Replacing Workers Who Walk NowIs a Bigger Drain on the Bottom Line
| Hold on to your employees for dear life. Burgeoning markets and corporate growth across the construction industry are turning a once-loyal work force into an endangered species. As job opportunities and salaries soar in a people-strapped business, firms are more hard-pressed these days to keep their employees, particular managers, in place. Some companies claim staff turnover rates are still under control, but others say the cost impact is growing and not just for those at the very top. To slow the flow of expense and erosion of the corporation's knowledge and client base, firms are taking more creative and deliberate steps to retain, motivate and groom their best talent. Higher pay is becoming a more critical carrot, but that is only part of the new work force strategy. "Employee turnover is the defining issue in our industry," says Michael Creed, CEO of engineering firm McKim & Creed, Wilmington, N.C. "We've finally realized we're in a people business. We can't get great people the same way we've been doing it for the last 20 years." Ripple Effects Bottom line realities related to employee turnover were brought to firms' attention at a meeting in New York City in April of company financial managers, sponsored by EFCG Inc., an industry management firm based there. They heard results of an EFCG survey that estimated per-person turnover costs at more than 100 firms. Some respondents, which were not identified, reported figures as low as $5,000, but others noted significantly higher numbers as more indirect business consequences were included. |
Some managers who calculated the financial impact of such ripple effects as damage to client relations or lost corporate knowledge estimated per-person turnover costs that exceeded $75,000 (see chart below). EFCG President Paul Zofnass believes a more realistic figure is closer to $50,000 but he estimates that employee turnover could still cost the firms surveyed at least $1.8 billion a year. "The financial ramifications...are huge in terms of the overall impact on profitability," he says.
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| UHLER |
Executives say turnover, even among mid-level managers, can wreak havoc. "Losing vice presidents is the most damaging," says Robert Uhler, president and CEO of MWH, Broomfield, Colo. "They own the client relationships." A departing branch manager could be a $1-million hit because of a "cascade effect" on others in the firm and the loss of valuable market connections and intelligence, he says. Uhler attaches lesser monetary impact to departures of higher ranking executives "because they don't have control of the marketplace," he says. "It all depends on whether they were being groomed for CEO."
Creed says the cost of turnover may not always be immediately apparent. "I can identify a $1.5-million impact over 21/2 years of one manager who didn't work out," he says, noting dire impacts on employees and shareholders. "Huge liability can erupt."
As a result, firms are becoming more careful in their recruiting. As recently as three years ago, young engineers at San Francisco-based URS Corp. "were jumping around every six-to-18 months looking for the best deal," says a regional marketing manager. "Now, if we think the person will be flying to the next firm, we won't hire him or her."
Some industry executives insist that staff turnover is still far from catastrophic. "You need a healthy level of turnover," says John Ryan, senior vice president and human resources director at Parsons Brinckerhoff, New York City. "The real issue is retention." He won't reveal PB's turnover rate, "but we think we're lower than other firms." The industry's average annual turnover rate is about 12%.
| How Turnover Costs Can Take a Toll | ||
| Average Cost per Employee* | $1,000s. | What Makes Up Cost |
| Lowest 10% of CFO respondents | 5 | Recruiting fees, training expenses, management interviewing time, human resource time, advertising, severance |
| Lowest 25% of CFO respondents | 15 | |
| Median | 30 | All of previous group’s items, PLUS lost revenue, lost productivity, initial inefficiency, relocation fees |
| Highest 25% of CFO respondents | 50 | All of previous group’s items, PLUS additional salary for new employee (generally higher than worker lost), lost clients, damaged client relations, rework on projects, lost knowledge |
| Highest 10% of CFO respondents | 75 | |
| *Based on responses by 110 chief financial officers of engineering and construction firms in 2006 survey | ||
| Source: EFCG Inc. | ||
Edwards and Kelcey Inc., Morristown, N.J., touts low turnover in its busy transportation niche, particularly among employee owners who make up about 14% of the firm's work force. But CEO Kevin McMahon admits the firm is spending more on executive recruiting fees and has had to turn down work for lack of staff.
"Our turnover rate is creeping up slightly from historical levels, but it's not dramatic at this point and it's not causing concern," says Larry Myers, human resources senior vice president at Washington Group International Inc. "But we're looking forward in time and wonder what will come in the future."
Compression
But the hunt for management, professional and craft talent is forcing contractors to be more attuned to turnover impacts. "Competition is so stiff that wages are escalating tremendously," Jeffrey M. Robinson, president of compensation research firm PAS Inc., Saline, Mich., told the Associated General Contractors at the group's March convention. "You can't hire a new project manager without paying the market rate."
PAS Vice President Ron Phillips adds that turnover will increase because of wage compression. "It's putting grave pressure on firms," he says. The risk of a departing superintendent causing a job shutdown or delay that impacts an owner's schedule or a contractor's job profit is considerable, says Phillips, adding, "If the guy wants 1.5 times more money, it might be worth paying him." Some industry observers see staffing pressure from baby boomers who are financially able to retire early. "Retirements are making the available gene pool smaller," says one executive recruiter, who asked not to be identified. "As people retire, you can't replace them."
The recruiter claims high-level searches now are significantly more labor intensive. "We would talk to 100 people to complete a search at that level, now it's 300," he says. Fees are ratcheting up as a result, inching close to 40% of an executive's annual compensation. One engineering firm CFO admitted spending $40,000 for a recent search, "and it was not even at the top level," he says.
Early retirement is among the reasons for Fluor Corp.'s loss of about 80 employees in its soon-to-be-completed move from Orange County, Calif., to a new $40-million, 136,000-sq-ft world headquarters in a Dallas suburb. Steve Gilbert, Fluor's human resource senior vice president, claims it took early steps to mitigate turnover impact. "If someone couldn't make the move, we hired a replacement early so he or she was trained and productive when the transition came," he says. Fluor has 25 out of 170 positions left to fill at the new location.
Poaching
| Even so, the industry's shrinking numbers and crazed competitiveness have spurred a new level of corporate raiding. "We have our employees being called all the time by competitors," says Catherine Santee, senior vice president of finance for CH2M Hill Cos., Denver. "All of us are fighting for talent, every day, all the time. The stakes are very high." |
| MWH's Uhler sees a growing lack of professional courtesy in firms' recruiting. "Before, we used to call each other," he says. "Now, no one even blinks." Recruiting and turnover excesses are perhaps nowhere more acute than in the red-hot Las Vegas construction market. Employee poaching is widespread and aggressive recruiting tactics include everything from signing bonuses and moving expenses to flex hours and matching 401(k) contributions. Construction now is the second-fastest growing employer in southern Nevada, trailing only the hospitality industry, says the Nevada Dept. of Employment, Training and Rehabilitation. Construction employed 106,800 people in the state at the end of 2005, a 12.2% gain over 2004. There are now between $24 and 26 billion worth of resort expansions planned through 2009, the Las Vegas Convention Visitors Authority reports. The ambitious program will use over 7,000 workers at peak activity, or about 1/3 of southern Nevada's total building trade work force, says Richard Rizzo, chairman of Perini Building Co., a unit of Perini Corp., Framingham, Mass. It has been importing workers from out of state, paying 10% to 15% over scale, plus moving expenses. Perini offers flexible work days and hours, enabling employees to start and finish when they want, Rizzo says. Employees all have basic health benefits, although the firm froze pensions a year or two ago due to spiraling costs and increased liabilities. But it also offers matching 401(k) contributions, life insurance coverage, 100% tuition related to career development, and signing bonuses to college grads. "There is a premium for talent coming into our construction industry," Rizzo says. Perini maintains "a gentleman's agreement" when recruiting people from other local firms by notifying their employers, "although that doesn't always work," Rizzo admits. The firm now recruits nationally rather than in western states alone to "find more people outside the market that we need to come in," he says. Frank Martin, president and CEO of locally-based Martin-Harris Construction, uses headhunters and national ads to secure new management talent, but keeps locals off-limits. He finds poaching a "disturbing" practice that has strained relations with subcontractors. Busy firms are hand-picking jobs and pre-qualifying owners to avoid risking subs' availability if the project is not real, Martin says. |
Strategic Imperative
The industry's growing people crisis has firms across the U.S. scrambling to shore up the work force with new incentives and treat employee development as the new strategic imperative, elevated to the same corporate priority as finding new markets and making money.
| Pay Strategies Vary with Employee Goals | |||
| Compensation Element | Attract? | Retain? | Motivate? |
| Base pay | High | High | Low |
| Short-term incentives and bonuses | Low | Medium to High | High |
| Long-term qualified deferred compensation | Low to Medium | Medium to High | Low |
| Long-term non-qualified deferred compensation | Low | Medium to High | Medium to High |
| Perquisites | Medium | Low | Medium |
| Benefits | Medium | Medium | Low |
| Source: FMI | |||
Edwards and Kelcey this year pushed ownership deeper into the organization. "We're making it easier to become an owner earlier in your career," McMahon says, although the perk "still depends on performance." He says turnover is "virtually zero" among employee owners.
Stock ownership can be an effective retention tool "by raising the ante of leaving," says one executive. But firms must walk a fine line in designing "golden handcuffs" that are not onerous to potential new hires. After conducting a comprehensive compensation evaluation "to make sure we're in the market," Kleinfelder, San Diego, is adjusting pay inequities and has set a company goal of annual reviews for all employees to get a better "temperature check of where people are in their career paths," says CEO Gerry Salontai. "In our new strategic plan, we are putting more focus on developing staff."
New corporate job titles reflect the rethinking. "We used to have employment managers, now they're managers of talent," says PB's Ryan. McKim and Creed's chief administrative officer, who manages the firm's human resouces, accounting and facilities areas, now is its "chief people officer," says CEO Creed. "If we believe people are our most important asset, we needed someone with the right title and clout," he says.
Among the most prized of those assets could be the industry's aging baby boomers and growing crop of retirees over the next decade. Washington Group's Myers says the firm is experimenting with ways to keep them more engaged. "They don't want to work full time, but they don't want to sit around and do nothing for the next 15 years either," he says. "They are redefining retirement."
| PB certainly has found enough for 70-something Lou Silano to do. The senior vice president and technical director of major structures is starting his 55th year with the firm. "I've always been involved in interesting projects," says the veteran of Boston's Central Artery/Tunnel project and New York City's 63rd Street subway tunnel, among others. He and three other PB employees recently were honored for 199 years of combined service. "If you're happy and content, you don't look for other avenues," says Silano. |
