Early each year, you get a concrete reminder of one of the biggest challenges associated with operating a franchise business. It comes when your accountant lets you know how many W-2 forms your franchise mailed out. Employee turnover is a constant in this business, but it’s never more apparent than when you realize just how many people spent time on your payroll during the year. According to a report by Korn Ferry, businesses in the restaurants and accommodations category experienced an average turnover rate of 72.9 percent in 2016.
Turnover is even more costly than most franchise operators realize. You may focus on what you have to pay to hire and retain employees, but the real costs of turnover show up in the amount of time it takes to bring a new employee up to full productivity, the impact of the reduced productivity during that time, and the negative effects on morale when employees see their peers heading out the door.
One study says that total turnover costs amount to 16 percent of the equivalent annual pay for your lowest-paying jobs, and 20 percent for mid-range positions such as managers1. Based upon that, replacing a $10/hour employee would cost $3,328 and replacing a $40,000/year manager comes to more like $8,000. You can debate the accuracy of the numbers, but it’s clear that turnover is costly.
By reducing turnover, you can achieve a significant increase in profitability. The best way to keep turnover at a minimum is to hire the right people in the first place. By hiring people who are well-suited for the positions, you’ll end up with people who are going to be more satisfied with their work and less likely to leave when the franchise across the street dangles another 25 cents per hour in front of them.
Most important, you need to hire the right managers. Besides being more costly to replace, managers have a tremendous impact on morale and productivity, meaning they impact the turnover rate of line employees. While you want to hire people who will push your employees to perform, it’s best to avoid tyrants. Look for people who are pleasant and easy to talk with. Pay attention to how much time they spend listening during the interview, compared to how much talking they do. How thoughtful are their answers to your questions? If they listen carefully to what you have to say, it’s more likely that they’ll treat line employees with respect, too.
When candidates come in to interview for a manager’s position, make them wait for a few minutes and observe their behavior. Do they become impatient and angry? Do they ignore your employees and avoid customers? Or do they engage people in conversation and offer friendly smiles to others? How people behave when they don’t realize someone is watching can tell you a great deal.
Once you’ve found the right people, encourage them to stay through incentive programs that reward them for doing the right things. If reducing turnover of line employees is a primary goal, perhaps you could offer an incentive to all of your managers if turnover stays below a certain percentage during the quarter. What sort of an incentive? One of the best ways to find out what will motivate your managers is one of the most simple: ask them. Do they want cash? Some kind of gift card? A bonus day off? The most effective incentive plans are the ones employees help to design.
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