Keeping the Good Ones Around

Are you afraid your key employees are ready to walk? Here's what you can do to keep your most valuable players around.

Every time one of the 46 employees of J.L. Patterson & Associates leaves, the company loses expertise, incurs the expense of hiring a replacement and risks alienating customers who must deal with a new recruit. "It leaves a huge void," says Jacqueline Patterson, 47-year-old founder of the Orange, California, engineering company with $7 million in 2005 sales. "We try to avoid having people leave us whenever possible."

Employee retention is a major concern for entrepreneurs everywhere. In fact, entrepreneurs see it as the single most critical factor for business success in 2006, according to Entrepreneur magazine and PricewaterhouseCoopers' first annual "Entrepreneurial Challenges Survey," which was reported in the January issue of Entrepreneur. Seventy-three percent of the founders and CEOs of 340 fast-growth businesses surveyed said retaining key workers was the biggest issue they faced. The next-ranking issue, developing new products and services, was named most important by only 38 percent of entrepreneurs.

Experts say retention should be a serious concern. "If you accept high turnover rates, it's costing you a lot," says Greg Smith, a Conyers, Georgia, retention consultant. "It costs about two and a half times a person's annual salary to replace them. And the more talent a person brings to the company, the more expensive that person becomes to replace." High turnover can also affect marketplace perception, employee morale and productivity, and a host of other factors.

Entrepreneurs are especially concerned about retention today because, as the economy improves, employees have more options. During the economic retrenchment after 2001, job opportunities were scarcer, and employees were less likely to leave than during the late 1990s. Now, the prospect of a healthy job market--and the rash of job-hopping that could accompany it--has entrepreneurs fearing they'll be unable to hang on to their best employees.

While opportunities are expanding, immigration restrictions, retiring baby boomers and shifts in the way people view the employer-employee relationship may also be increasing the difficulty of keeping key workers. The pressure is even greater on small companies because they usually can't offer pay, benefits and opportunities for advancement superior to those available in big companies.

But some entrepreneurs are overcoming the challenge, using both time-tested and innovative new techniques for employee retention. Patterson, for example, lost only three people from her 46-person staff during 2005. Her company's turnover rate is less than half the industry average, according to Patterson, who says she has used a combination of inducements to help keep her best people.

One way she hangs on to top workers is by offering a benefits package that matches those of larger employers. Patterson's workers get fully paid health insurance including dental and vision coverage for themselves and their families. The company matches 100 percent of 401(k) contributions up to the first 5 percent of salary. Tuition for engineering and project-management education courses is completely covered, as is half of tuition for work toward any degree of the employee's choice.

"Employees are looking for more than just a paycheck," Patterson explains. "They are looking to be treated fairly, be recognized for what they do and have the chance for advancement." She addresses other concerns by offering flexible hours, sponsoring monthly meetings where employees who have ideas for improving operations can speak up, and providing training and opportunities for promotion. "That's one of the things we notice most," she says. "The people who have left--it's because they don't see the chance for advancement."

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This article was originally published in the April 2006 print edition of Entrepreneur with the headline: The Long Haul.

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