Linking Compensation and Retention
By Patricia J. Daugherty, Robert F. Lusch, Matthew B. Myers, and David A. Griffith -- Supply Chain Management Review, 7/1/2000
One of the biggest challenges facing supply chain managers today is how to develop and retain human capital. In a recent survey, Andersen Consulting asked its clients what business issues would keep them up at night over the coming months. The number one issue mentioned by an overwhelming number of respondents: attracting and retaining skilled workers.1
Managers, especially good managers, don't necessarily hang around for the gold watch. The vast majority today are brighter, better educated, and less likely to take nonsense from their superiors than ever before.2 The best and the brightest also are the most mobile. Terms like brain drain and voluntary turnover are being used to describe this phenomenon.
The competition for talent has been made all the more intense by a solid decade of growth in the overall economy and an explosion in e-commerce. Within this turbulent environment, companies are striving for sustainable competitive advantage—a key source of which is employee knowledge. Such knowledge can be cultivated internally by retaining and nurturing employees or it can be acquired from the outside by hiring experienced workers.
In most instances, holding onto people and developing their skills is the preferable option. Replacement costs (including headhunters' fees, time co-workers spend training new people, and so forth) can amount to as much as 150 percent of the departing person's salary.3 In short, the cost of retaining an employee generally is only a fraction of the cost of hiring a new one.4 There are the softer benefits of retention, too, such as "the incalculable benefits from long-term employee loyalty."5
How can voluntary turnover—that is, the decision by the employee himself or herself to leave the company—be limited in these times of low unemployment and expanding job opportunities? This is not an easy question to answer. But companies can take certain actions to enhance their retention levels. High retention requires attractive compensation/rewards, training and development programs, a work culture that encourages coaching and feedback, and support from management.6
Establishing an environment in which managers feel they are empowered and can make important decisions also helps foster retention. Good compensation programs and development opportunities may not guarantee that employees will stay—but their absence may encourage people to look elsewhere.
The challenge of employee retention and development is especially evident with respect to staffing within the supply chain. As top executives increasingly recognize the importance of adopting a supply chain perspective, the demand for professionals with competency in this area has never been stronger.
Understanding how supply chain managers are being compensated—what education, experience, and skills are considered important and rewarded—is a critical first step in rewarding and retaining these professionals. To help create that understanding, a research team at the University of Oklahoma has completed the initial phase of a large, multiyear research project examining employment practices within the supply chain. The research has focused on job skills and compensation (salary plus bonus) of logistics managers. This discipline was selected because of the critical support role that logistics plays within the supply chain.
The following sections give an overview of the study findings and present the study team's observations on how these findings relate to the development and retention of human capital.
Overview of the ResearchTo assess logistics managers' current skills and compensation levels, the research team in late 1999 mailed a survey questionnaire to 1,000 members of the Council of Logistics Management, an international association of supply chain professionals. All of these individuals had vice president and/or director level titles. The analysis used 157 returned questionnaires, approximating a 16-percent response rate (24 surveys were returned as undeliverable).
Respondents were asked to evaluate the direct report logistics manager with whom they were most familiar. The intent was to make sure that the responding executive was well aware of the logistics manager's background, capabilities, skills, and general work experience. All of the research results are based on this methodology.
The survey collected information on each manager's total years of logistics-related experience, which, as shown in Exhibit 1, was considerable. In fact, only 3 percent had spent less than 10 years in the profession. No doubt, the findings reflect the need to "pay your dues" before attaining a manager-level position. The great majority of the managers fell in the mid-ranges of 10 to 15 years' experience (37 percent) or 16 to 20 years' experience (30 percent). The remaining 25 percent of the managers evaluated had 21 or more years of experience.
The logistics managers not only have extensive work experience but also high levels of education. (See Exhibit 2.) Two-thirds hold at least a bachelor's degree and one-fifth have a master's degree. With their solid educational background and extensive work experience, these logistics managers should be considered a corporate asset by any measure.
Although it is instructive to examine logistics managers' backgrounds and current compensation levels, it is also important to assess levels of expertise. Similar levels of on-the-job work experience or years of education don't always translate to similar capabilities. The research team wanted to judge overall skill levels among the logistics managers. Drawing from previous literature, input during preparatory interviews, and feedback received from individuals who pre-tested the survey, the team developed a list of 21 job skills intended to gauge a broad range of business and logistics capabilities. For the individual being evaluated, the respondents were asked to indicate how strongly they agreed or disagreed (1 = strongly disagree; 5 = strongly agree) with a series of 21 statements reflecting these skills. The mean scores, shown in Exhibit 5, indicate how well the logistics managers are doing. The scores do not, however, necessarily reflect the importance that upper management places upon the skills. Though all of the skills and capabilities are generally regarded as important, the research made no attempt to prioritize their relative importance.
The next-highest ratings were given to logistics managers' ability to set priorities well, meet deadlines, learn new procedures and methods, and rely upon insights and experience when making decisions. It's evident that the logistics managers evaluated can juggle the myriad tasks under their control. They know how to use their time effectively and can quickly draw on their experience and logistics expertise when making decisions. In short, they figure out what has to be done, how to do it within the allotted time, and whether standard procedures are appropriate or if a new approach is called for.
Continuing with the skill level rankings, the next items pertained to management style. The managers are doing fairly well at solving problems creatively, handling stress, being objective in decision-making, and leading effectively. (Again, they seem to exhibit the traditional leader profile.) They cope with day-to-day requirements and manage the stress. They handle the ordinary business activities in a consistent manner and at the same time can readily adapt to the out-of-the-ordinary situations.
The logistics managers have developed only slightly lower capabilities regarding the skills listed in the bottom third of Exhibit 5. They appear to be adequately analytical when approaching such tasks as problem solving or project management. The managers received their lowest overall rating on their ability to deal well with ambiguity. That's not particularly surprising as few people are comfortable with uncertainty—either in their business or personal lives. Some personality types, however, may be better able than others to cope with ambiguity.
Forming the Skill SetsThe list of 21 logistics-related skills is somewhat cumbersome. So to better understand which skills go together, the research team conducted a factor analysis of the data. This technique is used to discover patterns of variables (skills in this instance) that cluster together into groups. (Exhibit 6 gives the five groups and the skills associated with each.)
The traits associated with the social skills group are reflective of a manager's personal or interactive style. (The term charisma comes to mind.) A high ranking here suggests the leader persona—an individual good at dealing with others and taking charge. Not only can such people lead, they get others on board and focused on what has to be done.
Decision-making skills are action oriented. Managers with these skills seem to be able to balance the value of experience with the need to develop new approaches. They are intuitive; they don't need to have everything defined or spelled out. They are objective and self-confident and have a knack for choosing the right alternative. This ability to determine what needs to be done and then carry through is a highly valuable trait. Too often, operations become bogged down because of indecisiveness or resistance to change.
Problem-solving skills incorporate both analytical and creative dimensions. Managers with these skills can assess a situation and determine whether to apply linear solutions and conventional approaches or take a more creative, nonstandard tack. Most managers spend considerable time handling problems that involve a number of variables. To be effective in this kind of environment, they must be able to balance analytical vs. creative solutions. It's so easy to resort to the standard fix.
Good time-management skills reflect discipline and a sense of organization. Managers with this capability focus their efforts on the most important areas. Things get done on time because they know what's important and what isn't—or at least what isn't immediately important. They know which fires to put out first. These capabilities really come to the fore when they manage a project.
The last of the skill groups contains only one variable—operating with integrity. Integrity means being honest, sincere, and upright. People with integrity operate in a trustworthy manner; they are straightforward in their interactions with others and up front in their business decisions. The logistics managers were evaluated higher on the integrity dimension than on any of the other skills measured.
The Compensation LeversAnalysis of the survey results yields a number of interesting relationships between compensation and other factors. Particularly notable are the impacts on compensation of education and responsibility, skill level, and education and skill level combined.
The Impact of Education and Responsibility
The study found a fairly strong correlation between compensation and the logistics manager's experience, education, and responsibility. One key finding, for example, is that advanced education does pay. A college degree is worth an estimated $13,000 in annual income compared with a high school/technical school diploma. A graduate degree, in turn, is valued at $23,000 more than a bachelor's degree.
Another key finding is that compensation increases with responsibility (as indicated by the number of direct reports) and by the size of company (as indicated by annual sales volume).
The Impact of Skill Level
Beyond education and experience, organizations want individuals who can master a variety of activities and perform at a high skill level. Considering that the skills measured in the survey are generally considered to be highly desirable (and, therefore, presumably, should be highly rewarded or compensated), the research team also was interested in exploring the skill/compensation relationship.
In the preliminary fieldwork, the team found that decision-making, problem-solving, and time-management skills as well as integrity were critically important. However, we were surprised to learn that only decision-making skills were monetarily rewarded. They are the prime drivers of compensation levels. Stated another way, a manager with integrity and good social skills, problem-solving capabilities, and time-management skills is not necessarily compensated for those attributes.
The logistics manager who develops these other important attributes may feel taken advantage of since he or she will not be rewarded for them. Yet we know that companies find these skills valuable, and undoubtedly, logistics managers themselves consider them to be valuable as well. The result is that undervalued and under-rewarded managers may leave the company for organizations that properly reward these elements of human capital. The research team challenges the industry to develop methods of assessing the valuable but unrewarded skills such as integrity and problem solving. Failure to do so will lead to higher and higher levels of voluntary turnover, particularly considering that the options for logistics professionals today are plentiful. They include, among other opportunities, the new e-commerce companies and the third-party logistics operators.
The Combined Impact of Education and Skills
For the most part, the companies surveyed are behaving rationally with respect to compensation of their logistics professionals. This is reflected in the table shown below, which shows the impact of education and skills on compensation levels.
Decision-making skills were chosen for the illustration because, as discussed earlier, they exert the greatest impact on compensation. The logistics managers were divided into three levels of decision-making skills—low, moderate, and high. They were further differentiated by education level. As expected, greater skill levels and higher education are rewarded. For example, logistics managers with high-decision making skills and a bachelor's degree on average earn $98,333, compared with $92,083 for those with the same level of education but only moderate decision-making capabilities. As another example, consider logistics managers with a high school education. The high school graduate with only low decision-making skills earns $72,685; his counterpart with high decision-making capabilities makes considerably more ($85,195). Education pays off. And when combined with enhanced decision-making skills, it pays off even more.
Wanted: "3-D" ThinkingAlthough it's interesting to note how strongly management values decision-making skills, it's somewhat disconcerting to learn that the other skills don't appear to be valued as highly. Common business sense says that social skills, problem-solving capabilities, time-management skills, and certainly integrity are highly desirable traits in any employee. Yet how can such skills be fostered if they aren't directly rewarded? Perhaps these attributes now are viewed as the threshold or minimum demanded of managers. As such, they would be required to keep a job but wouldn't necessarily influence their salary and/or bonus. But that line of thinking doesn't seem to reflect good management practice—particularly at a time when there are numerous outside opportunities for skilled logistics professionals.
An additional question included in the survey allowed the research team to explore the issues of skills and job performance further. Specifically, the vice president and director respondents were asked to identify skills they considered important when assessing a logistics manager's performance. No prompts were provided. The respondents could list up to four skills.
The most common responses centered on technical skills, computer capabilities, and systems knowledge. Eighteen respondents cited various technical skills as important for logistics managers. From the responses, it is clear that information technology plays a critical role in supply chain operations today—and obviously has emerged as a core capability for employees.
Fourteen of the respondents identified job- and/or industry-specific knowledge as important for logistics managers. Such knowledge may come from experience or from education. These results suggest that executives expect their managers to have this specific knowledge—further reinforcing the need to hold onto employees and stem the tide of voluntary turnover.
Communications skills were the third-most- cited skill, mentioned by 11 respondents. In their responses, the supply chain executives indicated the precise communications qualities they sought—for example, interpersonal communications, communications with outsiders, networking skills, and listening skills. As the supply chain becomes increasingly complex and as cross-organizational interactions become more routine than occasional, the ability to exchange information clearly and effectively becomes critical.
Ten of the respondents emphasized the importance of being able to adapt to change. Through terms such as flexibility, change agent, change manager, and keeping current with trends, the executives' responses highlighted the dynamic nature of the supply chain. The message: Managers must keep up with change or, better yet, proactively work to make changes happen.
Leadership-oriented skills, too, were cited by 10 of the respondents in this open-ended part of the survey. Supply chain and logistics managers are expected to be good mentors, to motivate employees and exchange partners, and to become team builders. To a large extent, their performance depends on the ability to provide direction for others and get them to perform as desired.
Nine of the respondents identified creativity as a key component of logistics managers' performance. They want visionaries who think out of the box, who can develop new concepts, and who are open to new options. One respondent termed the desired skill "3-D thinking." This captures the need to go beyond a surface approach and look at standard business in a nonstandard way.
Finally, integrity is considered important. Seven of the respondents mentioned qualities like integrity, honesty, and trustworthiness as key elements in a logistics manager's performance. To integrate all supply chain functions within and across organizations, all of the participants need to operate in a mutually trustworthy manner. Not surprisingly, then, the executives surveyed considered the integrity of their logistics people to be of utmost importance.
What emerges in the responses to the open-ended skills question is a profile of a good manager—not necessarily a logistics manager or a supply chain manager but a business manager who can perform successfully in a range of settings. The respondents painted a comprehensive picture of the desired logistics professional—an individual with technical/computer skills, specific job-related knowledge, communication skills, ability to change, leadership qualities, creativity, and integrity.
On the supply side, that might seem like good news. There appears to be an adequate supply of qualified candidates provided that companies are willing to pay for the experience or if they want to "build" their own by providing the training in-house. The bad news is that the attributes that make a logistics or supply chain manager successful within the organization also open doors to opportunities on the outside. He or she can take the skill package and transfer to another supply chain-oriented position—or to an entirely different job outside of logistics management. The basic skill package has broad applicability and will be attractive to a wide range of potential employers.
Leveraging the Human CapitalAll of the knowledge and skills needed to operate the supply chain effectively cannot be captured in codified policies, procedures, and software code. There is a considerable tacit knowledge required as well. And when managers possessing this knowledge voluntarily leave, the company that employs them—and to a large extent, the entire supply chain—loses a valuable asset.
The University of Oklahoma research team believes that to take supply chain performance to the next level, companies will have to tap into this human element more intensively. Many companies have pushed hard on technological and infrastructure improvements and investments. The next wave of improvement and investment should center on the people who manage and operate the supply chain. The first phase of this research suggests that organizations may be able to stem the tide of voluntary turnover and the exodus of human capital by more proactively rewarding the broad range of managerial skills.
To retain high-performance human capital in today's knowledge economy, supply chain managers must be properly rewarded and presented with continuing professional development opportunities. They need to be compensated not only for their education and experience but also for their ability to make decisions, solve problems, conduct business with integrity, and manage projects in a timely and effective manner.
Companies need to act quickly to avoid further erosion of valuable human capital. A first step is to conduct a human resources audit to identify the most valuable supply chain resources. The next step is to determine whether these resources are being properly rewarded and professionally challenged. Then corrective actions must be taken and proactive programs developed to ensure that these objectives are being met. As the initial phase of our study suggests, supply chain success begins and ends with the human capital.
Authors' Note: The University of Oklahoma research team will be conducting additional studies relating to job skills, compensation, and employee retention in the logistics/supply chain positions. If you are interested in participating in these studies, please call Professor Patricia J. Daugherty at (405) 325-5899 or e-mail pdaugher@ou.edu.
| High School/Technical School | Bachelor's Degree | Graduate Degree | |
| High Decision-Making Skills | $85,195 | $98,333 | $121,306 |
| Moderate Decision-Making Skills | $78,940 | $92,083 | $114,051 |
| Low Decision-Making Skills | $72,685 | $85,828 | $108,796 |
| Author Information |
| All of the authors are from the University of Oklahoma. Patricia J. Daugherty is the Siegfried Professor of Marketing. Robert F. Lusch is the Helen Robson Walton Chair and George Lynn Cross Research Professor. Matthew B. Myers and David A. Griffith are assistant professors of marketing. |
| Footnotes |
| 1 Copacino, W. "Research Hypotheses for the New Millennium," Proceedings of the Twenty-Eighth Annual Transportation and Logistics Educators Conference—Council of Logistics Management, 1999, 1–22. |
| 2 Bruce, R. "Experienced and on the Move," ACCOUNTANCY, 115(1219), March, 1995, 62. |
| 3 Branch, S. "You Hired 'Em. But Can You Keep 'Em?" Fortune, 138(9), November 9, 1998, 247–248, 250. |
| 4 McKeen, J. "Retaining Workers Just as Important as Hiring," Computing Canada, 25(27), 1999, 33–34. |
| 5 Barker, J., R. Carey, B. Cummings, and M. Gunderman. "The Curse of the Vanishing Employees: How to Retain and Motivate Great Workers," Successful Meetings, 48(9), August, 1999, 43. |
| 6 Leonard, B. "Skills Development, Recognition Key to Employee Retention," HRMagazine, 43(8), July, 1998, 22–23. |
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