For most employers, “turnover” is a dirty word. With every employee departure — and therefore, a new hire — comes a cost. The more employers are able to mitigate turnover costs, common talent management thinking goes, the more an organization is likely to save in the long run. Keeping experienced employees around longer ultimately results in a more productive and competitive workforce.
But what if there was a strategic way to approach turnover so that a company might actually save money as a result? Economic theorists from the University of North Carolina at Chapel Hill Kenan-Flagler Business School might have an answer.
Ed Van Wesep, an assistant professor of finance at UNC, and Gunter Strobl, his co-author with the same title, demonstrate in a study that if companies communicate to potential hires the practice of actively promoting performance, they may actually be able to pay them less.
For years, Van Wesep said, economic literature has recognized that if an organization publicizes an employee’s performance, it is more likely that he or she will be poached and paid more by another company. A glamorous job title, a letter of recommendation or a performance-based award is likely to garner the attention of recruiters and other firms looking to hire top talent.
The UNC study, which will be featured in a forthcoming issue of Management Science, adds to this thinking. According to the professors, who claim to have proven the concept through economic modeling, firms that establish a reputation for hiring young workers and promoting the high performance of those who succeed are likely to lose those workers to competitors. In the meantime, however, those employers can pay less to those workers in exchange.
This, according to the authors, is particularly relevant for younger and less experienced workers, mainly because they are more likely to be searching for positions that could ultimately catapult them to a better job down the road.
The concept doesn’t necessarily work for every company.
“A company like Google would rather just hire the employees it knows are good,” Van Wesep said. “It’s not going to waste time with employees of uncertain quality.
“But companies [that are] sort of further down the ladder, that maybe aren’t quite as good as Google, they’re going to find it advantageous to hire employees where people aren’t really sure how good they are, figure out how good they are and then publicize it to the world.”
Van Wesep did offer a caveat: Because the study is based on economic modeling — it hasn’t been tested, either in the field or in a lab environment — the results may not translate cleanly into practice. The fact that the study did not take into consideration some of the complicated factors that commonly affect the labor market should also be noted, Van Wesep said.
For example, a company could decide to increase the pay of good employees down the road in an effort to retain them, or offer them some other non-financial perk or compensation.
Still, Van Wesep said he would be “surprised” if the big-picture concept didn’t bear fruit in some form or another — especially for smaller or less established firms that may be unable to offer competitive financial compensation.
The trick is being open and transparent upfront.
“If you can communicate to potential hires that, look, this is a benefit of working here, in spite of the fact that we might lose you,” he said, “we want everyone to know how great you are. That’s a great way to get new employees, especially younger ones.”
Frank Kalman is an associate editor of Talent Management magazine. He can be reached at fkalman@talentmgt.com.
