and reduces engagement and enthusiasm for others. Thirty-percent of employees said that a low-performer on their team required them to take on extra work; one-quarter said it reduces their engagement with their own work. Low performers and disengaged workers can detract from the investments businesses make in establishing and maintaining high-performance cultures.

Chart 5: Disinterested workers affect others’ work performance

Performance management systems and employee engagement surveys can help businesses create and sustain great cultures by managing both high-performing and low-performing workers. High-performing workers’ progress and career paths can be documented, with clear goals and paths to advancement. Low performers’ performance can be similarly documented in order to either support the worker on a path towards improved performance, or to support a termination decision. HR processes ensure that this process is fair and transparent, and tied to both effort and outcomes. 

Surveys can help pinpoint areas of low engagement in order to target morale issues before they degrade culture or performance. They can also be useful for identifying areas of high engagement in order to look deeper into lessons and best practices from those parts of the business.

Conclusion

The lost productivity due to attrition is a huge source of lost business value for businesses that have higher than typical turnover. Businesses can gain significant value by creating work experiences that employees value and feel engaged with. These value-adds to the worker experience are part of the total work experience that employees value, and which they think about as they think about future career options. Pay is only part of the equation. 

Non-pay investments in retention, such as performance management, culture creation, and high-value, low cost benefits are all shown to improve employee engagement and keep employees longer. This work shows that these aspects of the work experience aren’t resource sinks, they are investments in the long-term durability and profitability of businesses.

For more information on on how Gusto has to offer to help you start or enhance your employee benefits program visit https://gusto.com/product/benefits

Liz Wilke
Liz Wilke Liz Wilke is a Principal Economist at Gusto, researching the state of work and business in the modern economy. She is a veteran of both the technology and government sectors, where she directed research programs and public spending that supports dynamic, resilient companies and workers across the globe. Liz currently lives in Washington, D.C.
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