Employers of Choice:Strategies for Worker Recruitment and Retention

by Marc AnderbergThe demographics of Texas tell us that as a state we are getting older with a large segment of “baby boomers”

nearing retirement age. Already there are certain skill shortages emerging that will only be compounded as large numbersof skilled workers leave the labor force. It seems inevitable that Texas firms will face a skills shortage in the near future.Skill shortages create a sellers’market1 where employers will have to compete aggressively for the services of talented, andespecially technology-savvy workers. Human resource management practices must be adapted to sellers’ marketconditions. Productivity and profits will fall among firms that can’t recruit, reward and retain highly skilled workers duringthe coming shortage. However, Texas firms that become employers of choice can hold onto their market shares and remaincompetitive in the global economy.

lucky enough to find new jobs in the industries wherethey had been employed previously. But typicallythey have gone back to work for less than 80 percentwage replacement. Some have returned to their oldindustries as contract or part-time workers withoutmany of the benefits and perquisites they enjoyedduring the sellers’ market of the late 1990s. Otherworkers who had lost high-skill/high-wagemanufacturing jobs accepted lower-skill/lower-wageemployment in the service sector.4

As long as buyers’ market conditions prevail,most employers instinctively seek to bolster short-term profits, chiefly by holding down labor costs. Inaddition to holding the line on wages and benefits,employers will adopt more labor-saving technologyto enhance the productivity of each worker.

Although this buyers’ market likely will prevailfor a few more years, the pendulum is swingingback toward sellers’ market conditions. Keyindicators suggest that the national and stateeconomies are on the mend. Although the Texaseconomy is rebounding gradually from the slowgrowth pattern begun in 2001, labor surplusesfavorable to employers are likely to prevail inthe short run—particularly in low-skill

n the midst of a buyers’ market, employers findit hard to imagine the pendulum swinging inthe other direction.

The imperative for adjusting human resourcemanagement practices to enhance worker retention isnot obvious in the current environment because laborsupply conditions have favored employers sinceroughly the second quarter of 2001. Starting in thesummer of 2001, the economy slowed, growth inconsumer demand eased, and layoffs occurred asemployers adjusted to over-capacity, especially in thetechnology and transportation sectors,2 and to stateand local budget crunches. The increasing cost ofsecurity in the post September 11th world, the“Dot.Com bust” and price competition from foreignproducers have slowed domestic job creation.

With fewer new jobs being created, employersthat managed to survive the shakeout have increasedleverage in the labor market. Thousands of dislocatedTexas workers—including many who aretechnology-savvy—find themselves looking for jobsalong side recent high school and college graduates.3

In the resulting buyers’ market, wage growth hasdecelerated from the torrid pace seen through muchof the late 1990s. Some dislocated workers have been

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September 15, 2004 Volume 3 Number 1An Occasional Paper Series Published by Labor Market and Career Information

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occupations. But even in the current buyers’market, employers are experiencing skill shortagesin a number of high-skill occupations—especiallyin the health care industry.

Census data tell us that a skills shortage willbegin to emerge when Baby Boomers begin toretire starting as early as 2005. Boomers compriseroughly 60 percent of the prime-age workforce(i.e., workers between 25 and 54 years old). Ifthe economy only grows at a modest rate of 3to 3.5 percent, anticipated shortages in thedomestic labor supply likely will be 5.3 millionin 2010 and 14 million by 2020. That is becausethe cohorts that follow are just too small toreplace the [B]oomers.”5

If labor force attachment rates andoccupational employment patterns amongdemographic groups continue along historic trendlines, the general labor shortage will be felt mostacutely as a skilled labor gap in professional,managerial and technical fields. Baby Boomerswho are on the brink of retirement are employeddisproportionately in those high-skill occupations.Successive cohorts in the smaller “feeder pools”6

are comprised disproportionately of individualsfrom demographic groups which historically areless attached to the labor force and generallyhave lower levels of educational attainment.7

Economists ratchet the forecasted skillsshortages upward when they take enrollments andgraduation rates by field of study intoconsideration. Enrollments are declining in thekinds of math, science and technology-relatedpostsecondary programs most closely related tohigh-skill/high-wage occupations with the fastestemployment demand growth.8

Possible Responses to SkillShortages

In the past, American employersresponded to shortages in the domesticsupply of skilled labor by: importingforeign specialty workers on H1Bvisas; using L1 visas to transferemployees from a firm’s foreign plantsor subsidiaries to work sites in theUSA; or shipping the jobs themselvesoffshore. But according to PaulKaihla, despite “double-digit” growthin the use of H1B and L1 workers andoutsourcing to low-wage countries,

such solutions have barely made a dentin the imbalance between the supply of and demandfor highly-skilled labor.9

By the time anticipated domestic skills shortagesare painfully obvious in 2007, it will be moredifficult to recruit highly skilled workers fromabroad at relatively low wages. Shipping jobsoffshore to low-wage countries will become a lessattractive way of holding down labor costs.10 US-educated foreign workers will be increasingly likelyto return to opportunities in their native countries.This probably will result in a small scale “braindrain,” especially in math, science and engineering.

At the same time, the aging of the workforce willfactor more heavily into succession planning—atopic that is beginning to command the attention ofhuman resource managers in both the public andprivate sectors. Some firms already are devisingstrategies to retain the services of their older, highlyskilled workers beyond normal retirement age. Suchplans likely will appeal to Americans who, becauseof better health care and longer life expectancy,prefer to remain active and productive on the jobbeyond age 65. Such plans also will appeal to thosewhose anticipated incomes were decimated bydeclining stock prices and corporate failures among

“Somewhere between 2007 and2011, labor market conditions inthe United States should beginto resemble those experiencedbetween 1998 and 2001.Employers will again find itincreasingly difficult to recruitand retain skilled workers.”

“At the same time, the aging of theworkforce will factor more heavily intosuccession planning—a topic that isbeginning to command the attention ofhuman resource managers in both thepublic and private sectors.”

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They also will have to offer higher wages to recruitforeign technical specialty workers as former “ThirdWorld” countries experience improving economicconditions and their own skill shortages.17

Instability resulting from a vicious cycle of wagecompetition could create a mercenary workerenvironment and upset a firm’s internal wagehierarchy as competitors engage in retaliatorypoaching.18

In a tight labor market, firms can get caught in anupward wage spiral. To keep from being “raidingtargets,” employers have to up the ante to retain theirincumbent workers. Eventually, they will have fewerprofits to reinvest in research to develop nextgeneration products and identify new markets. Theywill have less to spend on state-of-the-art technologythey need to keep themselves competitive.

It would appear that employers may be on thehorns of a dilemma during the coming skillsshortage. Those that get sucked into bidding wars arelikely to get caught in an upward wage spiral thatdiminishes competitiveness in the long run. Thosethat don’t offer higher wages immediately mayexperience lower productivity, forgo business

key holdings in their retirement fund portfolios.Nonetheless, efforts to retain older, high skillworkers are only stopgap measures. The BabyBoomers eventually will retire and must be replaced.Anticipating the inevitable rash of retirements,progressive firms now have senior managers andprofessionals mentor and groom their ownsuccessors.11

To handle anticipated increased business as theeconomy rebounds, Texas companies are starting torebuild capacity at the managerial level. They aretrying to scoop up professionals with provenperformance track records who were laid off duringthe last rounds of downsizing.12 Gradually andcautiously, Texas firms will go deeper into theirstaffing patterns to rebuild capacity. Even now, someemployers are engaging in stealth hiring13 focused onspecific talents and targeting key top performers.Others are doing dry hiring (interviewing candidatesto identify desirable and available talent withoutactually hiring—stockpiling pre-screened resumes to“build bench strength”).

As businesses that survived the shakeout rebuildcapacity and as start-up companies begin to gainmomentum, workers withhighly sought-after technicalskills will command ever-higher wages. They will beable to “shop” their skills tofirms that pay the mostcompetitive wages andsupplement base earningswith the most attractivepackages of fringe benefitsand perquisites.14

As the shortage becomesmore apparent, someemployers likely will try topoach skilled workers byoutbidding their competitors.

What is an Employer of Choice?

An “employer of choice” is a firmwhose employment policies and humanresource management practices give itan edge over its competitors inrecruiting and retaining appropriatelyskilled workers and optimizing theirproductivity while maintaining orincreasing their profitability and marketshares.

In a Buyers’ Market In a Sellers’ Market

Terms andconditions ofwork

At-Will Workforce(i.e., workers hold jobs atthe will of the employer)

Free Agency (resemblingprofessional sports andentertainment) Me, Inc.

Prevailing view ofbest strategiesfor workers tosucceed at work

William H. Whythe,Organization Man15

lifetime employment andhierarchical career paths

Daniel H. PinkFree Agent Nation16

opportunistic, entrepreneurialcareer paths

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line managers views workers as assets and revenuegenerators rather than as expense or cost items.

There is no magic formula for becoming anemployer of choice—other than to be consistent intreating valued employees respectfully and fairly.Below are concrete recommendations commonlyoffered in the literature on employers of choice:

1. Continuously “re-recruit” top talent. That is,continue to court high performing incumbent workersas if they had not yet accepted a job offer from thecompany. Workers crave attention and egogratification. Make them know they are wanted.Recognize incumbent workers for their ongoingaccomplishments as if you are still competing fortheir services—BECAUSE YOU ARE! Understandthat the accomplishments of your top employees areindicators of talent that the competition will want topoach. Let your top performers know that they areworthwhile because of their impact on the companyand their positive contributions to society. Give theman occasional award—something as little as a plaque,a recognition luncheon, or a choice parking space. Ifyou wait to honor them with a gold watch atretirement, your top talent probably will be longgone.

2. In doing employee surveys, William Mercerdiscovered the second highest rated reason fordissatisfaction was career development.24 Highlyskilled workers want to be challenged and stimulatedin their jobs and provided opportunities to learn andgrow with the company.

Invest in doing a thorough interest and aptitudeinventory on new-hires. Make sure that they are givenjobs suited to their talents and engage their interestsso they can succeed. A significant portion of turnover—as much as 33 percent—can be attributed directlyto a “bad fit.”

opportunities and lose market shares or contracts forlack of skilled workers. Firms that figure out how torecruit skilled workers, retain them and continuouslyenhance their productivity will become “employersof choice.”

How Employers of Choice19 Respond

In exit interviews, workers often say they changejobs for higher wages. Employee surveys oftenidentify compensation as a chief source ofdissatisfaction.20 Instead of taking an adversarialview, employers of choice understand that suchfindings simply express workers’ aspirations to sharein their employers’ good fortunes. One way to tie theinterests of workers and employers together is toincrease compensation while staking more of it toperformance (e.g., commissions, bonuses forexceeding individual and team productivity goals)and mutual risk (e.g., through profit sharing and stockoptions).

But, more importantly, employers tend tooverestimate the importance of wages. Skilled labordoes not necessarily go to the highest bidder. Texasfirms must find ways—other than through biddingwars—to combine tangible benefits and intangiblesto make themselves more attractive to skilled workersduring the coming shortage. Assuming a firm offerswages that are reasonably competitive, other factorsweigh heavily in employee recruitment and retention,workplace satisfaction and productivity. These otherfactors revolve around the corporate culture. Namely,do a firm’s human resource policies, managementbehavior and manner of communications clearlyindicate that it genuinely values workers.21

Firms rated as the best places to work22 (i.e.,“employers of choice”) have another commoncharacteristic. They make a reciprocal commitment toworkers in exchange for their loyalty andproductivity. This reciprocal arrangement constitutesa performance-based corporate culture. In thiscorporate culture everyone from the CEO to front-

“The value of performers in the top 25percent of a firm’s staff is estimated atthree to seven times their annual totalcompensation.”23

“As the economy heats up again . . . theturbulent labor market of the 1990s willseem like a practice session.”—The Herman Group, Employer ofChoice: Prospectus at http://www.employerofchoice.com

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Employers of choice take an active interest intheir workers’ career development as a way ofenhancing their human resource assets. Letemployees know they have opportunities to growwith the company. For example, give each worker achallenge plan and a roadmap: Here is where thecompany expects to be in two years, in five years.Here is where you can expect to be in two years, infive years. Here is the company’s commitment totrain you for continuous employability and groomyou for advancement. Better yet, give them high-,moderate- and low-growth scenarios for the companyand what they can expect in each scenario.Demonstrate to them that their best interests areconnected directly to making significantcontributions that help the company achieve highgrowth. Base challenge plans on actual careertrajectories of predecessors in the company whostarted in the same job classification rather than onhollow promises.

Internal candidates are superior to externalcandidates because they usually have a muchhigher success rate in their new jobs. They alreadyknow the corporate culture and have alreadyperformed well in it.

3. To the extent possible, promote from within.Clearly tie career advancement to performancerather than simple seniority or cronyism. Clearlydefine internal career ladders and performancemetrics for advancing up each rung. This sendsout several important messages at the same time.It signals a commitment to all workers’ aspirationsfor opportunities to grow along with the company.It shows top performers that they are truly valuedby rewarding them with promotions and earnings

gains for their productivity. It reinforces thecritical understanding among other workers thatperformance is the key to their careeradvancement.

Remember, however, that expeditiously weedingout the deadwood is an essential part of establishinga performance-based culture. Highly skilled workerstypically resent having to carry the load for lowperforming team members. Failure to terminate lowperformers frustrates the top performers and lowerstheir morale.

Keep track of who is “overdue” for promotionand identify which incumbent workers are beingcourted by the competition. Keep your promises tohelp them advance as they increase their productivityand contributions to the company. “Some bosses holdback their best employees from transfers for theirown advantage. [But] if you don’t act to keep theircareers moving, they become your next retentionproblem.”25

4. Highly skilled workers expect to be treatedas professionals with control over their work life.They resent being micro-managed. Rather, theyexpect to be trusted to do their jobs to the bestof their abilities. Make it clear what they aresupposed to accomplish and how theirperformance will be measured and evaluated.But trust them to set an appropriate pace andgive them latitude to exercise independentprofessional judgment along the way. Give thema variety of stimulating and challenging tasks sothey don’t burnout doing something monotonous.Consider periodic job rotations and horizontalmoves. (The variety not only stimulates andchallenges talented workers but also serves thecompany’s interest by cross-training individualsto backfill positions quickly should criticalvacancies occur unexpectedly.)

5. Avoid layoffs.27 While wanting challenges andadvancement, talented workers also value theemployment security that comes from working for anindustry leader with staying power in themarketplace and a growing market share. (Those

“Highly skilled workers typically resenthaving to carry the load for lowperforming team members. Failure toterminate low performers frustrates thetop performers and lowers their morale.”

“Great ideas and products come frompeople, not from equipment, buildingsor capital.”26

—J. Sullivan, Cost Per Hire: A BetterMetric is the Quality of Hire

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returning to work after previous waves of corporatedownsizing may be especially anxious about earninga steady income.) As the economic returns fromproduct lines and services shift, redeploy top talentfrom divisions or projects with a low return oninvestment (ROI) to high ROI areas. As projects arenearing completion, start providing team membersthe training they need to take on the next assignment.

6. If you must downsize, cut fat, not muscle.Remember that business tends to be cyclical.Downsizing when the economy is sluggish reducesthe “bench strength” that will be required to respondnimbly when the economy recovers. It also has achilling effect on potential recruits by sending asignal that the firm is not fully committed to itsworkers. If necessary, use temps and contractworkers for peak season demands and short term-projects.

7. Also avoid across-the-board hiring freezes.28

An across-the-board hiring freeze unnecessarilyshortchanges divisions that can pull a companythrough a sluggish economy. It also causes you tomiss opportunities to hire top talent when it doescome available or to retain workers in occupationscritical to the organization.29

8. “Over-communicate” with employees. Provide“360 feedback” (i.e., constructive rather thanconfrontational criticism, a two-way dialog ratherthan a top-down command structure). Fairly evaluatetheir performance and progress—benchmarkedagainst their personal challenge plans. Periodicallyask them: What do you like best about your currentjob? Least? What do you want more of frommanagement? Less of? What do you see as barriers toyour productivity and performance? What wouldyour next “dream job” be?

Consider using “open book management.” Thatis, let employees know honestly how the company isdoing. Workers will tolerate lulls in earnings growthif they see that everyone on the team is tighteningtheir belts when profits are down and market sharesare being lost.

Alleviate anxiety or resentment by explainingpolicies. Let them see the big picture—like why, in

lieu of pay raises, a portion of profits might beinvested in research and development orproductivity-enhancing tools to keep the companycompetitive. If mergers and acquisitions are on thehorizon, let employees know well in advance howthey will be affected personally.

9. To the extent possible, accommodateemployees’ desires to achieve “work/life balance.”Consider allowing flextime, compressed workweekand work-at-home/telecommute options.

Don’t be unnecessarily stingy with health carebenefits, vacations, sick leave and family leave. Setup a cafeteria plan with a wide range of options thatemployees can purchase with pre-tax dollars. Giveeach employee the flexibility to structure a benefitpackage tailored to individual circumstances.

Involve the workers’ spouses and children in thecorporate family by hosting occasional social eventsand group outings. Sponsor things like a companybowling tournament or Little League team.

Employers of choice typically have a strongcorporate responsibility agenda. They are committedto improving the quality of life in communities wherethey do business (e.g., through the use of “green”renewable energy resources, promoting diversity inthe workplace). They encourage civic engagementamong their employees.

10. Get great mileage out of low-costperquisites:31 Onsite day care (which may besubsidized by state and federal programs) can cutdown on absenteeism and tardiness. So willconcierge-like services (e.g., onsite dry cleaning

“In today’s tight labor markets,companies compete to find and keepthe best employees, using pay, benefits,promotions, and training. [But] nomatter how generous its pay orrenowned its training, the company thatlacks great, front-line managers willbleed talent. Talented employees knowthat managers trump companies.”30

“Re-recruit your top talent ... if you wantloyalty, buy a dog! ... Practice randomacts of attention and recognition.”

—John Sullivan

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pickup and delivery) that the vendor will pay tooperate in exchange for the free use of a tiny amountof square footage.

By putting up a nominal fee, an employer canarrange group rates at fitness centers or wholesaleestablishments like Sam’s Club and Costco (whichthe individual workers pay for).

Treat reimbursements for travel to conferencesand membership fees in professional associations asinvestments in generating new ideas, employeegrowth, rejuvenation and morale building.

Give top talent state-of-the-art hardware andsoftware “toys” that confer an element of prestige onthe “power users” and generate excitement amongthem while enhancing their productivity.

11. Cultivate the future workforce by gettinginvolved with education and training institutions.Actively participate in educational forums to ensurethat the curriculum in industry-related programsimparts the knowledge, skills and abilities requiredfor productivity on the job after graduation. Establishrelationships with key faculty (through summer workoptions, consulting opportunities, endowed chairs,equipment and facilities pooling) in exchange for“top draft choice” job referrals on their promisingstudents. Pre-position the firm to “cherry pick” thebest students by providing them with mentors, jobshadowing opportunities, internships, apprentice-ships and summer work experiences before theygraduate.

The Payoff

The employer of choice strategy is not sometheoretic humanitarian agenda. It is about more thantreating workers with respect and rewarding them foraltruistic reasons. A prominent consulting firm, theCBI Group, explains it this way: “Simply put,employer of choice status is good business. Thestrategy can reduce your turnover, increaseproductivity, reduce costs and enhance your bottomline.”32

Happy employees—employed and constantly re-recruited by the high performance firm of their

choice—are more productive. They are motivated towork hard at their current jobs and constantly acquireessential skills needed to perform future duties andtasks proficiently. Happy employees are less likely tobe absent or tardy. They provide better customerservice.33 All this has a direct bearing on sales34 andprofitability.35

The biggest payoff, however, is reduced turnovercost.36 Too many firms underestimate the cost ofturnover because they look only at what they spendon advertising, applicant screening, interviews andthe paperwork required to bring a new-hire on board.They forget that turnover costs include:

Separation costs. Administrative costs areincurred when workers depart: severance pay, anyincrease in the employer’s contribution tounemployment insurance, COBRA processing,litigation (if any) for unjust termination or violationsof Fair Labor Standards, the Family Medical LeaveAct, or Equal Employment Opportunities Act.

Vacancy costs. Sales are lost when laborshortages result in missed project completion dates.In the worst-case scenario, project completion delaysmay cause the firm to lose the advantage—if not anentire market segment—if it fails to be the “firstmover.” When product delivery deadlines are missed,carrying costs increase as inventory turns too slowly.Customers cancel orders when delivery deadlines aremissed. In the worst-case scenario, disgruntledcustomers take all of their business elsewhere.

There may be a loss of team synergy. That is, theproductivity of remaining team members decreasesbecause the departing worker provided stimulationand input essential to accomplishing their respectivetasks. They may try to cover the duties and tasks butlack the expertise to be as proficient in accomplishingthem as the departed worker was. Morale amongremaining team members may decline. The quality oftheir output may decrease if they experience fatigueand burnout from carrying an extra load while thedeparted worker’s position remains vacant.

Labor costs increase if remaining employees are

“85% of the reasons why a typicalemployee leaves are controlled bytheir direct manager.” —J. Sullivan,Predicting Who Is About to Quit

“Simply put, employer of choicestatus is good business. Thestrategy can reduce yourturnover, increase productivity,reduce costs and enhance yourbottom line.”

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given overtime to cover the duties and tasks whilethe departed worker’s position remains vacant.Alternatively, a premium must be paid to any servicecompany that supplies temporary personnel to fill thevacancy. Temps may not be as proficient as thedeparted worker and produce lower quality outputeven though their wages plus the service company’spremium are greater than the departed worker’swages.

Replacement costs. These are the factors, previ-ously mentioned, that most firms recognize ascomprising turnover costs: direct expenditures forrecruiting (e.g., newspaper ads, referral bonuses andbounties); applicant screening (i.e., human resourcedepartment time spent reviewing resumes, testingapplicants, checking references); interviewing (i.e.,interviewers’ time plus administrative time to set upinterview schedules); orientation time and materials;processing paperwork for new hires.

For high skill positions, recruitment costs mayinclude extraordinary expenditures for such things asheadhunter fees, the added expense of conducting anationwide rather than local search, and the highercosts of advertising in specialized professional jour-nals or posting vacancy notices with occupationally-specific electronic job matching services.

In a tight labor market, a replacement with skillsthat are in demand may command a higher wage thanthe departed worker plus a signing bonus and/ormoving expenses. The total compensation for thenew-hire often exceeds the modest increment itwould have taken to keep a relatively satisfied highperformance worker from accepting a competitor’soffer.

Training costs. Training costs include tuition forformal education and training (or for materials and

in-house trainer’s time) to fill any gaps between anew-hire’s knowledge, skills and abilities and thoserequired for adequate job performance. Trainingcosts also include time spent by administrators orsupervisors on new-hire orientation.

Performance differential. Even after receivingformal “gap” training, a new-hire is not likelyto be as proficient as the departed worker whohad unique company- and project-specific knowhow (tacit knowledge acquired on-the job). Onaverage, new workers only do 75 percent asmuch work as an experienced employee.37 Speed-to-productivity varies inversely with the skill levelof the position. The higher the skill level, thelonger it takes a replacement to “get up tospeed” to match the productivity of the departedworker. The more on-the-job experience thedeparted worker had, the longer it will take thereplacement to get up to speed.

Indeed, as many as one in three replacementworkers never gets up to speed and has to beterminated.38 This starts the replacement processall over again with more separation, vacancy,replacement and training costs. (Note: incomputing the replacement costs—especially theperformance differential—it is important to usethe productivity of the original departed workeras a baseline rather than the productivity of theinterim replacement who did not work out.)

Replacement workers also have an indirect effecton productivity while getting up to speed. Theyrequire more supervision time by managers. Theymay turn out lower quality work: requiring more oftheir output to be reworked by others or scrappedaltogether because of excessive defects. They may bethe “bottleneck” in a process flow that bogs down theperformance and output of other team members.

“The higher the skill level of thedeparted worker, the higher the vacancycosts per unit of time. Total vacancycosts for high skill positions arecompounded by the greater length oftime they are likely to remain unfilled.The higher the skill level of the departedworker, the smaller the talent pool fromwhich a replacement can be recruited.The smaller the talent pool, the longerthe position is likely to remain vacant.”

“In a tight labor market, a replacementwith skills that are in demand maycommand a higher wage than thedeparted worker plus a signing bonusand/or moving expenses. The totalcompensation for the new-hire oftenexceeds the modest increment it wouldhave taken to keep a relatively satisfiedhigh performance worker from acceptinga competitor’s offer.”

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The proverbial invisible hand of economicnecessity may well compel Texas firms to adjust theirhuman resource policies to sellers’ market conditionswhere skilled workers are in short supply. Texas firmsthat anticipated the coming skills shortage alreadymay have a leg up on the competition by pre-needhiring of the top talent. Others, however, are sopreoccupied with the bottom line in the comingquarter that they fail to see the skills shortagelooming on the horizon. The longer it takes for themto realize that the pendulum is swinging back tosellers’ market conditions, the lower the talent levelamong those who remain unemployed and available.

Becoming an employer of choice is not aconcession to workers. It is the ultimate pairing forproductivity. When all impacts on productivity,marketing and labor costs are considered; it makesgood business sense to become an employer of choicevoluntarily—sooner rather than later.

ENDNOTES

1 The terms “sellers’ market” and “buyers’ market” refer towhich party has greater bargaining power in an economictransaction. In labor market transactions, the workers (i.e., thoseselling their labor) have relatively more leverage whenemployment demand exceeds the supply of workers. In a sellers’market, labor can command higher wages and extractconcessions from employer regarding the terms and conditionsof employment. Workers can shop their skills to other firmswhen their current employer will not meet their wage demands.When labor supply exceeds demand, we have a buyers’ marketwhere employers can hire labor at bargain prices and prettymuch dictate the terms of employment. Insofar as labor supplyand demand never truly reaches equilibrium, the pendulumswings back and forth from sellers’ market to buyers’ marketconditions.

2 While the terrorist attacks of September 11th had a directeffect on business transactions that ran through the twin towersof the World Trade Center, the economic repercussions were feltby companies far removed from ground zero. Tourism andpassenger airlines throughout the USA lost business when fearsof additional attacks led people to cancel business and vacationtravel plans. That had a ripple effect through related industries.Fast food establishments at DFW and Bush InternationalAirports, for example, had to lay off workers when the numberof passengers in the terminals dropped significantly. So didtravel agencies and the hotel/motel industry. See theUnemployment Insurance Benefits Letter #10-03 dated June 23,2003 to displaced airline-related workers from the TexasWorkforce Commission.

3 The post-bubble flood of dislocated workers into theranks of the unemployed added to the ever-present and fairly

Taken together, these factors add up to very sig-nificant turnover costs. Of course these costs will varyaccording to the skill level of the departed worker, theduration of the vacancy, the size of the talent pool, andthe efficiency and effectiveness of a firm’s humanresource department in finding a competent replace-ment. Without going through actual calculations, youcan get a feel for the range of vacancy costs fromexamples provided in various studies.

Turnover costs: fast food preparation worker,$500; fast food manager, $1,500; truck driver (longhaul/over-the-road), $5,000; insurance companyexecutive, $35,000.39

The “conservative” turnover cost for registerednurses is roughly 33 percent of the annual totalcompensation for the departed worker. At Texasprevailing wages, that comes to $18,270.39

For a software engineer, turnover costs areestimated at $150,000. For a project team leader on amajor application development project the turnovercosts can range from $200,000 to $1 million (ifdelays are so significant that the application is not“first to market.”); or worse, it could result in abusiness failure if the team leader’s departure meansthat the project is not completed.40

As alarming as these figures are, theyunderestimate turnover costs incurred when thedeparting worker is a top performer. The estimatesabove were generated using multipliers (usuallyaround 33 percent in moderate skill positions) basedon the productivity of the average worker in eachoccupation. John Sullivan, professor of HumanResource Management Studies at San FranciscoUniversity, suggests that while the turnover costs ofthe average worker may be 33 percent of the annualcompensation, turnover costs for the top performingworkers (i.e., those in the upper quartile) may be 3times (300 percent) of their annual compensation. Dr.Sullivan concurs with Bill Gates. “A superstar mayperform at a rate 100 times greater than the averageemployee.” Therefore, when calculating the turnovercosts for a specific firm, it is important to use aformula to reflect the weighted averages, say byquartile, for workers in each occupation in thestaffing pattern.41

“Unless they become employers ofchoice, Texas firms are likely to losethe race to recruit and retainappropriately skilled workers.”

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steady turnover due to normal frictional unemployment,technology-driven displacements and trade-related adjustments.

4 That was one of the segments of the Texas economy thatcontinued to exhibit employment demand growth while jobs inmanufacturing and the information technology industries wereimpacted by the Dot.Com bust.

5 Paul Kaihla, The Coming Job Boom in Business 2.0(September 2003) p. 98. Note that, in all probability, the laborshortage in Texas will be less severe than in other parts of thecountry. Texas has enjoyed significant net gains in individualsof prime working age as a result of cross-state migration withinthe nation and from immigration by foreign nationals. Thefertility rate (surplus of births over deaths) in Texas also ishigher than the national average. However, as the next bulletpoint will illustrate, higher than average population growth inTexas will not necessarily resolve the anticipated skillsshortage.

6 That is, potential replacements for the retiring BabyBoomers commonly are referenced as “Generation X” (or “GenX”) and “Generation Y” (or “Gen Y”).

7 While the anticipated general labor shortage likely willbe less severe in Texas than it will be in other states, the skilledlabor shortage is likely to be as bad—if not worse! Most of thepopulation growth in Texas has been fueled by the immigrationof low skilled aliens and higher than average fertility ratesamong Blacks and Hispanics, demographic groups thathistorically have had lower than average rates of labor marketattachment and educational attainment.

8 See M. Anderberg, Technology Worker in the New TexasEconomy (Austin, TX: Career Development Resources, 2002)and annual reports compiled by the National Center forEducation Statistics, the National Science Foundation, theInstitute of Electronic and Electrical Engineers, the TexasHigher Education Coordinating Board and the Texas AutomatedStudent and Adult Learner Follow-up System. What is evenmore alarming is that scores at the K-12 level on math andscience tests are low by international standards at a time when:a) math and science are becoming increasingly essential to highwage occupational employment; b) student scores in othercountries are improving rapidly.

9 P. Kaihla, op. cit.10 Wages gradually are creeping up in low wage countries

as their economies start to prosper—thus reducing the wagedifferential that made them attractive places for American-owned businesses to locate offshore operations. Countries suchas Japan, China, South Korea, India and Taiwan are providingmore opportunities and incentives for their talented andtechnology-savvy youths to attend postsecondary education andtraining programs in their homelands. Those countries (alongwith Germany, Russia, Ireland, Malaysia and Singapore) areproviding more incentives for graduates of math, science andtechnology-related programs to remain in their homelands andto lure highly skilled workers that had emigrated to the USA to

repatriate. See M. Anderberg, The Digital Divide (Austin, TX:Career Development Resources, 2003).

11 As firms downsized during the economic slowdownafter 1999, cuts were not necessarily made evenly across all agecohorts and levels within their staffing patterns. Many firms“flattened” their organizations as a means of downsizing. Thatis, they kept their senior leaders (now reaching retirement age)and their production line workers while eliminating layers ofjunior executives, mid-level managers, administrators andsupervisors. Thus, they deprived themselves of the “benchstrength” to replace retiring senior executives with in-housecandidates with proven performance records and intimateknowledge of company operations.

12 Indeed, firms try to hang on to top talent up to the veryend (i.e., when they close a plant or office as opposed to generaldownsizing). The most talented are the last to be laid off andthey don’t remain unemployed very long—even in lean times.The very best are not likely to be available when a reboundingcompany tries to recall them. The longer a firm waits to rebuildits staff during an economic recovery, the lower the talent levelamong the ranks of those who remain unemployed. See J.Sullivan, Effective Layoff - Avoiding Layoffs in the First Place;Why Hiring Freezes are Dumb: Shift Your Recruiting Strategiesas the Economy Changes; Pre-Need Hiring and WorkforcePlanning; Where Have All the Good Candidates Gone: TheShortage Explained; The War for Talent is Over and Guess WhoWon?; and How to Hire Great People That Don’t Need a Job.The works of Dr. Sullivan are available at (http://ourworld.compuserve.com/homepages/gately/sullivan.htm).

13 See The Herman Group Trend Alert (May 26, 2004) athttp://www.hermangroup.com. Roger Herman uses the term“stealth hiring” for employers that recruit quietly knowing theircompetitor watch each other’s hiring patterns as indicators ofgrowth and market positioning. “Dry hiring” is Herman’s termfor going through dry runs (just short of hiring) to identify desir-able and available talent to build “bench strength.”

14 In the wake of Netscape’s gazelle-like performance afterthe Initial Public Offering (IPO) of its stock in 1995, firms usedeither existing stocks or pre-IPO issues in lieu of wages abovethe prevailing rate to attract top talent. Throughout the Dot.Comboom (1995-1999), stock options and workplace accoutermentswere attractive perquisites. Since the Dot.Com bust in 1999, fal-tering stock prices in general and the poor post-IPO performanceof many technology stocks have reduced the salience of stockoption to high-skill workers and their effectiveness as recruitingenticements. Similarly, as widespread downsizing occurred inthe first part of this decade, dislocated workers discovered thetransitory value of workplace accouterments and firms realizedthat it was difficult to recoup their investments in such amenitiesas recruiting tools. Thus, during the next skills shortage, savvyjob-seekers likely will command more concrete and practicalbenefits - either provided by the employer or procured throughemployer-arranged opportunities to use pre-tax dollars.“Benefits” whose value is defined in some potential that maynever materialize or diminish significantly in the future (like

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stock options) likely will not be used as inducements nor willnice-to-have but rather superfluous amenities (such as steamrooms and massage tables in the office suite).

15 (New York City, NY: Doubleday, 1959); also see SloanWilson, The Man in the Gray Flannel Suit (New York City, NY:Simon and Schuester, 1955).

16 (Lebanon, IN: Warner Business Books, 2001). Thebusiness card of Paladin from the old television western comesto mind: “Have Gun/Will Travel.” See the web-based laborexchange service set up expressly to match freelance workerswith firms seeking to engage contractors on a project-by-projectbasis at http://www.free-agent.com and ongoing adviceavailable to freelance workers at http://www.fastcompany.com.Also read about the “Me, Inc.” concept in E. Moore, Pathwaysto Personal Independence (Austin, TX: Career DevelopmentResources, 2001). The same concept is presented as “You, Inc.”through a free newsletter available at http://www.inc.com.

17 See M. Anderberg, The Digital Divide, op. cit. andAnderberg and Froeschle PowerPoint slide show on the falseeconomy of relying on a supply of foreign technical specialtyworkers.

18 See J. Sullivan, The Coming Bid-for-Talent Revolution:Prepare Now or Else; and J. Sullivan, Poaching Isn’t Just forSalmon Any More. Both are available at http://ourworld.compuserve.com/homepages/gately/sullivan.htm.

19 Kaihla, op. cit., cites Cigna, Intel, SAS, Sprint andWhirlpool as American-based firms that understand the comingskills shortage and grasp its implications for human resourcemanagement. Indeed, 60 Minutes (CBS) did a feature story onthe human resource practices of SAS (April 20, 2003). Sullivanin his various works cites Cisco, Agilent Technologies, JuniperNetworks and Hewlett-Packard as employers of choice.Hewlett-Packard also is cited along with Federal Express, 3M,General Electric, Walmart and Southwest Airlines by B.Catlette and R. Hadden in Contented Cows Give Better Milk(Germantown, TX: Saltillo Press, 1998).

20 Dorrit T. Walsh, Let’s Stay Together - Keys to RetainingYour Valuable Employees citing data from studies done byWilliam Mercer and Coopers & Lybrand, LLP. (now Price,Waterhouse and Coopers at http://www.pwc.com).

21 M. Buckingham and C. Coffman, First, Break All theRules: What the World’s Greatest Managers Do Differently(New York City, NY: Simon & Schuster, May 1999).

22 Here we are talking about something broader thanratings of businesses offering specific kinds of occupationalemployment (e.g., Top Ten Companies to Work For [ininformation systems] by Inter@ctive Week or MBA’s Top 50Companies identified by Fortune at http://www.fortune.com/fortune/diversity/index.html) or for workers from specificdemographic groups (e.g., best places to work for women,Blacks, Hispanics, Asians and Native Americans.) See, forexample, http://www.black-collegian.com; 100 BestCompanies for Working Mothers and Best Companies for

Women of Color at http://www.working-mother.com; Fortune’s50 Best Companies for Minorities available athttp://www.fortune.com/fortune/diversity/index.html; or forHispanic females, Latina Style 50! at http://www.latinastyle.com/latina50.html). That is not to say thatrecognition of firms for their fairness to historically under-utilized demographic groups in hiring, retention, promotion andcompensation is unimportant. Indeed, equal employmentopportunities and appreciation of cultural diversity arenecessary but not sufficient conditions for being an employer ofchoice.

General selections made annually by Fortune Magazine arebased more broadly on responses to their surveys of employees(without regard for demographic pigeonholes). But little infor-mation is provided by the authors (Levering and Moscowitz) oncommon human resource policies and practices among the firmsthey recognize. The Great Place to Work Institute uses employ-ee surveys constructed around their “trust index” and [corpo-rate] “culture audit” but they do not disclose the details of theirmodels nor do they publicize what factors kept nominated firmsfrom making their list. (Go to http://www.100best.org.)

An employer of choice also is more than a plaque on thewall given to a firm that has been “recognized” as such by a con-sulting group (e.g., see the Herman Group athttp://www.employerofchoice.com, or the Dahlstrand Group athttp://www.dalstrandgroup.com) for having engaged its servicesand implemented its recommendations. (That is not to say thatconsulting group recognition or validation is unimportant.Employers of choice can use recognition and awards in theirrecruiting and retention efforts and in their public relations cam-paigns. While all firms that have implemented rigorous pro-grams recommended by consultants specializing in this newarea are likely to be genuine employers of choice, not allemployers of choice have engaged the services of the same—ornecessarily any—consulting group en route to becoming anemployer of choice.)

Despite the growing imperative to become employers ofchoice as the skills shortage approaches, no single entity is uni-versally acknowledged to have the authority to confer this titleto firms. No single laundry list of actions, policies and practicesdefines the term. Although it borders on circular reasoning, thebest definition is an empirical one: an employer of choice is onethat talented workers of any background deliberately choose towork for—even when they have other employment options.

23 J. Sullivan, Instead of the Cost-of-Hire, Measure theCost of a Bad Hire at http://ourworld.compuserve.com/homepages/gately/pp15js48.htm.

24 D. Walsh, Let’s Stay Together - Keys to Retaining YourValuable Employees.

25 J. Sullivan, Intraplacement at http://ourworld.compuserve.com/homepages/gately/pp15js37.htm.

26 J. Sullivan Cost Per Hire: A Better Metric is the Qualityof Hire at http://ourworld.compuserve.com /home pages/gately/pp15js26.htm.

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27 J. Sullivan, Effective Layoffs: AvoidingLayoffs in the First Place at http://ourworld.compuserve.com/homepages/gately/pp15js167.htm.See also J. Sullivan, Cost Factors and Business Impactof Turnover at http://ourworld.compuserve.com/homepages/gately/pp15js10.htm.

28 J. Sullivan, Why Hiring Freezes Are Dumb athttp://ourwolrd.compuserve.com/homepages/gately/pp15js122htm.

29 J. Sullivan, Pre-Need Hiring and WorkforcePlanning at http://ourworld.compuserve.com/homepages/gately/pp15js99.htm.

30 In general see the works of John Sullivan(Professor of Human Resources, San Francisco StateUniversity) at http://ourworld.compuserve.com/homepages/gately/sullivan.htm.

31 See for example, K. Blanchard and B. Nelson,1001 Ways to Reward Employees (New York City,NY: Workman Publishing 1994).

32 Go to http://www.thecbigroup.com/Employer_of_Choice.htm.

33 D. Lee, How Employee Emotions Affect YourOrganization’s Ability to Compete at http://ourworld.compuserve.com/homepages/gately/lee.htm.

34 To the customer, front line sales persons arethe face of the corporation. Their impressions of theentire firm and its products are colored by the qualityof service they receive. See Corporate Image 2001:It’s All About Customer Service at http://www.ipsos-na.com/news/pressrelease.cfm?id=1267. Disgruntledfront-line employees tend to be indifferent—if nothostile —when face-to-face with the customers. Badcustomer service not only results in decreased salesbut also is associated with increased complaints orreturns. In the worst-case scenario, bad service byfront-line workers can result in the permanent loss ofcustomers. On the other hand, customers may develoployalty to individual front line workers who doprovide good service. In the words of J. Sullivan,“Customers buy from their salesperson, not thecompany.” Top performing sales-people are in highdemand. Top salespeople are likely to jump ship andtake their loyal customers with them if a companydoes not recognize them and reward them for theirperformance. See Retention Tool Kit atht tp: / /ourworld.compuserve.com/homepages/gately/pp15js22.htm.

35 B. Catlette and R. Hadden provide datacomparing the sales and profit margins for sixemployers of choice and six “also-rans” in Contented

Cows Give Better Milk (op. cit.). Also see their websiteat http://www.contentedcows.com for data updates.

36 A spreadsheet for estimating the cost ofturnover is available from G. Green, J. Moskal and W.Pinkovitz at the Center for Community EconomicDevelopment at the University of Wisconsin -Cooperative Extension at http://www.uwex.edu/ces/cced/publicat/turn.html.

37 D. Walsh, Let’s Stay Together - Keys toRetaining Your Valuable Employees .

38 See J. Sullivan Cost Factors and BusinessImpact of Turnover and Cost of a Bad Hire previouslycited.

39 J. Brannick, Decreasing the Staggering Costs ofTurnover in Your Organization at http://www.floridaspeakers.com/turnover-costs.htm.

40 Colorado Department of Labor at http://www.coworkforce.com.

41 J. Sullivan, The Cost Factors and BusinessImpacts of Turnover (op. cit.) and J. Sullivan,Performance Turnover: The Cost of Turnover May BeHigher Than You Think at http://ourworld.compuserve.com/homepages/gately/pp15jso2.htm.

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