Wednesday, July 30, 2014

Market Basket and the Benefits of Low Employee Turnover

As the crisis at Massachusetts-based supermarket Market Basket rages on, it's worth noting that Consumer Reports just ranked the retailer as one of the top 10 supermarkets in the United States.  I also found an article this week on quite interesting, because it explored the question of how Market Basket could keep prices so low while offering employees compensation and benefits that exceeded those provided by rivals in the industry.  The article, by Adam Vaccaro, cites low employee turnover as one key to the firm's success.  I thought that I would do a bit of research on the economic cost of high turnover.  I went to the Hay Group's website, since that firm has done a great deal of research on issues related to employee compensation.   The Hay Group examined the economic benefit of having a highly engaged workforce coupled with low employee turnover (the two obviously are related... if you have high engagement, you are likely to have low turnover).  Here is what they found:

Similarly companies with high levels of engagement show turnover rates at 40 percent lower than companies with low levels of engagement. However, companies that both engage and enable employees demonstrate a total reduction in voluntary turnover of 54 percent... For an organization with 20,000 employees and an annual voluntary turnover rate of eight percent, the cost of turnover is approximately $56 million (assuming an average salary of $35,000). Reducing the voluntary turnover rate by 40 percent would yield annual savings of $22.4 million. But reductions in turnover through high levels of engagement and enablement would yield savings of over $30 million annually, a difference of more than $7.5 million.  

The Hay Group research also shows that highly engaged employees are likely to far more productive.  As a result, the firm achieves substantial additional economic benefits.  What can firms do with these economic gains from the combination of high engagement, low turnover, and high productivity?   Certainly, they can pile up healthy profits.  However, in the case of a firm such as Market Basket, it appears that they were able to share that economic value with customers and employees as well.  Employees received solid compensation and benefits, while customers enjoyed low prices.  Of course, all of these gains are at risk if the Board cannot move to resolve the leadership crisis at the firm.  As of now, the workers are standing strong in support of their former CEO.  The Board continues to examine a potential sale, either to that former CEO or to another party.  

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