May the workforce be with you

What's on your to-do list this week? A strategy session with your management team? A presentation by your marketing VP? Perhaps a review of last month's financials, followed by a meeting with your accountant?

More important, what isn't on your calendar but should be? How about finding someone to bring some human resources expertise to your board of advisors? A strategy session on making your firm an employer of choice? Figuring out how to reward that overachiever in sales — and fix the problem with the guy in shipping?

You're not alone if people issues aren't a top priority. Most entrepreneurs come from sales, finance or engineering backgrounds, which can lead to an under appreciation (to put it mildly) of the HR function. That's one reason dedicated HR personnel and systems are often the last supports to be installed in businesses as they grow.

But there are new reasons to believe that HR can no longer be pushed aside. First, business experts say that attracting and retaining the best and brightest employees is the only defense against Canada's growing talent shortage, which will soon accelerate with the exodus of baby boomers from the workforce. Second, and far more compelling: groundbreaking research by PROFIT and Toronto-based executive search and HR services firm IQ PARTNERS Inc. demonstrates the surprising extent to which sound HR practices drive financial performance, and reveals which tactics matter most (e.g., career planning) and least (it could be time to rethink your profit-sharing plan).

The undeniable message for every entrepreneur: if you want to build your business over the next two, five or 25 years, then you'd better let HR into the boardroom and put it at the head of the table.

Don't believe the hype about a looming skills shortage, because it's already here. Of the almost 400 senior decision-makers polled for the PROFIT/IQ PARTNERS survey, half said that being unable to find talented people is negatively impacting their firm. The results are in line with other recent surveys, which put the portion of understaffed firms as high as 66%. And it's only going to get worse — much worse. The Conference Board of Canada predicts that annual labour shortages could reach almost one million workers by 2020. That's because the boomers, who represent the largest demographic bulge in our population, will retire in droves over the next 20 years. (At 59 years of age, the oldest baby boomers are already ripe for early retirement.)

The result will be massive workforce gaps in experience, expertise and bodies that younger, smaller generations won't be able to fill. And, say economic forecasters at Global Insight (Canada) Inc., even doubling the annual number of immigrants to Canada to 400,000 wouldn't be enough to pick up all the slack.

It may be tempting to believe that shortages exist only in specific markets or professions. Not so, says Tim Rutledge, partner in retention services at IQ PARTNERS: "Shortfalls will affect all organizations in Canada." Data from the Canadian Federation of Independent Business (CFIB) back him up: firms that report labour shortages come in all sizes and are based in all regions and industries.

Anyone worried about Canada's future ability to compete will find some comfort in the fact that most leaders of entrepreneurial business are at least aware of the troubles ahead. Almost three-quarters of respondents to the PROFIT/IQ PARTNERS survey believe that demand for skilled workers is rising faster than supply. The vast majority (88%) also said that talent retention is and will be a challenge for Canadian businesses over the next five years, and three-quarters believe turnover will increase.

But those beliefs are not necessarily translating into action. For example, although the vast majority of respondents believe retention will be problematic, only half say they've crafted a retention plan for their company. That's especially bad news for small businesses; because of their low visibility in the job market and inability to offer the same wages and benefits as corporate Canada, they have trouble hiring — never mind retaining.

The cost of inaction is staggering. As workers catch on to the fact they're in a seller's labour market, they'll grow more likely to leap from firm to firm. As job vacancies rise, so will the amount spent on replacing departing staffers, which has been estimated at 50% to 250% of salary per employee. If you're short a few key staffers, you could miss out on contracts. In some cases, says the CFIB, "There may be no cost-effective alternative but to lose out on business opportunities." Some entrepreneurs might have to choose not to pursue a particular line of business or stop offering a service.

Imagine being unable to enter a new market, or stay competitive in the one you're already in. Ultimately, your basic business plan would be in jeopardy. "[A shortage of skilled workers] can stop growth or even shrink a company," says Mark Murphy, president & CEO of Washington, D.C.-based consultancy Leadership IQ, and co-author of The Deadly Sins of Employee Retention. "Especially as we move out of a product-based economy and into a knowledge-based one, finding people who have the skills to do what your company does is about the only competitive advantage you can have anymore."
 

At the very least, you can expect your people costs to rise. "It's Economics 101," says Guy Beaudin, managing director of the Toronto office of RHR International Co., a global leadership and human-resources consultancy: as organizations go after a decreasing pool of talent, top staff will become more expensive to attract.

As opportunities go begging and money to fund HR strategies is pulled out of other departments, from product development to marketing, countless companies will suffer. The Canadian economy will suffer with them: Global Insight predicts the coming HR crisis will reduce average annual GDP growth from 3% to 2% over the next decade.

Clearly, more entrepreneurs must consider HR a strategic priority, elevating it from the ranks of middle management into the executive class. By dedicating more mental and financial resources to people issues, smart companies will be far better able to avoid retention pitfalls and apply the tactics that turn average workers into the highly engaged super-staffers every business wants and, increasingly, needs.

The PROFIT/IQ PARTNERS study presents strong guidance — and a few surprises — in these areas. It's based on a February survey of 394 Canadian entrepreneurs and senior managers, primarily from small and mid-sized businesses, concerning the reasons employees have quit their companies and the HR tactics they apply. We then identified the best retention and motivation practices by comparing the HR tools of high-performing companies (i.e., those enjoying net income of at least 10%, plus revenue growth of at least 15% over the past three years) to those of low-performing companies. Here are the highlights (for more survey results, see tables at end of article).

1. Career paths count: Some 74% of high-performing companies offer non-managerial employees formal, off-the-job training in order to increase their promotability, and 69% ensure that supervisors are aware of their direct reports' career aspirations within the firm. "A couple of times a year, have a conversation [with high-performers] around the kind of skills and experiences they'd like to develop," recommends RHR's Beaudin. "Demonstrate a willingness and an interest in their growth and development."

Furthermore, some 52% of respondents to the survey said employees left their firms due to insufficient career development.

2. Never fail to communicate: A system of regular, planned staff briefings by senior management exists at 83% of the most successful companies. These types of meetings "make the employees feel a part of the organization," says Mike Salveta, COO at Mississauga, Ont.- based Pivotal Integrated HR Solutions. "That's why people stay with a company. They believe in the business, they're engaged in the business, they understand the mission and direction of the business, and they buy into that." In fact, 77% of high-performing firms regularly inform workers of their strategic objectives and targets. One-on-one communications also create value.

 Murphy recommends requiring every manager to conduct a once-a-month, 15-minute conversation over coffee with their direct reports in order to find out what's motivating them and what's turning them off. "If you know what makes them tick, you'll never be surprised," he says. The conversation can also help you determine whether staff are underutilized. It's critical knowledge, given that 38% of respondents said employees left their firm for more challenging work.

3. Pay for performance: Most successful companies award merit bonuses to high-performing non-managerial workers (73%) and executives (83%).

4.Court your stars: Some 83% of top firms identify high-performing employees and discuss their potential, while 72% actively remove low-performers.

5.Beware of profit-sharing: Although profit-sharing and employee share ownership are commonly praised as motivational tools, the best firms used these tools with about the same frequency as the weakest firms in the study. One hypothesis for the disconnect: while these tactics should work in theory, companies often bungle their execution. (Example: failing to tie an employee's share of profits to specific actions or results within their direct sphere of influence.)

While some of the best practices identified, such as employee succession planning, might take longer to implement and pay off, many can generate instant results. "One thing that costs nothing and can have an immediate huge impact is the practice of the supervisor giving recognition to employees on achievements and performance," says Rutledge. This need not be a complex reward system: "Most forms of recognition are just riffs on 'thank you'."

Finally, experts say, one of the most often overlooked reasons why employees leave their job is bad bosses. If a worker has a good relationship with his boss, "it's amazing what he'll do, and do happily," says Rutledge. If the relationship is toxic, "then every little request feels like it weighs a ton and it's resented," leading to disengagement.

Beaudin says regular management training, coupled with 360-degree feedback can solve the problem of bad bosses — at least, in one regard: while a little introspection can make you a better people person, the worst bosses are those who continue to undervalue strategic HR.

The PROFIT/IQ PARTNERS study asked entrepreneurs to reveal the retention, training and motivation tactics used by their firms, then compared the tactics of high-performing* companies to those of low-performing companies.

HR practice: Employees' career aspirations within the firm are known by their manager
Usage among high-performing firms: 69%
Usage among low-performing firms: 48%
Best practice? Yes

HR practice: Employees are offered formal training programs in order to increase their promotability
Usage among high-performing firms: 74%
Usage among low-performing firms: 47%
Best practice? Yes

HR practice: Our firm identifies high-performers and discusses their status with them
Usage among high-performing firms: 83%
Usage among low-performing firms: 61%
Best practice? Yes

HR practice: Formal appraisals are conducted of non-managerial staff at least annually
Usage among high-performing firms: 85%
Usage among low-performing firms: 70%
Best practice? No

HR practice: A system of regular, planned staff briefings by senior management is in place
Usage among high-performing firms: 83%
Usage among low-performing firms: 58%
Best practice? Yes

HR practice: Supervisors keep open communications with employees
Usage among high-performing firms: 90%
Usage among low-performing firms: 69%
Best practice? Yes

HR practice: All employees are informed about the firm's strategic objectives/targets
Usage among high-performing firms: 77%
Usage among low-performing firms: 52%
Best practice? Yes

HR practice: Employees receive pay based solely on their job performance
Usage among high-performing firms: 48%
Usage among low-performing firms: 27%
Best practice? Yes

HR practice: Our firm pays whatever it takes to prevent losing high-performers
Usage among high-performing firms: 40%
Usage among low-performing firms: 27%
Best practice? No

HR practice: Merit bonuses are available to non-managerial employees
Usage among high-performing firms: 73%
Usage among low-performing firms: 47%
Best practice? Yes

HR practice: Internal promotion is the norm for positions above entry level
Usage among high-performing firms: 83%
Usage among low-performing firms: 72%
Best practice? No

HR practice: Profit-sharing is available to non-managerial employees
Usage among high-performing firms: 52%
Usage among low-performing firms: 48%
Best practice? No

HR practice: Employee stock ownership is available to non-managerial employees
Usage among high-performing firms: 20%
Usage among low-performing firms: 24%
Best practice? No

*High-performing firms achieved net income of at least 10% and revenue growth of 15% or more over the past three years.

Why employees quit
The PROFIT/IQ Partners survey asked business leaders why employees voluntarily leave their firms. While compensation issues top the list, IQ PARTNERS' Tim Rutledge warns that departing employees often cite more money to avoid burning bridges. Ask them how much more their new employer is paying, he advises: "If it's less than 15%, I'd have strong suspicion that it's for something other than money."

More money 63%
Workload too heavy 30%
Insufficient career development 52%
Problems with manager 29%
More challenging work 38%
Insufficient development and learning 25%
Better non-monetary incentives 35%
Unavailability of flexible work programs 19%

CEOs: What, me worry?
While most respondents to the survey believe the talent crisis is coming, relatively few believe it will affect their firm

Entrepreneurs who say:
Turnover in the general labour market will increase in the next five years: 75%
Turnover at their firm will increase in the next five years: 36%
Talent retention is and will continue to be a challenge in the next five years: 88%
They have a plan to retain employees: 49%