Daniels professor Scott McLagan shares how to increase employee retention, without raising salaries
With years of experience in the boardroom and the classroom to lean on, Daniels College of Business professor Scott McLagan said the key to employee retention boils down to one, often-overlooked thing.
“The person that has more control over your world [than anyone else] is your immediate supervisor,” he said.
So, when companies are struggling to retain employees, McLagan said, it’s easy to fall into the compensation trap. Employers begin to explore paying more or offering a stronger benefit package as a retention tool. Instead, he said, management should look inward at the quality of leaders around them.
While working at Emerson Electric, McLagan saw what true leadership and accountability looked like. He’s used that experience to shape how he teaches the next generation of leaders in the Daniels Executive Education and Executive MBA programs.
Emerson had high-level leaders meet with the company’s CEO each year to perform a talent review. Part of that process involved identifying the employees with the highest potential, those struggling with their performance and a group in between.
“When you were doing that review, one of the cardinal sins at Emerson was when someone you identified as ‘high potential’ left under your watch,” McLagan said. “That was true accountability for keeping and retaining top talent.”
This changed McLagan’s mindset and outlook for the rest of his career. He shifted the time he focused on talent management from around 10% of his efforts to nearly 30%. Recent studies reinforce this shift for managers.
Research from the MIT Sloan Management Review found that a toxic corporate culture is 10.4 times “more powerful than compensation in predicting a company’s attrition rate.” The next most important factors are job insecurity and reorganization, high levels of innovation and failure to recognize employee performance. All of these factors rank higher than compensation.
While compensation isn’t a crucial factor in employee retention, the failure to keep employees can prove to be a costly endeavor. Employment software company Workable estimates that the average cost of filling an executive position is $14,936; and it can take up to 94 days to replace highly skilled workers.
With those dire numbers, why aren’t more companies better at retaining employees? Is it a lack of effort or ability?
McLagan thinks that companies are often misguided in diagnosing their retention problems. He said companies lean too heavily on exit interviews, taking flawed information from departing employees to help guide their strategy.
“When you ask people why they’re leaving, the number one answer is always a better opportunity,” McLagan said. He adds that often the answer is truly their manager, but employees don’t feel comfortable sharing that and aren’t looking to burn a bridge. So, if these companies are operating under the false assumption that there are better opportunities out there, compensation is a quick and easy way to rectify that.
“People think they’ve got a compensation problem and they really have a leadership problem,” McLagan said. “There’s a lot of data that supports the fact that if people are happy in their jobs, they’re not looking [for other jobs]. They won’t even entertain an offer that is higher.”
Lowering employee turnover doesn’t come with a one-size-fits-all solution, but McLagan thinks that a few small tweaks can offer tremendous returns for managers.
“People stay if they can connect to a purpose, if you can help them grow, if you can give them the level of autonomy where they don’t feel like they’re micromanaged, and if you recognize them,” he said. Certain employees will need more of these motivators than others, but McLagan said they are good pillars to lean on for strong leadership.
With four or five very different generations in the workplace, there are more variables than ever for leaders. McLagan said there’s a mismatch in expectations between his Baby Boomer generation and the younger, Millennial and Gen Z workforce that switches jobs and roles more frequently. Rather than fighting these perspectives, McLagan advised that leaders use them to shape their business.
“The truth is every generation has a different view of work,” he said. “I think the Millennials and Gen Zs have it right. So you have to say, ‘What is wrong with me that I’m not adapting to the generational needs?’”