Length of Service Versus Cost

Unless they’ve been asleep at the wheel, employees with more years of service have greater firm-specific knowledge. That knowledge often makes them more productive than newcomers, and the productivity differential can be measured objectively. However, at any given career level long-serving employees generally cost more than do people hired off the street; that is another fact that is easily checked.

The question that many companies want answered is this: Is the greater productivity of long-term employees worth the added cost? In other words, they are asking, “Are we getting what we pay for in terms of added value?” Perhaps you’ve been asking the same question. In the First Tennessee case actual measurements of productivity versus cost were made at different levels of years of service, all of which indicated positive value: The company was getting greater value for higher pay. However, what was true at First Tennessee is not necessarily true at other companies, including yours. The only way to know with certainty is to dig out the facts, as the following example shows.

A Value Gap

This story is based on an actual case. ConstructCo is a subcontractor in the highly competitive commercial building market. Its executives knew that profitability and growth depended on its being very competitive on price. Since labor was a major component of their total cost structure, the company’s building crews had to be highly productive. ConstructCo’s executives believed that length of service increased productivity. However, long-term employees performing jobs with high physical demands also tended to be costly in terms of health claims, disability, and absenteeism. Those highly tenured employees were paid considerably more than people with less experience or years of service were. What was the economic value of long-term service to the company after overall employment costs were accounted for?

The only way to answer that question was to dig out the facts by using ConstructCo’s HR and payroll records and measures of productivity. After controlling for other influences, such as location and on-the-job training, the answer became clear: Employment costs eventually outpaced tenure-related productivity. Every one of the job levels examined reached a crossover point at which pay and benefit costs exceeded productivity gains. Overall, after the eighth year on the job the typical crew member’s productivity growth stalled even as his or her costs of employment continued to rise. This produced a value gap that threatened to blow a hole in ConstructCo’s future profitability. The increasing age of its building crews made that threat extremely serious. These findings encouraged the organization to design reward and skill-building initiatives aimed at boosting individual productivity in an employee’s later years. A number of jobs were redesigned with that end in mind. Collectively, those actions were projected to produce annual savings of about 22 percent of average crew members’ annual earnings, an amount sufficient to close the value gap.