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Management Research News

Challenges of employee retention
Kevin J . Sigler
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Kevin J . Sigler, (1999),"Challenges of employee retention", Management Research News, Vol. 22 Iss 10 pp. 1 - 5
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Chal lenges of Em ployee Re ten tion
by Kevin J. Sigler
Re ten tion of tal ented em ploy ees can be a source of ad van tage for an or gani sa tion.
But there are chal lenges in at tempt ing to re tain these em ploy ees (Bar ney [1991];
Werner felt [1984]; Pett man [1975]). In a per fect world the pro duc tive em ploy ees
are en cour aged to stay within the or gani sa tion and the non pro duc tive poor per -
form ers are en cour aged to leave. In fact, if it were meas ur able a com pany would
keep each em ployee 1) whose con tri bu tion pro duces a posi tive risk ad justed profit
for the firm and 2) who will also have a more posi tive in flu ence on the firm than
any em ployee hired to re place him or her (tak ing into ac count the cost of hir ing the
new em ployee). But be cause of prob lems such as asym met ric in for ma tion it is no
easy task to carry out this goal. This ar ti cle ad dresses the prob lems, costs and
meth ods used to re tain pro duc tive em ploy ees.
Costs of Em ployee Re ten tion
The loss of tal ented em ploy ees may be very det ri men tal to the com pa ny’s fu ture
suc cess. Out stand ing em ploy ees may leave an or gani sa tion be cause they be come
dis sat is fied, un der paid or un mo ti vated (Coff [1996]), and while try ing to re tain
em ploy ees within the or gani sa tion they may pres ent other chal lenges as well.
They may de mand higher wages, not com ply to or gani sa tion prac tices, and not in -
ter act well with their co work ers or com ply to their man ag ers’ di rec tions.
Asym met ric In for ma tion
Be sides these prob lems asym met ric in for ma tion or lack of in for ma tion about the
em ploy ees’ per form ance may com pli cate an organi sa tion’s en deav our to re tain
pro duc tive em ploy ees. With out ade quate in for ma tion an or gani sa tion may not be
able to dis tin guish pro duc tive work ers from non pro duc tive ones. Em ploy ees of -
ten may take credit for the suc cesses and de flect fail ures to other em ploy ees. This
is known as a moral haz ard prob lem. In many in stances com pa nies may re ward or
pun ish em ploy ees for an or gani sa tion out come for which they had no im pact (Kerr
[1975]).
In suf fi cient in for ma tion about em ploy ees’ per form ance may re sult in ad verse
se lec tion by them (Gross man & Hart [1986]). The bet ter em ploy ees may move to
other or gani sa tions for bet ter op por tu ni ties. The co work ers who can not im prove
their po si tions are more likely to stay. This is es pe cially pos si ble when due to in -
ade quate in for ma tion out stand ing per form ance is not re warded. Non pro duc tive
and pro duc tive work ers end up re ceiv ing the same or nearly the same com pen sa -
tion and pack age of perks be cause of man age ment’s in abil ity to dis tin guish tal -
ented em ploy ees from the rest of the la bour force in the or gani sa tion.
The prob lem of at tempt ing to keep tal ented mem bers of the work force is fur -
ther com pli cated be cause of bounded ra tion al ity (Si mon [1976]). It is an other re -
sult of asym met ric in for ma tion where both the man ager does not know the
in for ma tion for which to ask from the em ployee and the em ployee does not know
what to pro vide. There fore, pro duc tive work ers can not dis tin guish them selves
from non pro duc tive co work ers.
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Vol ume 22 Num ber 10 1999
Bio graphi cal Note
Dr. Kevin J. Sigler can be
con tacted at the
De part ment of Eco nom ics
and Fi nance, Cam eron
School of Busi ness,
Uni ver sity of North
Caro lina at Wil ming ton,
601 South Col lege Road,
Wil ming ton, North
Caro lina 28403 - 3297,
USA.
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Agency Costs
Even if an or gani sa tion is for tu nate enough to re tain tal ented em ploy ees, the com -
pany may still have to cope with agency costs re sult ing from them and their col -
leagues. When in for ma tion about an em ploy ee’s ac tivi ties is dif fi cult to gather,
the em ployee (or agent of the share hold ers) may be mo ti vated to act in his own in -
ter est which may di verge from the in ter est of the or gani sa tion.
This di ver gence of in ter ests re sults in costs to the or gani sa tion in the form of ex -
ces sive per qui site con sump tion, shirk ing of job re spon si bili ties and poor in vest -
ment de ci sion mak ing. Jensen and Meck ling [1976] ex plained that it is in an
em ploy ee’s in ter est to over con sume perks and shirk job re spon si bili ties of the
firm if they are not sole own ers of the or gani sa tion.
Em ploy ees may also be en ticed to make sub- optimal in vest ment de ci sions for
the firm. Since most com pany em ploy ees have their wealth tied up in the or gani sa -
tion for which they work, em ploy ees may at tempt to make in vest ment de ci sions
which are less risky than the stock hold ers of the firm would pre fer. This is done to
re duce the risk of fail ure by the com pany which pro tects the non- diversified em -
ployee from loss of wealth. This in vest ment strat egy may also re duce the re turn on
in vest ment that the di ver si fied own ers of the firm de sire (Mur phy [1985]).
The em ploy ees or agents of the or gani sa tion may also use a short sighted ap -
proach in in vest ment se lec tion to en hance their own ca reer chances (Naray anan
[1985]). The em ployee can sig nal the la bour mar ket his su pe ri or ity through the se -
lec tion of a fast start ing proj ect which may fiz zle out later for the firm (of course
by the time the true value of the short sighted proj ect is re vealed the em ployee has
moved on to a bet ter job). This strat egy may cause the firm to miss out on prof it -
able long- term proj ects or much needed re search and de vel op ment.
Em ploy ees may also at tempt to in crease the size of the firm through ac qui si -
tions and proj ect se lec tion re gard less of the ef fect on com pany prof it abil ity in or -
der to in crease their own power base within the firm.
Reme dies to Em ployee Re ten tion Prob lems
In cen tive com pen sa tion is one method which is used to re duce the prob lems sur -
round ing the ef fort to re tain em ploy ees. By align ing the in ter ests of the em ploy ees
with the own ers of the firm through pay in cen tives, the agency prob lems of ex ces -
sive per qui site con sump tion, shirk ing and poor in vest ment de ci sion mak ing may
be re duced. In cen tive pay may also give the em ployee the in cen tive to stay in the
or gani sa tion, pro vide a com peti tive wage so the em ployee is paid fairly, and en -
cour age the em ployee to com ply to or gan isa tional prac tices. In ad di tion to us ing
pay in cen tives to re ward the em ployee for reach ing com pany goals and dem on -
strat ing loy alty to the or gani sa tion, ef forts can be made by the or gani sa tion to im -
prove job sat is fac tion. This may also in crease the num bers of tal ented em ploy ees
who stay in the com pany.
In cen tive Pay
In cen tive pay may con sist of cash bo nuses for em ploy ees upon reach ing pre de ter -
mined goals. The bo nus is nor mally tied to ac count ing meas ures and many times
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Man age ment Re search News
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spe cifi cally to the em ploy ee’s job area.
Stock own er ship by the em ployee is an other type of pay in cen tive. It in es sence
makes the em ployee a stock holder of the or gani sa tion align ing the in ter ests of the
em ployee with the own ers. Em ployee stock own er ship can come through re -
stricted stock plans where own er ship of the stock is not trans ferred to the em -
ployee un til af ter a spe cific pe riod of time has passed or a spe cific goal has been
achieved. Other stock own er ship by em ploy ees may come through Stock Ap pre -
cia tion Rights (SAR) or Phan tom Stock plan where em ploy ees bene fit if the value
of the firm’s stock in creases. Stock op tions are also used to mo ti vate em ploy ees
and re duce agency costs and re ten tion prob lems. Em ploy ees have the right
through these op tions to pur chase the com pany stock at a pre de ter mined price.
This pro vides em ploy ees the in cen tive to drive the stock price higher through their
work ef fort.
But each of the pay com po nents dis cussed above if in cluded in an em ploy ee’s
pay pack age may pro duce other prob lems for an or gani sa tion. Cash bo nuses are
many times based on the per form ance of firm which is meas ured us ing ac count ing
num bers. This may mo ti vate an em ployee to ma nipu late the tim ing of reve nues
and ex penses over which they have con trol to maxi mise their own pay out (Healey
[1985]). Cash bo nuses may also fo cus the em ployee on short- term per form ance of
the firm at the det ri ment of long- term per form ance.
Com pen sa tion in the form of com pany com mon stock may have the draw back
of not be ing spe cific enough to truly mo ti vate the em ployee to work hard, stay in
the or gani sa tion and com ply with prac tices (Larcker [1983]}. For in stance, the
stock of the com pany is driven in large part by how well the over all mar ket for
stocks per forms. There fore the price of most com pany stock moves up and down
in value de pend ing on the over all econ omy over which the em ployee has no con -
trol. Also since the stock price is not tied solely to the em ploy ee’s job, an em -
ployee may ride the ef forts of one or a few col leagues who make de ci sions and put
forth ef fort which in crease share value.
One way to re duce the short com ings of each pay com po nent is to pay com pany
em ploy ees with a com bi na tion of bo nuses, stock pay out and sal ary. An ade quate
base sal ary al lows the or gani sa tion to com pete for em ploy ees in the la bour mar ket
ef fec tively. In clud ing stock own er ship as a part of an em ploy ee’s com pen sa tion
pack age off sets the prob lems of ac count ing ma nipu la tion by com pany em ploy ees
and also may mo ti vate em ploy ees to fo cus on long- term per form ance of the firm
(us ing re stricted stock). Cash bo nuses based on spe cific per form ance of the em -
ployee mo ti vates the worker not to sit back and ride the coat tails of pro duc tive col -
leagues. This may be the rea son ex ecu tives as well as other em ploy ees in many
or gani sa tions have com plex pay pack ages.
Job Sat is fac tion
Be sides us ing com pen sa tion, re tain ing tal ented em ploy ees may also be ac com -
plished through im prov ing their job sat is fac tion. Man age ment can in sure tal ented
em ploy ees are given auton omy in their job func tions and are given mean ing ful as -
sign ments, al low ing them to be in volved in the de ci sion mak ing for their area of
ex per tise. Pleas ant work ing con di tions can also en tice pro duc tive work ers to stay
in their or gani sa tion and not look else where. In ad di tion, of fer ing these tal ented
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Vol ume 22 Num ber 10 1999
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em ploy ees train ing to keep them cur rent on their job func tions and al low ing them
to learn new skills can also be util ised to im prove em ployee sat is fac tion with the
or gani sa tion (Rice, Gen tile, & McFar lin [1991]).
Pay in cen tives will help align the em ploy ees’ in ter ests with those of the organi -
sa tion’s own ers and ef forts to im prove job sat is fac tion through em ployee auton -
omy, train ing, and pleas ant work ing con di tions will help re tain tal ented
em ploy ees. But be cause of asym met ric in for ma tion it may be dif fi cult to en cour -
age poor per form ers to leave the or gani sa tion. Bet ter moni tor ing of em ploy ees
through audits and sur veil lance may help dis tin guish pro duc tive from non pro duc -
tive em ploy ees.
But even if an or gani sa tion can dis tin guish tal ented em ploy ees from poor per -
form ers it still needs to as sess the im pact the em ployee is mak ing on his co work -
ers. Em ploy ees though tal ented may have a nega tive im pact on the other
em ploy ees and re duce the pro duc tiv ity of those around them. Or, tal ented em ploy -
ees who do not buy into the mis sion of the firm may in flu ence oth ers to ques tion
the di rec tion of the or gani sa tion and there fore pro duce a nega tive work at mos -
phere. Meth ods to as sess the poi son ing im pact of these kinds of em ploy ees must
be util ised by man age ment and ef forts to re move these types of work ers must be
con sid ered in con junc tion with pay in cen tives and im prov ing job sat is fac tion.
Con clu sion
Re tain ing tal ented pro duc tive em ploy ees and elimi nat ing poor per form ing em -
ploy ees is es sen tial to the long run suc cess of an or gani sa tion. But there are prob -
lems such as ad verse se lec tion, moral haz ard and agency costs as so ci ated with
reach ing this goal. In cen tive com pen sa tion and in creas ing em ployee job sat is fac -
tion may be use ful in ad dress ing the chal lenges sur round ing em ployee re ten tion.
Ref er ences
Bar ney, J.B., 1991, “Firm Re sources and Sus tained Com peti tive Ad van tage”,
Jour nal of Man age ment, Vol. 17, pp.99- 120.
Coff, R.W., 1997, “Hu man As sets and Man age ment Di lem mas: Cop ing with Haz -
ards on the Road to Resource- Based The ory”, Acad emy of Man age ment Jour nal,
Vol. 22, pp.374- 402.
Gross man, S.J. & O.D. Hart, 1986, “The Costs and Bene fits of Own er ship: A The -
ory of Ver ti cal and Lat eral In te gra tion”, Jour nal of Po liti cal Econ omy, Vol. 94,
pp.691- 719.
Healey, P., “The Ef fect of Bo nus Schemes on Ac count ing De ci sions”, Jour nal of
Ac count ing and Eco nom ics, April 1985, pp.85- 107.
Jensen, M. & W. Meck ling, 1976, “The The ory of the Firm: Mana ge rial Be hav ior,
Agency Costs and Own er ship Struc ture”, Jour nal of Fi nan cial Eco nom ics,
pp.305- 360.
Kerr, S., 1975, “On the Folly of Re ward ing A While Hop ing for B”, Acad emy of
Man age ment Jour nal, Vol. 18, pp.769- 782.
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Larcker, D., “The As so cia tion Be tween Per form ance Plan Adop tion and Cor po -
rate Capi tal In vest ment”, Jour nal of Ac count ing and Eco nom ics, April 1983,
pp.3-30.
Mur phy, K., “Cor po rate Per form ance and Man age ment Re mu nera tion”, Jour nal
of Ac count ing and Eco nom ics, April 1985, pp.11- 42.
Naray anan, M., “Mana ge rial In cen tives for Short Term Re sults”, Jour nal of Fi -
nance, De cem ber 1985, pp.1469- 1484.
Pett man, B.O., (Ed.), 1975, La bour Turn over and Re ten tion, New York, John
Wiley.
Rice R.W., D.A. Gen tile, & D.B. McFar lin, 1991, The Clash of Cul tures: Man ag -
ers Man ag ing Pro fes sion als, Bos ton, Har vard Busi ness School.
Si mon, H.A., 1976, Ad min is tra tive Be hav ior: A Study of Decision- making Proc -
esses in Ad min is tra tive Or gani za tion, New York, Free Press.
Werner felt, B., 1984, “A Re source Based View of the Firm”, Stra te gic Man age -
ment Jour nal, Vol. 5, pp.171- 180.
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