Solving a Multi-Billion Dollar Problem with Mentoring

In 1995 Peer Resources conducted a national study of the 2000 most productive corporations in Canada to determine the extent to which they were involved in mentoring (Carr, 1999). Almost 1700 of these companies participated in and completed our interviews. Our findings revealed that the two primary reasons for establishing a mentoring program in these highest producing Canadian corporations were (1) to provide opportunities for the career development of employees, and (2) to identify and nurture leadership potential in employees.

We also found one other result. Unfortunately, we did not pay sufficient attention to this additional finding because at the time we were too focused on how to bring mentoring youth in the community and corporate mentoring experience together. Today, however, this finding could be considered a multi-billion dollar oversight. What we found was that less than five percent of the sampled corporations reported that mentoring served either the purpose of (1) attracting and retaining employees, or (2) establishing systematic leadership succession planning.

Ironically, these two infrequently noted mentoring strategies can be more easily examined in terms of cost implications or return on investment (ROI) than either of two reasons that led most companies to initiate mentoring programs. Today, for example, more and more companies are recognizing the cost of losing an employee. Turnover or employee loss can be as high as 50 percent in some industries. Previously all the costs associated with recruiting, interviewing, selecting, and training a replacement employee remained obscure. Now, however, business analysts have consistently calculated that for every employee that leaves a company the cost to the company will be about 1.5 times the employee’s salary to hire a replacement.

I don’t shop at Wal-Mart very often, but I’m always impressed by the range of products and friendly service. Yet I noticed something that seemed at odds with the friendly service: I hardly ever encountered the same employee when I returned to scout out another product. My observation was verified by a stunning figure that appeared in a recent business newspaper. Wal-Mart has to hire between 500,000 and 600,000 employees a year to replace employees who leave. While the article I read was focusing on the progress unions were making in organizing workers (not much), the turnover figure left me wondering about Wal-Mart and how much this turnover is costing them.

Wal-Mart employs close to 1.6 million associates worldwide. The average salary of a Wal-Mart employee is estimated to be between $US13,000-15,000. Managers average between $80,000 and $106,000. Using the cost-of-turnover formula, this means that Wal-Mart spends approximately $1 billion dollars annually just to replace employees!

Replacement cost also includes the costs associated with (1) a staff managing the existing workload when an employee leaves, and (2) the time staff must take to orient a new employee and bring him or her up to speed. If turnover is extensive, it can severely disrupt the workplace and have a dramatic impact on productivity. These factors, which previously were not considered part of turnover cost calculations, are now more likely to be estimated when assessing how turnover impacts the dollar value of productivity.

Recognition of this cost has prompted many companies to search for better ways to reduce turnover and increase an employee’s commitment to and connection with the organization. Some of these companies rely exclusively on strategies that improve pay, bonuses, perks, or other financial incentives. But a rapidly increasing number of corporations are relying on mentoring strategies to prevent or reduce turnover. The primary reason for choosing mentoring is because study after study of new employees,questioned about what attracts and keeps them associated with their employers, has shown three consistent needs: (1) opportunities available for learning; (2) associations with people who care about the work they do; and (3) ability to engage in meaningful work. No other workplace strategy can fit more snugly with these needs than mentoring.

Employees are not the only ones who leave a corporation. One of the results described in a recent study by Booz Allen Hamilton (2004) of the world’s 2,500 largest companies has shown a dramatic rise in the number of CEO’s (14 percent) leaving their corporate position. European and Asian countries have even higher percentages of revolving door CEOs.

A recent study (Bloomberg.com) showed that the average CEO pay in 70 of the 100 largest companies in the US is $14.1 million. Yet too few of these corporations have in place any type of leadership succession plan. The number of companies that hire an external CEO far outnumbers those that hire from within. Yet data from the Booz Allen Hamilton study shows that external hires are more likely to result in an unsuccessful tenure often resulting in the newly-hired CEO leaving before term, lowered overall productivity, and an endless string of bad hires. The situation has become so rampant at the top executive level, the authors of the Booz Allen Hamilton study called CEOs “the new ‘temps’ of the working world.”

The cost to replace a CEO is staggering. Yet the cost to create a leadership succession plan where top executives mentor less senior executives is minimal. Corporations must establish a way to groom future candidates for the chief executive position. The creation of an executive-level mentoring system is essential to continue the productivity of the corporation and the accountability to shareholders. McDonalds (as reported in the Booz Allen Hamilton study) lost two CEO’s to untimely deaths during one year. Yet they were able to continue on despite these tragedies because of their well-established executive mentoring program.

Mentoring today is necessary at all levels of corporate life. While ROI isn’t the only reason to initiate and maintain a mentoring program in business, the tools available now to measure such returns add considerable weight to the value of mentoring and its impact on benefits to corporate life.

For further information about the studies cited in this article:

Carr, R. (Winter, 1999). The status of corporate mentoring in Canada: A survey of the 2,000 most productive businesses. Compass: A Magazine for Peer Assistance, Mentorship, and Coaching, 15, 1, 13-19. (Retrieved from http://www.peer.ca/Compassinfo.html).

Lucier, C., Schuyt, R., and Tse, E. (Summer, 2005). CEO succession 2004: The world’s most prominent temp workers. strategy+business. (Retrieved from http://www.strategy-business.com/article/05204?gko=47020-1876-9227977).

Riggs, P. (2005). Executive remuneration: thriving under observation? Mercer Human Resource Consulting. (Retrieved from http://www.ceoforum.com.au/200412_remuneration.cfm).

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

~ Warren Buffett ~

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