Cost of Turnover and Cost of Referral Correlation

We have developed very specific, most-wouldn’t-think-of-them strategies to increase referrals such that up to half of all of our client companies’ hires come from referrals. One of those client companies connected the dots between referrals and the cost of turnover. And their outcome is brilliant.

Thinking backwards for a minute, consider those times when you debated how much to pay for referrals, maybe slugging it out with your CFO regarding how many hard dollars might fly out the door if you were fortunate enough to get any referrals at all. And I would guess when HR challenges finance over something involving money, HR usually loses. That’s where placing a dollar cost on turnover comes in…and doing so is the very first step we take with our clients.

Want to calculate your cost of turnover? You can do so for free here by using our proprietary turnover calculator.

This client provides a service to its customers delivered by skilled tradespeople, the type of worker who was in high demand even before the current applicant crunch. Nationally, there are a limited number of technicians who can do this work…and there is no easy pathway for hiring interested people and training them. Many earn greater than $100,000 per year and can find jobs with other companies in an hour. Our client has over 100 locations across the U.S. and each location is vulnerable to technicians leaving on any given day.

Buy In on Cost of Turnover and Conversion to Cost of Referral

“Leaving” is where the cost of turnover comes in. This executive team totally buys into that losing one technician for a month results in lost revenue greater than $60,000. And sometimes these jobs stay open for longer than one month. So if you knew this same type of data for your company, would you be sparring with finance over whether to pay $500 or $1,000 for each referral? Probably not.

So our client company made fast policy decisions to fill jobs quickly with employee referrals. For example…

1. The referring employee will earn $1 dollar per hour extra for one full year, resulting in a total bump of $2,000 to $3,000 depending on overtime.
2. The payout begins when the new hire joins and the only “stay” requirement is the referring employee must stay the full year to receive the continuously-paid bonus.

So this means if I refer someone who gets hired, I just earned a large chunk of cash regardless of how long my referred employee stays…because this client company smartly said it’s the company’s job to decide if the candidate will stay and not the job of the referring employee.

Is the Cost of Referral Tied to Cost of Turnover Too Radical?

But then comes the extraordinary policy part. This is a policy feature I’ve suggested to scores of clients who saw this idea as too radical…but this client said “absolutely”. When any technician refers five new hires…who must only get hired with no “stay” requirement…that technician gets double payouts for any future referrals. So instead of earning one extra dollar an hour for a year, any employee who refers five technicians who get hired would now earn two. And these referring employees have the potential to continually “recruit” new hires and consequently keep increasing their pay…with no limits.

Bold maybe? A better word is “smart”. Imagine a competitor CEO telling her board of directors, “We lose $60,000 per month when a technician job is open so we’ve initiated an employee referral program where we will pay any technician who refers a new hire a full $500 for each referral”. Not so smart…but common among most companies who don’t connect their referral payout amount to their cost of turnover data.

The key point is the top team has determined the cost of turnover and realizes paying up to $6,000 to fill those jobs is a win/win, and actually a bigger win for the company. And their cost analysis beats back any objection that these represent “soft costs”. Real revenue is flying out their one-hundred-plus doors.

The Dollar Value of Turnover is Key to Understanding the Cost of Turnover

Why is our first step with new clients that we place a dollar value on turnover? Because it’s the ice-cold-bucket-of-water dumped on their executive teams’ heads, the wake-up call that turnover is likely their second or third greatest overall expense. Finance traditionally has no interest in turnover because they see it as HR’s job, all while finance is trying to find coins in the couch to cut costs. And HR makes their top team’s understanding worse by disclosing turnover “benchmarks” which only stifle corrective actions. Compare these two scenarios:

Scenario #1:

HR: Our turnover is 28% and the benchmark is 30%.

CEO: Great work, HR!

Scenario #2:

HR: Our turnover is 28% and it’s costing us $3.4 MM per year.

CEO: We have to fix this!!!

Costing turnover is the genesis, the beginning for gaining vigorous support from your c-suite to then establish retention goals for leaders, implement Stay Interviews, and all other solutions that are part of Finnegan’s Arrow®.

Our Comprehensive Turnover Solution is designed to get results for companies like yours by cutting turnover 20% and more. Write me or connect with me if you want to learn more…DFinnegan@C-SuiteAnalytics.com.

This updated blog was originally published September 21, 2021.

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Let’s together read that italicized sentence again. For most companies, gaining employee referrals is an afterthought. If I asked whether onboarding or referrals are more important for retention, those companies’ HR executives would say “onboarding”. Or they would also choose events with food…or pet insurance, my favorite benefit to pick on. The fact is that gaining employee referrals matters more than just a handful of the usual HR initiatives…especially when good candidates are so rare.

Let’s be bold here. As most companies are planning their 2022 objectives, make one of yours be to triple your percent of jobs filled by employee referrals.

We help our client companies do that by looking at nine criteria, and today we will focus on just one:

How much money do you pay the referring employee on their referred employee’s first day of work?

The initial answer for most companies is maybe a little but certainly not much because we don’t want to reward any employee whose referral doesn’t stay with us. Or some companies say we don’t pay a nickel until the referred employee stays with us 90 days or longer. Their logic goes like this:

• We will only pay hard dollars if the referring employee sends us someone who is a long-term keeper.
• We also want to avoid any conspiracy where both of those involved privately agree up front that the “new hire” will quit early and both will split the jackpot.
• And the referring employee will be motivated to coach the new hire to stay if dollars are on the table.

For the record, I agree with this last position…and with the first two above it, too, as long as the employees who you are looking to for referrals are in professional jobs and don’t live paycheck to paycheck.

But let’s suppose you are looking to increase referrals from manufacturing workers, call center agents, retail and restaurant employees…or any of our other occupations where workers are likely to see incoming dollars only in the framework of helping to pay this month’s bills. Three mind-grabbing statistics jump out here:

1. 63% of our U.S. workers live paycheck to paycheck in our current covid-impacted country.[i]
2. A full 70% of millennials live paycheck to paycheck and they are quickly becoming the largest segment of our workforce.[ii]
3. Workers now need to make $42 an hour in order to spend the recommended quarter of their income on an average one-bedroom apartment…while the average hourly pay for restaurant workers for example is $11.52.[iii]

Let me make the argument, then, that your employee referral program offers no financial incentive for entry-level workers…or for most hourly workers…if you don’t pay a significant chunk of your total payment on the first day the referred new hire starts. So if most of the employees who you are incenting to refer others are paid by the hour, your employee referral program will fail.

Our Comprehensive Turnover Solution is designed to get results for companies like yours by cutting turnover 30% and more. Write me or connect with me if you want to learn more…DFinnegan@C-SuiteAnalytics.com.

Let’s next turn some other traditional thinking about referral programs on its ear by asking this:

Who is responsible for ensuring a referred employee stays with your company for a designated period of time?

Or said another way with a cynical smirk, is tying the referring employee’s payout to the referred employee’s length of service an honorable and fair strategy…or is it just a way to save a few bucks if the newly-hired employee quits early?

Referring employees are not hiring experts, nor can they impact how your managers will treat referred employees. You do, however, have hiring experts in HR recruiting and most managers have ideally developed skills to identify how long an employee will stay. And it is that manager who has the most impact on that new-hire’s length of service. So it seems fair to ask why should the referring employee be on the hook for how long the new hire they refer stays. And instead, why shouldn’t the HR recruiter and the referred employee’s manager be on that same hook?

So the recommendation here becomes clear: Pay at least half of the total reward to the referring employee on day one, especially if that employee is paid by the hour. Otherwise your referral program begins with a fatal flaw…at a time when you’ve never needed employee referrals more.

[i] https://www.cnbc.com/2020/12/11/majority-of-americans-are-living-paycheck-to-paycheck-since-covid-hit.html

[ii] https://www.businessinsider.com/broke-millennials-living-paycheck-economic-crisis-savings-spending-survey-2021-6#:~:text=Economy-,70%25%20of%20millennials%20are%20living%20paycheck%20to%20paycheck,more%20than%20any%20other%20generation&text=70%25%20of%20millennials%20say%20they,but%20not%20yet%20peak%20earnings.

[iii] https://apple.news/ATcs4k9ACTsaHgmFwj4yXsA

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The obvious reason why referred employees stay longer is your current employees won’t risk their reputations by referring a low performer. The greater reason, though, might be that referred employees already know the upsides and especially the downsides of the jobs from listening to their buddy. They know what peculiar duties and work circumstances they are walking into.

I then dug even deeper to learn which companies were best at how they managed their programs. Some companies’ policies were considered extreme, thinking of one example where an organization offered to pay anyone a $500 fee for a referral…including you or me so they mean ANYONE…whereas most other companies restrict payments by eliminating managers and HR. I like the “more the merrier” approach.

Most companies see employee referrals as just another HR thing that companies do, so they put together a committee to form the policy and eventually sprinkle some communications, on the walls and electronically. Then they wait for referrals to pour in. Or not.

So right now, is the time to promote your referral program, promising holiday shopping money in return. Or some of you might provide different rewards, say time off or gift cards. Regardless, employees are always scratching for dough in any form during the holidays, and employee referrals provide a way for you to give them. Here are the six ways we recommend increasing referrals to our clients:

1. GOAL: Set a goal for what percent of new hires will come from referrals, increase the goal periodically, and hold one person accountable for achieving it, likely from recruiting; the ultimate goal is to get half your new hires from referrals.
2. PAYMENT TIMING: Pay half the award on day one when the referral starts, and the second half after the employee has stayed for a reasonable period of time so you know the new hire is a keeper, for example 90 days.
3. MARKETING: Ask the marketing department to assign someone to help achieve the goal, too…or form a small committee of smart and well-connected employees to help.
4. VISIBILITY: Present awards publicly with a large cardboard check, asking the employee how she intends to spend her reward money.
5. REMINDERS: Raffle off a night on the town each quarter for those who have successfully made a referral during the previous year.
6. TAXES: Increase the award to cover all taxes so the winning employee receives the full amount.

And now here are my favorite power moves to make your referral program soar:

POWER MOVE #1: Assign a specific referral goal to whoever conducts onboarding or new-hire training, as new hires just came from another company and likely know more candidates than someone who has been with your company for years…and those same new hires will be eager to impress.

POWER MOVE #2: Announce that you will double your reward for any employee who successfully provides five referrals, and that double reward will stay in place for as long as that employee works for you.

Whereas most organizations see referrals a just a way to increase the applicant pool, we see referrals as a way to improve retention…and engagement, too.

Please email your comments to me at DFinnegan@C-SuiteAnalytics.com.  You are also welcome to forward this blog to anyone you believe would find it helpful.

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