Sound the Alarm
According to the 2019 Retention Report published by the Work Institute, 27% of employees voluntarily left their jobs in 2018.  By 2023, they estimate that this number will climb to 35%. According to their estimates, it costs $15,000 to replace an employee. In the healthcare industry, the cost can be more significant. According to the Robert Wood Johnson Foundation, the expenses associated with losing a nurse can reach up to $64,000.  For a mid-sized healthcare system ranging from 1,000 to 3,000 employees, this could translate into a yearly spend of over $67 Million by the year 2023.  In addition to these costs, the ability of an organization to sustain profits and grow revenue is severely compromised. Employees that leave organizations take with them valuable knowledge that, in most cases, cannot be recaptured. When you consider that there is a shrinking talent pool and escalating competition for workers, the problem for organizations that don’t course-correct will only get worse.
The Good News
According to the Work Institute, most employees leave their organizations for preventable reasons. Applying Pareto’s famous 80/20 rule, Career Development, in-and-of-itself, accounts for 22.2% of why employees leave a company. Whereas an organization has little to no control over when an employee retires, they can influence Career Development through innovative system design. If we split the categories into what an organization can influence, i.e. more preventable, versus what it can’t, i.e. less preventable, 2 out of 3 employees that leave companies could have been retained. In the previous healthcare example, this would translate into over $23 Million in cost savings. 
Equity Theory as a Model for System Design
If we further analyze the top 7 categories associated with why employees leave, the theme of equity emerges, allowing us to formulate powerful employee retention and engagement strategies. In 1963, J. Stacy Adams, a workplace and behavioral psychologist, asserted that employees seek to maintain equity between the inputs that they bring to a job and the outcomes that they receive from it and compare these to the perceived inputs and outcomes of others.  In simple language, people expect to get back what they put in and that is influenced by what they see others get back for what they put in.
In simple language, people expect to get back what they put in and that is influenced by what they see others get back for what they put in.
For employees, inputs can consist of any of the following, ranging from the tangible to the less tangible: time, education, experience, effort, loyalty, hard work, commitment, ability, adaptability, flexibility, tolerance, determination, enthusiasm, personal sacrifice, trust in supervisors, and skill. On the other side of the equity theory equation, outcomes similarly consist of tangible and less tangible examples: job security, salary, employee benefit, paid expenses, recognition, reputation, responsibility, sense of achievement, praise, thanks, and stimuli.
Let’s apply equity theory to a relevant example that connects back to the top category reason that employees leave organizations – career development. In our example, employee A puts in 8-hour days and always volunteers to work overtime when the team needs it. Employee B also works 8-hour days, but rarely volunteers for overtime. However, employee B contributes ideas to the team that allows for greater efficiencies in how the work is done. This leads to higher productivity levels. Employee B is promoted to frontline supervisor in a matter of months, while employee A is “overlooked” for the position. Company leadership does not perceive this as unjust. According to them, employee A was rewarded with overtime pay (1.5 x the rate of regular pay), while employee B was rewarded accordingly with a promotion because his inputs demonstrated the ability to be a thought-leader.
|Employee||Employee Inputs||Employee Outputs|
|A||✓ 8-hours of work |
|✓ Regular salary|
✓ Overtime pay
|B||✓ 8-hours of work |
✓ Ideas for improvement
|✓ Promotion with increased salary|
Whether or not employee A had reason to be upset, perception is reality, and, in this case, employee A perceives an injustice. Employee A feels this is unjust due to the level of effort he provides to the team. Soon, Employee A will begin to look for employment elsewhere and stop volunteering for overtime hours, compromising the team’s ability to meet productivity targets. The result: the organization will lose someone who was willing to work hard and, as a result, will soon have to spend, at a minimum, $15,000 to replace him. The reality is often much worse as there are typically several employees, like employee A, who believe they are deserving of that promotion.
So how can organizations avoid this scenario?
Enter the Equity Management System™
At the Kōhei Group, we have developed a unique, evidence-based  system that helps companies design equity into their day-to-day operations – the Equity Management System™ or EMS. This system ensures the following is achieved:
- Required inputs: Employees have a clear understanding of what inputs matter to the organization
- Standard delivery of Inputs: Employees have a standard way of delivering the inputs which minimize waste and burden
- Skilled employees: All employees are skilled in how to deliver the inputs
- Removal of obstacles: Leadership helps employees remove obstacles that obstruct the delivery of inputs
- Available outputs: Employees have a clear understanding of what outputs the organization is willing to provide and how they can be earned
- Visualization: Inputs and outputs are visualized so that employee perception matches reality
1. Required Inputs
As simple as it may seem, most companies fail to identify what required inputs are expected from their employees. As part of our EMS, we start with the basic input of how much time each employee is expected to work. This includes a standard start and stop time, including breaks and lunch in-between. We then identify critical jobs that each employee must perform, including how many of each, i.e. productivity, and with what level of quality. When targets are not met, expectations regarding overtime are made clear. When an employee arrives at work, they should be given direction on what success looks like for the up-and-coming shift. This ensures each shift begins with a sense of equity regarding expectations and ownership.
2. Standard Delivery of Inputs
In addition to telling employees what inputs are required, our EMS includes a standard way, i.e. standard work, on how to deliver said inputs. Standard work is a common way for all employees to deliver an input with the minimum amount of waste, i.e. overproduction, waiting, conveyance, processing, inventory, motion, and correction.  This baseline enables continuous improvement as employees can improve upon a common approach to delivering inputs.
3. Skilled Employees
Once standard work is defined, each employee is trained in a standard way to ensure all employees can deliver inputs. In our EMS, a tool called a skills matrix is maintained by each manager to keep track of who can deliver required inputs. When employees are not able to do so, the manager is responsible for formulating a plan to train them so that they can do so. Although there are common skills each company seeks when hiring employees, it is important to ensure when an employee is hired they are skilled on how to deliver inputs in a standard way as this will most likely vary from the way they were taught in a culture that did not apply continuous improvement thinking.
4. Removal of Obstacles
As employees work and attempt to deliver inputs, obstacles will come up that get in their way. When those obstacles do come up, our EMS consists of tools that allow employees to inform leadership. As such, leadership can act to remove those obstacles so that employees can work uninterrupted. For example, in a healthcare setting, if a nurse is attempting to take the vital signs of a patient and their vital signs machine is not working, leadership should be made aware so that the machine can be fixed or replaced, allowing the employee to continue to deliver their required inputs.
5. Available Outputs
In our EMS, the outputs a company is willing to provide are made transparent and employees understand how to receive those outputs. For example, if an employee works overtime, they will know what output to expect by providing that input; typically, a multiple on regular pay. If an employee meets their productivity targets, outputs in the form of a bonus may be provided. In our EMS, a typical output is job promotion and salary increase correlated to an employee’s skills, productivity and quality levels.
Now that we have our first 5 elements in place, it is time to visualize both inputs and outputs to ensure perception matches reality. For example, by visualizing how many skills an employee has and their productivity and quality levels on whiteboards or with other visualization tools, all employees can clearly see the execution of input delivery. By also visualizing who receives rewards, employees can see whether a company is appropriately rewarding those individuals who deserve awards. For more progressive companies, this can include making even salaries visible.
In summary, employee retention is a growing problem that will only get worse if ignored by companies. However, companies can take the right measures to get ahead of the curve. Equity theory provides a powerful framework that will allow them to do so. The Kōhei Group’s Equity Management System™ or EMS designs equity into the day-to-day operations of a company and increases the likelihood of employee retention. Companies that keep their employees are able to leverage their experience and improve the way inputs are delivered through continuous improvement and, as such, outperform their competitors.