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 DOI: 10.1177/08863680022097920

2000 32: 65Compensation & Benefits ReviewMaureen Hannay and Melissa Northam

Low-Cost Strategies for Employee Retention  

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© 2000 Sage Publications, Inc. JULY/AUGUST 2000 65

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oday, there is extensive evidencethat organizations—big and small,high tech and low tech, locallymanaged and internationallycompetitive—are experiencing aretention crisis. The Bureau ofLabor Statistics reports that thenational unemployment rate re-mains at a low 4.1%, further inten-sifying the tight labor market. Withthe cost of recruitment skyrock-eting to a reported 50% to 60% ofan employee’s first year’s salary(and up to 100% for certain spe-cialized, high-skill positions) thefinancial implications of turnover

are staggering.1

The practical concern of most employers is,however, preventing what can be termed dys-functional turnover. Dysfunctional turnoveroccurs when the best employees move on to neworganizations, while the company’s worstemployees stay on with the employer. In manycases, the employer pays directly through anincrease in recruiting costs but also indirectlythrough reduced productivity, as the best per-formers are lost to competitors. Organizationsare recognizing that they have two choices: either

institute effective retention strategies designed toretain known quantities or continue to pursueaggressive, expensive recruiting plans that havean uncertain future.2

As a result, many employers are developingnew retention plans and strategies to retain theirpeople in this increasingly competitive market.Many of these strategies have focused on expand-ing the benefits package as one method to buildloyalty and commitment in the workforce. Goneare the traditional benefits packages offering onlymedical, dental, a defined contribution pensionplan and two weeks vacation each year. Today’semployee expects a much more creative, innova-tive, individualized and, unfortunately (for theorganization), expensive package.

Onsite childcare, fitness and medical facilities,flexible work scheduling, telecommuting, occa-sional sabbaticals, loan programs for home com-puters, stock options, concierge services, eveninsurance for the family pet are all part of thecompensation package in the new workplace.Although most employees would be excited toreceive these benefits, not every organization canafford to provide them. The question, then, iswhat strategies can organizations with limitedcompensation budgets use to compete foremployees in a tight labor market?

Maureen HannayAssistant Professor

Troy State University-Florida,Department of Management

Melissa NorthamAssociate Professor

Troy State University-Florida,Department of Management

The keys to retaining quali-ty employees lie in targetedrecruitment and retentionstrategies that focus onmore than just financialcompensation.

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Low-Cost Strategies forEmployee Retention

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Survey ResultsTo answer this question, data were collected from188 working adults attending classes at a public,southeastern university in the evenings and onweekends in pursuit of a college degree. Almost65% of the respondents were between 31 and 50years of age, and the sample was about equallysplit between men and women. More than 75% ofthe respondents were pursuing a graduate degreein management or human resources manage-ment. The rest were completing an undergradu-ate degree in the social sciences.

More than 50% of the participants identifiedthemselves as working at the management level.Approximately 30% of respondents indicated thatthey worked for an organization having between1,001 and 5,000 employees, and another 30%indicated that their organization was composedof more than 20,000 employees. There was anotable split among the respondents in terms oftenure with their current organization. An almostequal percentage of respondents indicated thatthey had been employed with their presentemployer for between 1 and 5 years and for morethan 10 years. Almost 40% of the respondentswere employed in the private sector, with theremaining 60% working in public sector institu-tions. Almost 71% of the sample of working adultsreceived some form of tuition assistance fromtheir employer to defray their educationalexpenses.

When the survey participants were askedwhether they intended to remain with their pre-sent employer once they had completed theireducation, more than half indicated that theyintended to leave or were currently undecided.Less than 50% responded that they were commit-ted to staying on with their current employer.The survey further asked participants if theiracceptance of financial assistance from theiremployer to fund their education obligated themto a service commitment with that employer.Only 42% of those respondents who receive tuitionassistance from their employer incur a serviceobligation to that employer. Of that group, only19% were employed in the private sector.Therefore, it appears that very few private sectoremployers require those accepting financial aidfor education to obligate themselves to theiremployer as a “pay back” for that assistance,thereby increasing the portability of the tuitionbenefit across employers.

Survey participants were asked whether theirexpectations about the workplace had been met

by their employer. They responded on a 1 to 5scale, with 1 indicating that they were very disap-pointed and 5 indicating that they had beenpleasantly surprised by the workplace. The meanresponse was 3.25, indicating that respondents,on average, got about what they expected fromtheir employer.

Respondents were further asked whether theyexpected any future opportunities from theiremployer once they completed their degree. Thisquestion encompassed a variety of expectations,such as additional responsibilities, more interest-ing responsibilities, more money, a promotionand more respect. This question was scored on ascale of 0 (indicating that they expected nothingfrom their current employer) to 10 (indicatingthat they perceived many opportunities wereforthcoming). This question received a meanresponse of 3.98. However, more than 25% of therespondents scored this question at 0, indicatingthat one quarter of the sample group expectednothing from their employer on completing theireducation.

Respondents were also asked if they perceivedthat their current salaries were competitive in theexternal market. A score of 0 indicated that theyperceived they were underpaid compared to oth-ers doing similar work elsewhere, whereas a scoreof 5 indicated that they believed they were paidmore than others doing comparable work. Themean score for this group was 2.82, indicatingthat most of the respondents to this survey per-ceived that their pay was equitable compared toothers doing similar work in other organizations.Finally, participants were asked whether theywere currently able to relocate to take what theyconsidered to be a better job, with a score of 1indicating they were unable to relocate and ascore of 4 indicating that they were very mobile.The mean value for this variable was 3.06, indi-cating that this particular group is generallymobile and prepared to pull up stakes to relocatefor another position.

What Determines Employee Retention?After analyzing the data, four variables werefound to be significant predictors of employeeretention: perceived future opportunities fromthe employer, employee age, the degree to whichemployee expectations have been met by the em-ployer and the availability of employer-sponsoredtuition assistance. It quickly became apparent inreviewing the results that these respondents were

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not necessarily seeking more money, more bene-fits or more tangible compensation. Instead, theyidentified relatively low-cost solutions to theemployee retention challenge. Clearly, the key toemployee retention does not lie in the organiza-tion with the biggest wallet. Rather, the key is tolisten carefully to employees and strategicallydeploy resources in areas that can deliver thebiggest benefit to the organization.3

Perceived Future OpportunitiesEmployees who perceived that there would befuture opportunities within the organizationwere more likely to remain with the employer(see Exhibit 1). But what constitutes futureopportunities? These employees identified thefollowing opportunities:

• additional responsibilities,

• more interesting and challenging responsi-bilities,

• more money,

• promotional opportunities,

• more respect and

• autonomy

Although money was identified as one factoremployees were seeking, it was by no means theonly—or even the most important—factor intheir decision to stay. Although the tangible ele-ments of the compensation package (like pay andbenefits) are often the main factors attractingnew recruits to an organization, it is the intangi-ble factors that play the most important role inretaining them. The good news for employers isthat these intangible working conditions canoften be improved at a relatively low cost.

The key is to spend the time designing andredesigning jobs to incorporate more of the fac-tors employees are seeking—like autonomy, chal-lenge and variety—to satisfy their needs. Whatresults is the individualization of jobs to meet thediffering needs of each employee. This will be atime-consuming task and will require that thehuman resources department work closely withline management to design jobs that meet theneeds of both the employee and the organization.However, the benefits to the organization can besubstantial. Employees will be more motivated,more satisfied and more committed to theemployer. And, as employers tap into all of theemployees’ available skills, including their abilityto “supervise” themselves, organizations will also

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Number of Future Opportunities

EXHIBIT 1Future Opportunities and Employee Retention

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benefit from improvements in productivity andefficiency.

Employee AgeAs more emphasis is placed on the strategicimportance of minimizing employee turnover,organizations must carefully consider the typesof employees that are initially being hired intothe organization. Our research indicates thatolder workers are less likely to voluntarily leavethe organization than are younger workers.Therefore, tapping into the underused pool ofolder workers may have a positive impact onemployee retention in the organization. With thefederal government’s recent repeal of the earn-ings penalty for workers collecting social security,we can anticipate growth in the pool of availableolder workers.

Many employers have historically been reluc-tant to hire these employees, as they perceive thatolder workers are unable or reluctant to learnnew skills, will be absent from work more fre-quently and will overburden the health insuranceprogram. Study after study has indicated thatthese perceptions are simply not accurate. Olderworkers can in fact provide a competitive advan-tage to the employer wise enough and savvy

enough to effectively use their experiences, skillsand wealth of organizational knowledge.

Rather than focusing on skills that they do nothave (perhaps they lack the latest computerskills), employers should focus on the skills thatthey do have. Management skills, mentoringskills, writing skills and presentation skills are allattributes gained and refined through years ofexperience. They are skills that are developedover time, not taught over night. Computer skillscan be learned in a training course; these otherattributes are the result of a lifetime of experiencein the business world. By effectively employingthe older worker in the organization, the resultwill likely be not only a reduction in employeeturnover but also an increase in the skills avail-able in the workforce.

In targeting older workers, recruiters may needto expand their traditional applicant sources.Contacting companies in the community that aredownsizing or offering early retirement packages,networking with the veterans’ administration toidentify military retirees, posting jobs at the localSocial Security Administration offices or contact-ing the local AARP offices are just some placeswhere recruits can be sought. It may also beimportant to offer the option of part-time andflexible work arrangements to these recruits.

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20 to 30 31 to 40 41 to 50 51 to 60

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EXHIBIT 2Age and Employee Retention

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Some may be keen to return to the workforce butmay also be interested in “semi-retirement.”These perks could help attract this segment ofthe population to the organization. Effectivelyintegrating older workers into the workplace is alow-cost strategy designed to stabilize the orga-nization’s workforce.

Meeting Employee ExpectationsOne of the most significant results of our surveyis, in fact, one of the least expensive “fixes” anemployer can make. Our findings clearly showthat simply providing employees with realisticjob previews, in which they are informed of boththe positive and negative aspects of the job, canreduce turnover. Where there are gaps betweenthe employee’s expectation of the employmentcontract created by the employer and the realityof the job, turnover increases. It is equally impor-tant to keep in mind that the realistic previewshould encompass more than just the job.

The employee must also be educated aboutthe culture, policies, environment and workingconditions of the organization. Disappointmentjust as frequently results from unrealistic expec-tations about the organization itself. If the com-

pany does not offer its employees significant lat-itude for upward mobility, for example, do notsell new recruits on the basis that it does. If trav-el and weekend work are required, do not mini-mize it—telling job candidates the true nature ofthe job and the organization increases the likeli-hood that a perfect “fit” among the job, the orga-nization and the employee will be achieved.

Many recruiters have been in the position oftrying to “sell” a job to an applicant to fill a criti-cal role in the organization. More often than not,having oversold a position or the organizationsimply results in recruiting for that job again in afew months. Not only is the organization spend-ing more time and money on the recruiting andselection processes, it has not come anywhereclose to recouping the money already sunk intoorienting, training and socializing that employeeinto the organization. By providing employmentcandidates with a realistic preview of both the joband the organization early in the recruitingprocess, some applicants will recognize that theposition does not meet their needs before theoffer is tendered.

Money will be saved by using the most expen-sive selection techniques for the fewest numberof candidates who are all fully aware of the pros

VeryDisappointed

SomewhatDisappointed

What IExpected

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PleasantlySurprised

Degree to Which Expectations Were Met

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EXHIBIT 3Expectations and Employee Retention

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and cons of the job and by ensuring that the timeand money spent training and orienting the newemployee will be recovered over time. And, bycarefully presenting both the job and the organi-zation, the job applicant can be lead towarddeveloping more accurate initial job expecta-tions, thereby minimizing disappointment withthe reality of the job and the organization.

Human resource managers and line managersboth have roles to play in this process. Humanresources must ensure that a detailed and accu-rate job analysis is performed, either by them orby the department manager, before any recruit-ing begins. It is essential that both positive andnegative information is included. Once the newrecruit is hired into the organization, line man-agers must strive to ensure that actual experienceon the job and in the organization is consistentwith the expectations developed in the recruitingprocess.

Finally, we must consider the needs of a groupof job applicants who are often not given ade-quate consideration in the recruitment process.Although all the stops are pulled out to ensure agood match when bringing an external recruitinto the organization, the needs of internal appli-cants in the recruiting process are often ignored.Management assumes that internal hires “knowwhat they’re getting into” and therefore may notprovide all the information internal applicantsneed to make an accurate decision about whetherto move into a new position in the organization.

It is just as important, indeed arguably evenmore important, to ensure that these internalrecruits are given a true picture of the new job. Iftheir expectations are not met and they chooseto leave the company, the organization loses anemployee in whom it has likely made consider-able long-term investments in terms of educationand training. Furthermore, this individual walksout the door with considerable organization-specific knowledge that could easily end up witha competitor. The same effort and attention mustbe devoted to providing an accurate picture ofthe job to both external and internal recruits.

Providing new recruits with a realistic previewof both the job and the organization is anotherlow-cost strategy to help reduce turnover in theorganization. Beyond that, it is an essential partof any effective recruitment program; without anaccurate, detailed picture of the job, it will beimpossible to find the right fit within the appli-cant pool. The important thing to remember isthat the most important tool in an effective reten-

tion program is to first have an effective recruit-ment program.

Tuition Assistance ProgramsThere are differing opinions on the role employer-provided tuition assistance programs may play inthe organization’s retention strategy. On onehand, it is argued that to improve employee reten-tion rates organizations need to provide non-portable benefits—benefits that accrue to employ-ees only as long as they are employed by thatorganization. These would include such things ason-site daycare, flexible work scheduling andcompany cars. Tuition assistance is what wouldbe termed a portable benefit. Once the employeehas the education, he or she can take it anywhere.The employer then “loses” its investment as theemployee walks out to the nearest competitor whooffers the career path desired by the employee.

On the other hand, it is clear that educationalopportunities are one of the top benefits employ-ees are seeking. And, if managed correctly, atuition reimbursement program has the potentialto be a win-win situation in the workplace.Employees win by improving their skills andincreasing their knowledge at a reduced cost, andemployers win through the development of amore educated and flexible workforce. Therefore,although there are some up-front expenses, theseshould be recouped through increased produc-tivity, efficiency and profitability.

The results of our survey indicate that thoseemployees who receive tuition assistance fromtheir employers are more likely to remain withthat organization than those who do not (seeExhibit 4). It appears that a tuition reimburse-ment program can be an important element in anorganizational program designed to build loyaltyand commitment to the employer. However,these results must be interpreted cautiously. Tobe effective, a tuition reimbursement programmust be managed carefully. Increased educationgenerally leads to increased expectations foropportunities within the organization. We havealready discussed the fact that the availability ofdevelopment opportunities is one key factor inan employee’s decision to remain with the orga-nization. So, although providing tuition reim-bursement programs for employees appears toincrease the likelihood that they will stay on withthe employer, if other opportunities and expecta-tions are not fulfilled, it is less likely that theemployee will remain.

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When adopting tuition reimbursement pro-grams, therefore, employers must be realisticabout other opportunities they can provide. If nofuture advancement, challenging work assign-ments or increased responsibilities will be forth-coming, the employer is likely spending moneyfrom which a competitor will reap the benefits.When employers provide portable benefits suchas tuition reimbursement, they are taking a risk;that risk must be managed by ensuring that theorganizational environment can fulfill the expec-tations of these newly educated employees.

ConclusionIt has become increasingly clear over the past

two decades that the traditional competitivetools such as technology, access to raw materialsand product innovation are no longer sufficientto ensure competitive success in the increasinglyglobal economy. More and more organizationsare recognizing that their competitive advantagelies not with capital or physical resources butrather with their human resources. At the sametime, our booming economy has made people ascarce commodity with the labor market becom-ing a seller’s rather than a buyer’s market. Thefinancial consequences of employee turnoverhave challenged employers to search for newstrategies to retain their employees.

Many of these strategies involve employersspending more and more money on highersalaries, signing bonuses and increasingly expan-sive benefit programs. Interestingly, this studyfound that more money and more benefits werenot the keys to solving the retention crisis.Organizations often view money as a quick fix tothe retention problem, assuming employees willalways be satisfied with more tangible compen-sation. Clearly, our findings indicate that thesolution to this problem will not be so simple. Toimprove employee retention, the focus mustmove away from the tangible aspects of the com-pensation package.

Our research indicates that individualizingjobs to satisfy employees’ needs for autonomy,challenge and growth, investigating alternatelabor markets by hiring older workers, providingrealistic job previews to applicants during therecruiting process and providing a tuition reim-bursement program to employees will contributeto improved employee retention. The retentioncrisis cannot be solved by money alone. Improvedemployee retention begins with effective, target-ed recruitment and is sustained by a work envi-ronment that satisfies both the extrinsic andintrinsic needs of employees.

Focusing only on increasing financial com-pensation at the expense of the growth and devel-opment needs of employees will likely foster

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EXHIBIT 4Tuition Assistance and Employee Retention

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rather than reduce turnover. Salary is an easy fig-ure for employees to compare; if the only factorthat keeps employees loyal is their paycheck, thenthey can easily be lured away by a competitorwith a bigger and better offer. A work environ-ment that provides challenge, opportunity, auto-nomy, respect and variety is not easily foundand can be even harder to leave. Focusing onthese important, yet relatively inexpensive fac-tors could be the key to improving retention inthe organization.

Notes1. These figures are cited from Jamie Hale,

“Strategic Rewards: Keeping Your Best Talentfrom Walking Out the Door,” Compensationand Benefits Management 13 (1998): 39-50;and Steve Vernon and Charlie Commander,“Stay for Pay: A Retention Solution,” HRFocus, 75 (1998): S7. These figures clearlyillustrate that turnover is a significant organi-zational expense.

2. This idea is expanded on in Mel Mandell,“Avoiding Costly Turnover,” World Trade, 11(1998): 99. The organization must make adecision about how to deploy its resources.And, where these resources are limited, theymust be deployed in a manner that will gen-erate the greatest returns.

3. To determine the relative importance of eachof the variables analyzed in this study, ordi-nary least squares (OLS) regression and logis-tic regression procedures were used. The fourvariables discussed below were all found tobe statistically significant predictors ofemployee retention. In other words, in thecase of future opportunities from the employ-er, employee age and employee expecta-tions, the results indicate a less than 1%probability that the results occurred bychance. In the case of the tuition assistancevariable, there is a less than 5% probabilitythat the results occurred by chance.

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Maureen Hannay, BA, M.I.R., Ph.D., holds a BA from the University of British Columbia, a master ofindustrial relations degree from the University of Toronto in Toronto, Canada, and a Ph.D. in industrialrelations/human resource management from the University of Toronto. She worked as a compensationanalyst and a human resources generalist in both the oil industry and the banking industry in Canadabefore joining Troy State University—Florida Region as an adjunct professor in 1996. Hannay wasappointed to her current position as an assistant professor of management in 1998.

Melissa Northam, BA, MA, Ph.D., holds a BA from Baylor University, a master’s degree in marketing fromthe University of Alabama and a Ph.D. in business administration from the University of South Carolina.She has worked as an internal marketing consultant in DuPont’s corporate headquarters. Northam hasalso worked as an independent market consultant for a variety of services-oriented firms and served onthe faculty of several major universities. She joined Troy State University as an associate professor of man-agement in 1995.

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