Workplace Issues

How Growth Companies Can Manage Churn

Turnover can help high-growth companies evolve, but it can also be costly.
Marielle SegarraJune 12, 2013

Growing companies, with their steady stream of new ideas, ambitious goals and fresh faces, can be thrilling places to work. But they can also be a revolving door.

Turnover is a fact of life for growth companies, says John Challenger, chief executive officer of Challenger Gray & Christmas, an outplacement firm. “For a growth company, it’s hard to keep people around, because your core is always shifting,” Challenger says. New hires “come in with new ideas and inevitably change the organization. If a company really is growing quickly, it won’t be today what it was a year ago.”

CFOs should be wary of too much churn, Challenger says. As a company loses employees, institutional knowledge can go running out the door, too. And replacing workers can be expensive. In a series of 22 case studies last year, the Center for American Progress, a think tank, found that turnover costs companies about 20 percent of an employee’s salary.

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“It costs money to recruit and replace people,” says Jack Segerdahl, CFO of EHE International, a workplace health provider that has seen double-digit revenue growth over the last two years. “You lose productivity as you bring somebody on board and have to train them or get them accustomed to [company norms].”

At the same time, Challenger says, not all turnover will hurt the business. “If the company is not flexible enough to throw off its skin and become something new, it’s not going to grow consistently,” he says. “It’s pretty soon going to get stuck in one of its iterations and lose its growth capacity and potential.”

How can companies manage turnover (both good and bad)? They can start by paying attention to why their workers are leaving, Challenger says. One of the most common reasons: employees may be discontent with how quickly the company is changing — and what it is turning into. “When a company hits a growth phase, there are always people who have been there in a previous era who feel like ‘this is not the company that I knew,’” Challenger says. “So there’s inevitably some kind of unhappiness there.”

Other employees might leave the company because they don’t get along with new hires. “In growth companies, there are always new people coming in, much more frequently than you’d see in a stable company,” Challenger says. “Those people are putting pressure on the people who are there, so conflicts are more likely to occur.”

Some employees simply may not like the growth-company culture, says Segerdahl. “There are folks that aren’t made to work in an environment of rapid change, shifting priorities and the other things that growth companies go through,” he says. “It’s not the same old thing day after day. Not everybody is cut out for that kind of environment.”

In these instances, companies must decide how valuable departing employees are to the business. “If you see the kinds of people that are leaving are ones that you really, really want to retain, that should raise your antennae and you should try to better understand why they’re leaving,” Segerdahl says. In particular, finance chiefs should pay close attention to exit interviews. “Growth companies move in a very quick fashion, and sometimes you’re too close to see what those changes are doing in terms of culture,” he says.

Within expanding industries, growth companies also often lose employees to larger firms that offer higher salaries and more perks. “Certainly in growth situations, where there’s competition for employees with a certain skill-set, salaries get bid up,” says Segerdahl. Particularly in the information-technology department, employees may be looking to move on to a bigger company. “Everybody wants to be the next employee hired by Yahoo,” he says.

Rather than enter a wage competition with behemoths like Yahoo, EHE International focuses on what skills — and how much experience — it really needs for a position. If long-term employees are ready to move to another company, EHE might hire workers with less experience to replace them. In some cases, “turnover may be a natural evolution to go through,” Segerdahl says. “If an employee now has five years experience and is looking to improve themselves, that’s the natural thing. We don’t necessarily need somebody with that much experience for a particular job. So we’d replace them with someone who has one or two years and recognize it as part of the cycle.”

Of course, companies must decide which positions require experience and institutional memory and which can be done equally well (or better) by someone new. Ultimately, “one of the challenges for growth companies is how to manage the change, keep a solid foundation and not lose your soul,” Challenger says.