Hiring and retaining top talent are the most crucial factors to any business’s success. So why do small businesses pay so little attention retaining their best people?

As a general rule of thumb, I believe executives in a business should be the most highly rewarded when a company is profitable, but at the same time, take the most responsibility when the business incurs a loss. On the flip side, junior employees who have less of an impact on overall profitability should be compensated based on their performance, regardless of profit to a certain extent; the caveat being that if the company is in financial trouble and struggling with cash flow, then paying bonuses does not make any sense. However, if cash flow is not an issue, and the company has one bad year, it is typically a mistake to withhold all bonuses across the board.

Employment agreements typically should include a salary and a discretionary bonus based on company and individual performance. These employees should expect to receive their bonuses if they achieve their goals. A well designed bonus structure exhibits the following characteristics:

• In line with corporate goals: The more employees can see how they contribute to the big picture, the more motivated they are as they find more meaning in their work.
• Measurable: The ability to gauge success is as objective as possible. You want to avoid a situation where success is unclear.
• Obtainable: The goals should be set so they are within the employee’s control minimizing external factors that can lead to failure.
• Output focused: Far too often, I have seen goals that just reflect completion of a task. The quality of the work needs to be incorporated; otherwise employees will just be focused on completing tasks as quickly as possible, with little attention to detail.

There is nothing more frustrating for anyone in an organization than to be denied compensation based on variables completely out of their control. In every organization, there are superstar performers, good performers and weak performers. A company never wants to lose their superstar performers or good performers for that matter. In a bad year, I recommend my clients terminate weak performers and/or make temporary cuts to executive compensation across the board in order to retain superstar performers. 

CEOs often underestimate the cost of turnover, because you cannot directly see the impact on financial statements. Regardless of the level of experience, there is a learning curve to get up to speed joining any new organization:

• Organizational structure: How does each division make decisions?
• What is the protocol for communication?
• Roles and responsibilities: Who do I need to approach to get something done?
• General operational processes
• Need to review old emails and documents to understand what was done by predecessor

New employees generally spend a good part of a couple weeks just getting acquainted with the organization to understand how everything works, and it can take months to be fully integrated, even if they are fully qualified for a position from an education and experience perspective. Hard and soft costs of turnover include the following:

• Employee morale: Employees are distracted and begin to gossip about the incidents surrounding terminations and speculate who is next.
• Lower productivity: Employees need to spend time getting new employees up to speed, taking time away from their daily work.
• Team environment destroyed: Employees begin to fear sharing information with others who may take their jobs. 
• Severance costs for terminated employees
• Recruiting costs to hire new employees

Too frequently, I have heard comments from owners / managers saying things like, “That’s ok. If this person doesn’t work out after 3 months, we’ll just replace them.” HR decisions are the most important decisions in any corporate organization.  Replacing an employee often means starting things from scratch and three months is a lot of time to lose.  Any long-term hire should never be rushed – taking a significant amount of time to hire the right individual will pay off.

When the right hire is made to fulfill a role, the company must make every effort to retain this talent and ensure they continue focusing on their strengths. At junior positions, bonuses tend to be smaller, but extremely meaningful for the individual. All efforts should be made to reward them for their performance, even if it means sacrifices at the top. Executives who put the company first and are entrepreneurial will understand the importance of making a small temporary sacrifice for the good of the company.

Recognition of strong performance is heavily underutilized in small businesses; it can often be more effective than monetary compensation. CEOs are extremely busy and often do not even know what everyone does in the company. However, a very small gesture from an owner walking over to an employee’s desk and saying something like “Listen, I heard you worked late on Friday and put in some hours over the weekend to meet your project deadline. I want you to know that I really appreciate your efforts and great work on your project” can go so far to improve employee satisfaction. This recognition for many individuals is more important than compensation itself.

It also essential for managers to provide immediate feedback upon completion of a task – negative or positive.  This way, the employee can pinpoint the exact actions that resulted in this feedback. When managers are only providing feedback at annual performance reviews, this typically result in vague general feedback which causes confusion. When the employee asks for specific examples, they are citing actions that took place months prior that may be difficult for the employee to recall. Employees become extremely frustrated when they believe they are performing well and are surprised to hear negative feedback at a performance review.

CEOs need to remember that employees are not owners of the business. They are not motivated in the same way and don’t get excited that the company is profitable. They want to be compensated based on their performance and they want to be recognized for their hard work. Spending a little bit of effort and resources in this area can go a long way to exponentially increasing productivity and reducing turnover.