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Knowledge at Wharton


Declining Employee Loyalty: A Casualty of the New Workplace

In a nomadic world, a decreasing sense of commitment

Published: Friday, May 18, 2012 - 11:56

If loyalty is defined as being faithful to a cause, ideal, custom, institution or product, then there seems to be a certain amount of infidelity in the workplace these days.

Consider some recent studies: MetLife’s 10th annual survey of employee benefits, trends and attitudes released in March 2012 puts employee loyalty at a seven-year low. One in three employees, the survey says, plans to leave his job by the end of the year. According to a 2011 Careerbuilder.com report, 76 percent of full-time workers, while not actively looking for a new job, would leave their current workplace if the right opportunity came along. Other studies show that each year, the average company loses anywhere from 20 percent to 50 percent of its employee base.

Whatever the actual figures, some employees are clearly feeling disconnected from their work. Among the reasons cited for this: the recession, during which companies laid off huge swaths of their employees with little regard for loyalty or length of service; a whittling away of benefits, training and promotions for those who remain; and a generation of young millennials (ages 15 to 30) who have a different set of expectations about their careers, including the need to “be their own brand,” wherever it takes them. In a nomadic world, one of the casualties is a decreasing sense of commitment to the organization.

Wharton management professor Adam Cobb sees another reason for what is clearly an evolving relationship. “When you are talking about loyalty in the workplace, you have to think about it as a reciprocal exchange,” he says. “My loyalty to the firm is contingent on my firm’s loyalty to me. But there is one party in that exchange which has tremendously more power, and that is the firm.”

Cobb suggests that at a minimum, “loyalty is not something a company can rely on. But when people say that employees have no loyalty to their firms, you get into a chicken-and-egg kind of argument. Imagine a different world where firms took care of their employees, and loyalty was reciprocal. Would employees be job-hopping to the extent they are now?”

Employee behavior, Cobb says, has been influenced by the dramatic organizational restructuring that began 30 years ago. “Firms have always laid off workers, but in the 1980s, you started to see healthy firms laying off workers, mainly for shareholder value,” he says. “In their announcements of pending staff cutbacks, “firms would say, ‘We are doing this in the long-term interest of our shareholders,’” Cobb notes. “You would also see cuts in employee benefits—401(k)s instead of defined benefit pensions, and health care costs being pushed on to employees. The trend was toward having the risks be borne by workers instead of firms. If I’m an employee, that’s a signal to me that I’m not going to let firms control my career.”

Peter Cappelli, director of Wharton’s Center for Human Resources, agrees that these days, employers’ attitudes toward their employees has changed. “They see them as short-term resources,” he says. And because employers have ended lifetime employment, adds Cappelli, author of the forthcoming book, Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It (Wharton Digital Press, 2012), “job security depends now on continuing usefulness to the employer. Cuts in pay and increasing workloads happen when they are useful to the organization.” As employees see their careers operating across many employers, they no longer focus their attention solely on the ones they work for now.

Loyalty to individuals, not the company

The Loyalty Research Center, an Indianapolis-based consultant that focuses on customer and employee loyalty issues, defines loyalty in part as “employees being committed to the success of the organization and believing that working for this organization is their best option.... [Loyal employees] do not actively search for alternative employment and are not responsive to offers.” Cappelli says that “employee loyalty” is a “practitioner term. The closest analogy in research is with the concept of commitment, [the idea] that employees are looking after the interests of their employer.”

Wharton management professor Matthew Bidwell divides the term into two parts: “One piece is having the employer’s best interests at heart,” he says. “The other piece is remaining with the same employer rather than moving on.” Management experts, he says, describe this as “organizational commitment.” And that, he notes, is changing. “There is less a sense that your organization is going to look after you in the way that it used to—which would lead you to expect a reduction in loyalty as well.” But Bidwell questions how much loyalty people ever felt to their organizations, in good times or bad. “Employees are often more loyal to those around them—their manager, their colleagues, maybe their clients,” he says. These employees have a sense of professionalism—and loyalty—that relates to the work they do more than to the company.”

Some of Bidwell’s research has focused on comparing independent contractors to full-time employees. One would typically expect these independent contractors to have an “arm’s length, less-committed relationship” with company managers compared to the commitment level of full-time staff, he says. “But when I talk to managers, they often suggest that there really isn't much difference between the contractors and the company employees.” Relationships with organizations are getting weaker, he notes, which is “why some people believe that company loyalty is dead.”

James Harter, chief scientist of workplace management and well-being for Gallup, has a different perspective based on a Gallup poll first initiated in 2000 to measure employee engagement. The poll divided workers into three parts: engaged employees are those who are emotionally attached to their workplaces and motivated to be productive; not engaged employees, who are "emotionally detached and unlikely to be self-motivated; and actively disengaged employees, who view their workplaces negatively and are liable to spread that negativity to others.

In 2000, the poll indicated that 26 percent of employees were engaged, 56 percent not engaged, and 18 percent were actively disengaged. In 2008, those figures came in at 29 percent, 51 percent, and 20 percent, respectively; in 2010, at 28 percent, 53 percent, and percent; and in 2011, at 29 percent, 52 percent, and 19 percent. In short, there is surprisingly little difference between the numbers. Indeed, as Harter sees it, “not much has changed in terms of people’s everyday experience at work.”

He cites a Gallup report titled “State of the American Workplace: 2008–2010,” which includes 12 questions designed to address such issues as productivity, quality of relationships with co-workers and managers, and employee alignment with the organization’s overall mission. One conclusion of the report: “Despite the workplace stresses accompanying the most severe recession in decades, American employees’ average level of emotional engagement with their jobs did not drop significantly.”

Finding that silver bullet

Loyalty, which can be considered a component of employee engagement, is based on a number of factors, says Harter, including whether the employer “looks out for employees’ best interests, pays attention to their career path, gives them opportunities to improve their well-being, and so forth.” In this equation, managers play a crucial role, he adds, referring to a survey done several years ago that analyzed all the reasons people stay with or leave an organization. “If you’re looking for a silver bullet, it is the quality of the relationship between an employee and his or her manager that determines the overall level of employee engagement. Good companies develop a growing list of great managers over time.... It’s local level teams and how they are connected together by leaders and managers” that have the most impact.

Human nature, Harter adds, “doesn’t change when the economy changes. It might take on a different dynamic” during a recession, but what remains constant is “the need to be connected—to a manager, a co-worker, or a purpose, and also the need to be recognized.” People's perceptions of their own standards of living “did drop as the economy dropped,” he says. But that same drop was not registered in workplaces where employees said they have “someone who encourages their development. There is something about having a mentor, or someone in your life who helps you see the future in the midst of chaos, that can make a difference.”

Wharton marketing professor Deborah Small cites a body of research on what is called “procedural fairness,” indicating that much of what employees feel about an organization “is not the outcomes they get, but the processes. If people feel like processes are handled fairly in the organization, even if they don’t get the best for themselves,” that would tend to encourage loyalty.

Research also shows that not all behavior is self-interested, Small adds. “Sometimes people do things at considerable cost to themselves, like sticking to a job with lower pay when they could move on and potentially earn more money,” she says. “It’s because we care a lot about relationships and the welfare of others. When we have a relationship with our firm or colleagues, there is a social cost to leaving.” To the extent that an employee is well treated by a firm or a boss, “that might, on the margin, make a difference” in her decision to stay or leave.

Financial incentives—including stock options, restricted stock and pensions—are other ways that companies have tried to tie employees to their firms. But Wharton accounting professor Wayne Guay isn’t sure that such types of deferred compensation are strongly correlated with loyalty. “There is evidence that stock options, restricted stock, and other devices that require vesting do result in lower turnover,” he says. “Executives and others tend to stick around a little longer. But it doesn't [suggest] an implicit bonding between an employer and employee. It’s more of a contractual agreement.”

Defined benefit pension plans have historically been a strong retention device used by companies to lock employees in, Guay adds, but very few firms these days offer them. More common are 401(k)s, which require employees to bear the investment risk, and which are portable—employees can take these vehicles with them when they leave the company.

At the same time, stock and stock options can, in some cases, be more than a retention device. They can motivate employees to not just stay at the company, but also to work hard and go beyond the minimum requirements, says Guay, adding, however, that they are most effective with high-level executives “who can actually see how their own actions affect the firms’ stock price and overall performance. Once you get too far down in the organization, there is usually less of a direct link between your actions as an individual employee and overall performance.” Some firms, he notes, have division-level or plant-level versions of incentive plans that can drive better performance.

Growth of the global marketplace is another factor in workplace mobility. “There is a tremendous amount of competition, both domestically and internationally, which has forced firms to be more nimble with respect to hiring and firing,” says Guay. “It is now a two-way street: Employees recognize that firms are not going to be able to offer lifetime employment, and companies recognize that employees will feel free to move around.” Social and business networking plus the explosion of available information on companies and career paths have helped that process along. “In the last 10 or 20 years, it has become so much easier to find jobs in other industries or regions than it was 10 or 20 years ago when we didn't have the Internet,” he notes.

Bidwell suggests another dynamic behind the changing employer-employee relationship. Many of the things employers did to increase employee loyalty—at least up until the 1980s—were done not to encourage higher productivity and job satisfaction, but to keep the unions out, he says. “Companies were very worried about unions and the possibility of strikes,” he says. “They treated their employees well so they wouldn’t join a union. But that is no longer the case. Unions are on the decline. It’s easy to quash them if they try to organize. So some managers might not care as much about employee loyalty as they used to.”

The challenge of measuring employee loyalty

Is it possible to measure employee loyalty, and if so, does any increase or decrease in loyalty affect company performance? While loyalty is clearly not on the same level as revenues or profits, for example, which directly affect the bottom line, “there is some evidence that an organization's more satisfied employees perform better,” says Bidwell, “but the link is not that compelling.”

Using employee loyalty as a performance metric has merit, adds Cappelli. “The issue has been to put a dollar value on this: How much is it worth if employees consistently place the company’s interests ahead of other factors in those situations where they have discretion? Probably a lot, but it’s hard to put into dollar terms.”

Cobb also acknowledges the difficulty in coming up with a definitive loyalty measure. “Often the survey questions related to this are something like: ‘Do you intend to look for another job in 12 months?’ I could be looking for a job for a variety of reasons that have nothing to do with displeasure with the company,” he says. “I could be considering going to graduate school, or perhaps I want to live closer to my elderly parents. So these kinds of measurements are fuzzy. They are not actually measuring loyalty. They are measuring what you hope is related to loyalty.”

Do organizations need to be concerned about fostering loyalty when some employers simply want their employees to do what is asked of them? Cappelli would answer yes. The big challenge for employers, he says, is that “employees have discretion, more so now with jobs that have more autonomy. Bosses aren’t, and can’t be, looking over them to tell them what to do all the time.”

In addition, notes Cobb, some workers have brought with them, or acquired, skills that are very difficult to replace. “You don’t want that knowledge and expertise to walk out the door.” Also, disloyal employees can be a risk for an employer if they spread the word that their company is an undesirable place to work. “It affects the perceptions your customers have of you,” he adds.

Perhaps the most compelling argument for trying to retain good workers is that replacing managerial and professional employees can cost approximately 150 percent of their annual salary, according to various estimates. Harter suggests that for frontline, lower-end workers, it costs about half of their salaries, while for high-level IT professionals, the figure could be as high as 200 percent. “The real impact,” he says, “can be on co-workers’ productivity.”

For Cobb, the debate over employee loyalty comes down to the actions of the more dominant side of this equation—the firm. “The employee/employer relationship has changed because of the firms,” he says, “You hear people say that ‘employees just don’t care about having long-term employment relationships.’ Maybe I’m naive, but I don’t think humanity changes that much.” The rhetoric of the 1980s, he says, was all about “taking control of your career, and your life. I have a hard time thinking my father is that different from me [in this regard]. It doesn’t make sense to say that individuals who were born in the 1970s experience a [huge] epiphany that they need to be in control of their lives, and that people born in the 1940s don’t think that way. People have always wanted to be more in control of their lives.” What’s different now, he notes, is how firms treat employees. “It seems strange to me to be loyal to a firm that I know has no loyalty to me.”


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Knowledge at Wharton

Knowledge@Wharton is the web-based research and business analysis journal of the Wharton School of the University of Pennsylvania. Launched in May 1999, its goal is to disseminate business knowledge and insights to readers around the world. The Knowledge@Wharton Network offers free access to analysis of current business trends; interviews with industry leaders and Wharton faculty; articles based on the most recent business research; conference overviews, book reviews, and links to relevant content; and a searchable database of more than 1,500 articles and research abstracts.


Declining Employee Loyalty

The worst thing a company does to its employees is it creates this posture: "Employees are hired / fired at will". And, arbitrary firings of talented employees is the #1 reason why no one feels secure enough to do their best. One engineer I know was employed for 23 years at a major US company, and his accomplishments are still considered exemplary after 4 years of his sudden, unceremonius dismissal based on trumped up charges created by a jealous, unqualified supervisor who felt threatened by this engineer. The engineer went on to another company, and the original employer, having exercised his wonderful right to fire the employee "at will" has been fired by many  customers who went with the engineer to his new employer.

Most successful companies have veteran employees for decades who give their all-out performance to their employers. Most of these companies are also Japanese, and most of them happen to succeed brilliantly where their stupid US competition has miserably failed; even when US happens to have 19 out of the top 20 universities in the world.

Endless reviews and polls will not result in employee loyalty. Only a culture of nurture, where the employer is committed to take care of the honest, hardworking employee, and does so repeatedly as a part of the corporate policy, will earn employee loyalty.

...And Deming would say...

Great comments, Vijay. It reminds me of Deming's 14 Points For Management. In particular, I am reminded of Point 8 - Drive Out Fear and Point 12 - Remove Barriers That Rob People Of Their Right To Pride Of Workmanship. Deming's other Points for Management apply as well. Demiong's theory of management will create loyalty above and beyond buying a dog!


If you want loyalty, buy a dog.

ruh roh

Rough... err... I mean.... ruff