Tackling employee turnover at brick-and-mortar retailers

Employee compensation plans are a challenging topic across industries: a sensitive subject that impacts companies on financial and human resource management – compensation plans have a real and measurable impact on employee satisfaction.

Our client, a large market-leading electronic retailer operating both an e-commerce business and a large chain of brick-and-mortar stores, was facing trying times when tackling employee turnover, dealing with unsustainable levels of employee churn – 50% increase YOY, and currently over 5pp above the industry-considered “healthy level” – and also operating in a challenging market environment, facing fierce competition, low unemployment rates and a foreseeable increase in the legal minimum wage.

A holistic approach to compensation plans was required: these must be defined considering not only the market but also the desired employee turnover rate and adjusted to the sales forecast and company strategy.

A three-pronged strategy was devised to tackle the problem:

1. Explaining employee turnover: an accurate machine learning model which predicts each employee’s churn probability based on a myriad of factors was developed, highlighting which variables truly impact the turnover rate. This holistic model, which covers variables ranging from each employee’s career path, base salary, performance prizes, commercial team, store profile, demographic and context factors, exposed clear relationships between variables and showcased which actionable variables genuinely have a positive impact on reducing turnover rate;
2. Deep drill-down on employee compensation plans: a comprehensive descriptive analysis was conducted on the current compensation plan, highlighting the difference between base salary and performance bonuses and their current fulfillment rate across the company, stressing a very important empiric takeaway which was analytically confirmed: performance bonuses are unevenly distributed throughout the workforce, and generally don’t impact the voluntary turnover rate – the main driver for employee churn was unequivocally identified as the base salary;
3. Relating commercial performance and employee turnover: an advanced statistical model was fine-tuned with historical data and successfully proved a significant relationship between both variables, further strengthening the case for compensation plan review.
   

Combining the result of these three axes with an extensive benchmark focused on the key competitors and their compensation plans, and aligned with the company’s desired strategic position, both on a market level and on the desired turnover rate, allowed for the design of a novel analytical-based compensation plan.

The model developed allowed for the design of a scenario where a desired reduction of 5 percentage points in the voluntary turnover rate (which by itself reduces onboarding costs with new employees) would require an increase of 5% in compensation spending, translating into an increase in sales, which outperforms the rise in compensation spending, increasing overall operational results in 1%.

The newly proposed analytical-driven approach to compensation plan design highlights the relationship between employee compensation and voluntary turnover and allows for the exploration of different scenarios while measuring both costs and benefits of each scenario.