Recruiting and retaining employees at any level is a major challenge for businesses, but when it comes to senior leadership, this process is even tougher. Hiring executives comes with naturally higher stakes, with larger salaries, greater visibility, and more significant business impacts all on the line.
While many businesses focus most of their efforts on the hiring process, the work is only beginning when your new hire signs on the dotted line. As 40 percent of executives hired at the senior level are pushed out, fail, or quit within 18 months of their start date, retaining successful executives and avoiding leadership churn is something all organizations should aim for.
But what is leadership churn, exactly? And how can your business avoid this costly issue? Continue reading to find out.
What is Leadership Churn?
Leadership churn indicates the number of senior team members who leave an organization over a given period of time. Leadership churn is calculated using a simple “churn rate” formula:
(Leaders who leave / Total new leaders) X 100 = Leadership Churn Rate
For example, if you hire 10 new executives in a year and 1 of them exits the company, you have a 10% leadership churn rate that year.
While the goal is to keep your churn rate as low as possible, it’s important to remember that this number doesn’t always tell the whole story. For example, if you have a low-performing executive who exits the company, this is still included in the churn rate.
While a low-performer leaving the business might be seen as a positive thing, there are a number of reasons senior-level employees fail in their positions. They might not have received adequate onboarding, or they may not have received the support they needed from their colleagues and superiors. Whatever the cause, taking the time to understand how many leaders are leaving and why will have the greatest impact on reducing leadership churn.
The Hidden Costs of Leadership Churn
There are significant costs associated with employee churn of any kind. According to The Society for Human Resource Management (SHRM), the cost to replace an employee is approximately six to nine months of that individual’s annual salary. While this is costly, when it comes to replacing someone with an executive’s salary these costs can be staggering.
For example, if a member of your leadership team earns an annual salary of $400,000, it would cost about $200,000 to $299,999 to replace this person. When businesses reduce leadership churn, they’re able to save significant funds and boost their bottom line.
While the direct financial burden is considerable, there are also a number of hidden costs associated with leadership churn. These include:
As the saying goes, time is money. When an employee at the leadership level leaves, a business must account for the cost of the time invested in their recruiting, interviewing, hiring, and onboarding.
For example, before an executive is even hired an HR team spends time creating a job description, posting the position, going through resumes and recommendations, interviewing candidates, conducting background checks or other assessments, and negotiating salaries and contracts. As SHRM finds, hiring a new employee takes an average of 36 days.
After hiring a leader, an organization must spend time on onboarding and training. A crucial part of the transition period for any senior team member, onboarding is one area where the ROI on time spent is high. As long as your organization establishes a comprehensive onboarding program (more on this, below) you have a great chance of retaining top talent and reducing churn.
However, the key here is to have an effective onboarding program. If your business doesn’t allocate sufficient resources to the onboarding process, there’s an increased chance the new executive will exit the company — wasting the time spent on the inefficient onboarding program.
No matter how talented a new hire is, nobody can reach maximum productivity on their first day of the job. As the Institute for Executive Development (IED) explains, “the ramp up time for a new external hire can range from six to nine months, while an internal hire has a ramp up time from three to nine months. This means that during this time, the company is paying full-price for a lower-than-normal level of productivity.
According to Harvard Business School, mid-level managers need at least six months to reach their breakeven point (BEP) — or the point where the company is earning back the time and money invested in hiring the individual.
Lower employee morale
If you’ve ever been part of an organization with a high leadership churn rate, you know the impact this can have on employee morale. Employees across a business look to the senior leadership team for guidance and direction, so when the C-suite appears unstable, constantly in flux, or low-performing, there’s an unavoidable trickle-down effect.
Unsuccessful transitions result in 15 percent lower performance by employees reporting to the individual, with lower-level employees 20 percent more likely to be disengaged or leave the organization.
Plus, a high leadership churn rate means that the executive team is composed of individuals who are consistently less-experienced with the intricacies of the business. Direct reports and lower-level employees are then made to fill these skill and knowledge gaps, undoubtedly causing resentment and a negative impact on overall morale.
It all Starts with Onboarding
Many HR departments allocate significant resources to recruiting new executives, yet it seems as if onboarding is often an afterthought. With the right tools and processes in place, businesses have an opportunity to reduce leadership churn and increase value. As Glassdoor finds, 49 percent of people who went through effective onboarding were positively contributing to their team within their first week.
Not only that, but nine out of ten teams with a successfully onboarded leader will meet their three-year performance goals. So how can you ensure your organization is included in the positive end of that statistic? As we mention in a previous post about how to keep the momentum going after onboarding, it’s important to “develop a comprehensive onboarding plan with proven best practices and technology that enables new leaders to start working toward their business goals from day one.”
To apply these best practices, think about how to best introduce the different areas of your organization to a new leader. The Harvard Business Review recommends focusing on three key areas—the organizational, the technical, and the social aspects of your business:
- The Organizational: Organizational onboarding consists of showing new hires how the logistics of the company function. This is where they’ll learn things such as where to park, how to enroll in health benefits, the language of the company such as specific acronyms, and company norms.
- The Technical: This is where clear goals and expectations for the new hire are laid out. This helps the executive understand their role—and how to excel in it.
- The Social: While it can sometimes be hard for new hires at the executive level to build relationships across the organization, this is an important step in any successful onboarding program. Connecting them with people from different teams and varying seniority levels will help them feel more deeply integrated in the company culture, and give them valuable insights into how different areas of the company work.
A standardized onboarding program can mean the difference between a high-performing leadership team and one that experiences constant churn.
Reducing Leadership Churn with Technology
Just like you wouldn’t use outdated sales techniques, any outdated onboarding processes need to evolve for a modern working environment. Instead of manual practices that take up excessive time and resources—yet fail to show results—advances in technology mean you can boost your onboarding success while reducing time and effort spent.
Transformative technologies like ThoughtExchange streamline the onboarding process so that new leaders can transition into their roles with confidence and clarity. With ThoughtExchange’s New Leader Onboarding and Integration, your new executives are given valuable insights into their new team from day one.
While their team members might not feel totally comfortable sharing pain points and areas of opportunity with their new boss right away in a 1:1, ThoughtExchange gives them a place to share and prioritize this information. Plus, once you fine-tune a process that works for your organization, it can be repeated and is scalable (saving you even more time).
The hiring process is costly and time-consuming at every stage. By having a standardized framework, setting clear expectations, and using technology to your advantage, your organization can reduce leadership churn—and increase profit. It’s a win-win.
Learn more about how ThoughtExchange can support your onboarding process.