How to Retain Key Employees

High employee turnover can be devastating to a business. According to a study by the Employment Policy Foundation, the average cost to replace an employee is 25 percent of that employee's annual salary. The highest turnover costs are borne by companies in information technology and financial services. Overall, the average cost to replace a private sector employee is over $13,000 according to the study, taking into account the costs of hiring, bonusing, training and lost productivity.

• 1

  Hire employees who have a reason to stay. For example, try to hire employees who live near the workplace, since they will not be tempted to quit in order to have a shorter commute. Find out what is important to employees at the outset, and provide it. Some people work for a company because of an attractive work-home life balance, or because the company is flexible with childcare arrangements. Keep in mind that abrupt policy changes could negate such incentives.

• 2

  Survey the compensation market. Always keep an eye on what competing firms are offering good, qualified employees. You can use a formal survey company, online salary comparison tools such as Salary.com, or just keep an eye on newspaper and Internet want ads in your area. You don't need to be the highest-paying employer in your industry, but you don't want to fall far behind, either.

• 3

  Talk to your employees. Give them a safe place to air their concerns and desires to management. The use of anonymous surveys can uncover problems with morale and retention that your employees won't tell managers face to face.

• 4

  Structure compensation to encourage retention. Give attainable bonuses at regular intervals. One technique: Use key person life insurance to fund employee retention bonuses, a technique known as "golden handcuffs." You take out a permanent life insurance policy on the key employee, and bonus the employee all or part of the cash value after a certain number of years. You can also use non-qualified, deferred compensation bonuses and plans to encourage employee retention.

• 5

  Provide small incentives and rewards. For example, treat employees to a dinner together if they meet a short term goal or finish a large project. Let them know when you catch them doing something right, and praise and reward them publicly.