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Quit rates and number of qualified applicants tell who is over- or underpaid

Posted by John Reed on

Wal-Mart today announced wage increases to stem an overly high turnover rate. I have often written about quit rate and its significance. Normal is about 20% per year. That is, in a normal organization, about 20% of the employees quit per year. I don’t want to quibble about the percentage. Whatever it is, there is a normal quit rate.

Quit rate below 20% = overpaid

If your quit rate is HIGHER, as at Wal-Mart, your pay/benefits/working conditions package is too low. Conversely, if your quite rate is BELOW 20% per year, your pay/benefits/working conditions package is too generous.

Who fits that description? Who rarely quits their job? Military personnel who have been in more than about eight years rarely quit. Ditto police and firemen. Ditto union members. Ditto college professors. Government employees. Who am I leaving off?

Every year, not just one year

Furthermore, the quit rate needs to be 20% throughout the worker’s whole career. There is a 20% quit rate in the U.S military—probably around the five-years-in point. But a momentary 20% quit rate is not evidence of a correct compensation package. People who have been in the military for 19 years should also be quitting at a 20% per year rate. They don’t because the present value of the retirement package is way too generous.

Portable pensions

How would you achieve that? Simple. Switch the pensions of military personnel to IRAs or 401(k)s. Those are portable. Pensions that are not portable are golden handcuffs.

Organizations where people rarely quit—less than 20% per year—are paying their employees more than they are worth. Those employees are getting two days pay or some such for a day’s work. That’s why they almost never leave.

Adjust up or down according to the labor market

Wal-Mart is a real, competent organization. They pay what makes sense. They raise or lower what they pay according to conditions in the labor market, as they should. It is a huge scandal that government employers who are using taxpayers’ money to over pay their almost-never-quit employees—many of whom are blatant political supporters of the mayors and councilmen who approve the compensation packages.

Line around the block to be a cop

Another measure is the number of qualified applicants who show up to apply for the job when there is a vacancy. If say, your local police department has two openings for policemen, the pay/benefits/working condition package needs to be such that it attracts two qualified applicants, not three, and not one.

Cops and fire fighters are lately fond of saying they run into buildings when everyone else runs out. Yeah, and if they advertise two openings on the police force or fire department, there will be a two-block-long line outside the police station of men and women, most of whom are qualified, eager to get those over-compensated, action-figure jobs.

When the pay/benefits/working conditions package attracts two qualified applicants for the two openings, the package is correct. If more apply, it is too generous; fewer, it’s too stingy.

Exceptions for unique, long training skills

Some exception to this is persons with extreme training that is government only. For example, you would want a lower quit rate for fighter pilots because you need to be able to amortize the cost of the training and experience over a longer time period.

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