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    More than Minimum Wage

  • There’s something that matters more than money when retaining employees.

    In fact, McDonald’s managed to partially subvert the term both through marketing and by offering its employees more opportunities for career advancement. Evidence of the latter is that half of McDonald’s franchisees and 75 percent of its managers started as store workers, stats the company proudly proclaimed in the lead-up to its inaugural National Hiring Day on April 19.

    While people may disagree on how effectively restaurants are competing in the labor market, nearly all agree that providing prospective employees with a clear path to advancement is a crucial factor, perhaps even more so than wage.

    “You need a competitive wage to get somebody into your organization,” says Tom McMullen, vice president and North American reward practice leader of Hay Group, a consulting firm. “You need to be within spitting distance of your competitors just to attract someone to go work for you.

    “But just having a competitive wage, and even a competitive benefits program, won’t be the primary vehicle that you have to retain these folks,” McMullen says. “The key thing that retains people in a job is … ‘Do I feel that I have long-term potential around here?’”

    The average nonsupervisory employee makes $8.92 per hour, or $1.67 more than the national minimum wage of $7.25. This means that restaurant nonsupervisory employees who work full-time all year long make, on average, less than $16,000 per year.

    This yearly figure is well above $10,890, which is the 2011 U.S. poverty line for an individual, but it is hardly a handsome income. It should also be mentioned that only 43 percent of restaurant employees work full-time all year; the rest work either part-time or full-time for only part of the year, and they therefore take home a lower income.

    Termination by Tenure
    One-third of all terminations are people that are at the restaurant for less than 3 months. Two-thirds of industry terminations are people that were at the restaurants less than a year.
    Source: People Report, 2011 Turnover and Retention Report
    Cost of Turnover
    Since training costs remain static in good economic times and in bad, experts expect to see replacement costs grow as finding and recruiting capable employees becomes more difficult as the economy rebounds.
    Source: People Report, 2011 Turnover and Retention Report

    If the goal is to compete in the labor market, jacking up wages is one way to achieve the goal. But cost of labor ranks alongside cost of food as restaurants’ biggest expenditures, so it isn’t necessarily a variable with much room for growth.

    McMullen says that doesn’t mean restaurants are doomed during times of low unemployment to busing in employees.

    “The laws of supply and demand prevail, and the fact is that restaurants can operate and be profitable and get employees to work at the wages they offer,” he says.

    The fact remains, however, that at the current wage levels, restaurants must withstand debilitating turnover, which will likely return to an above-100-percent average once unemployment drops.

    As all restaurant operators know, turnover is expensive. It costs a lot of money to hire and train a new worker, and there is no guarantee the investment will pay long-term dividends. In fact, the annual turnover rate statistics seem to guarantee that it won’t.

    There are restaurants that manage, against the odds, to minimize turnover. So far in 2011, only a quarter of restaurants have less than 60 percent turnover of nonsupervisory statistics, says McMullen, who also provided the other turnover statistics.

    While more than half of their employees are still dropping off, restaurants able to keep turnover a full 20 percent below the current average will see “a world of difference in terms of what is hitting your bottom line,” McMullen says.