How Employee Retention Affects the Organization

Matt Tenney, Author of Inspire Greatness: How to Motivate Employees with a Simple, Repeatable, Scalable Process

Most organizations strive to maintain high rates of retention and for good reason. Employee turnover can significantly affect an organization’s operations and long-term success due to its financial impact.

However, high rates of retention can also have unforeseen consequences for organizations when disengaged employees make up a significant portion of the overall number of retained employees—a potential downside to retention that many leaders don’t consider until it’s already a problem.

Pursuing engagement strategies that help organizations retain the best employees requires a thorough understanding of the pros and cons of retention and how they impact organizations. 

Employee retention affects an organization’s performance, productivity, culture, profitability, and customer satisfaction in positive and negative ways. While the high costs of turnover make retention essential for an organization’s future success, retaining the wrong employees can hinder success.

In this article, we’ll look at how employee retention can affect organizations in positive and negative ways. 

What is Employee Retention?

Employee retention refers to an organization’s ability to retain employees. A high rate of retention is achieved by reducing employee turnover, which is the number of employees who leave a job, either voluntarily or involuntarily, during a certain period of time.

Increasing employee retention has a significant impact on organizational performance and success.

According to the Society for Human Resource Management (SHRM), employee retention programs play an important role in attracting and retaining skilled employees and reducing turnover and its associated costs. 

Because it is more efficient to retain qualified and highly-skilled employees than to train and onboard new hires, retention is good for an organization’s overall performance, productivity, and profitability. 

Retention/turnover was the top workforce management challenge cited by 47% of human resource professionals in the SHRM/Globoforce survey Using Recognition and Other Workplace Efforts to Engage Employees.

The Benefits of Employee Retention

High retention rates can indicate that a team is highly engaged, performing well, and providing better customer service. Engagement is particularly important as employees who care more about an organization’s mission will feel a sense of purpose in their roles and demonstrate more commitment to their jobs.  

High rates of retention mean lower rates of turnover—which is so important because the cost of turnover can have a devastating effect on a company’s bottom line. Companies typically want to avoid turnover as much as possible to avoid the costs that come with it. 

It has been reported that turnover costs companies, on average, six to nine months of an employee’s salary to replace them. 

But the high financial cost of turnover is not the only reason organizations want high retention rates.

In addition to the cost, the time and effort managers must expend on addressing attrition takes time away from the aspects of their job they should be focused on. Managers spend less time and effort on the recruitment process when there is less turnover.

High turnover can also hurt employee morale and lead to burnout. Employees can become overworked due to the increased workloads and responsibilities they have to take on until roles are filled. Even newly hired employees can experience low morale as they struggle to quickly learn their new job duties.

Drawback of Employee Retention

While we often hear about the benefits associated with high turnover, high retention can also have its drawbacks. Though the cost of turnover can negatively impact a company’s performance and profitability, not all turnover is harmful. 

It may seem counterintuitive to view retention as a bad thing in some cases, since we mostly hear about how much turnover can affect a company’s bottom line. But retention can also potentially create problems on teams that snowball over time. 

One of the main drawbacks to high employee retention is disengaged employees who stay in their jobs, hurt productivity, create toxic work environments, and drive good employees away. When this happens, an organization’s retention rates will be high, but the quality of the work being done and employee morale can suffer.

Disengagement is a serious issue many organizations are facing. According to Gallup, 17% of full- and part-time employees are actively disengaged. It is estimated that disengaged employees cost organizations in the U.S. $450-500 billion annually.

Disengaged employees lack the enthusiasm their peers demonstrate for their jobs and  show a lack of commitment to the organization. They don’t see themselves as playing a vital role in the organization’s success and will not be invested in its future. They often exhibit toxic behaviors, underperform, and lack a strong belief in or dedication to the organization’s mission, vision, or core values.

These employees are not interested in problem-solving, process improvement, collaboration, or innovation, and they may be resistant to change and learning new skills and processes. 

The negative, toxic environments disengaged employees create can impact engaged employees who may become less engaged due to the morale problems it creates for them. This can drive away other employees that disengaged employees feel threatened by and cause organizations to miss out on new, more talented and engageable hires.

This becomes an even bigger issue when disengaged employees remain in jobs for a long time, sometimes longer than more talented employees. This phenomenon is often referred to as “sheltering in job.” 

In this scenario, employees stay in their jobs, even when they are unhappy in their roles and want to quit, because they fear the consequences of job hunting during times of uncertainty in the job market or their particular field. 

Surprisingly, even engaged employees can pose problems for organizations. Employees that stay with organizations for a long period of time may also be more resistant to change than newer hires, more unwilling to take on new responsibilities and learn new processes, more stagnant in their thinking, and less innovative.

They, like their disengaged peers, can prevent organizations from hiring more talented employees. They can also create work environments that aren’t inclusive and lack diversity. 

Diverse teams can provide a wide variety of perspectives because each team member’s ideas and inspirations come from places that seem unrelated. This combination of ideas, in an inclusive work environment, leads to more innovation, enhanced creativity, and better problem solving.

While high turnover can temporarily hurt productivity and performance, replacement hires from diverse backgrounds can be more productive, have more up-to-date skills, and bring fresher perspectives to the organization than the workers they are replacing.

Sustainable Retention and Positive Attrition

In the short term, high rates of retention can save an organization a lot of money and reduce the amount of time and other resources spent on recruitment efforts. But the negative aspects of high retention may be felt more acutely when it comes to long-term success and employee sustainability.

The toxic environments created by disengagement can drive away high performers and create inhospitable, unsustainable working conditions for engaged employees.

Two of the obvious benefits of having a culture of employee sustainability are high employee engagement and retention. But positive attrition can also be an important part of a culture of employee sustainability and necessary for the success of all employees and the organization as a whole.

When less talented and disengaged employees leave an organization, talented employees who are better performers and a better cultural fit will fill those roles. This positive attrition still costs the organization, but those costs are offset by the boost in productivity, performance, and engagement that new employees can provide.

One of the biggest factors impacting employee engagement is organizational culture. A good organizational culture can keep employees engaged and help diffuse the issues caused by disengagement. Being able to make the distinction between disengaged employees and engaged employees can help managers focus retention efforts on the right employees. 

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