Keeping Workers
Earns a Bonus
In Some Offices

A small but growing number of companies are grading -- and paying -- top managers on their ability to hang on to employees.

Car retailer Penske Automotive Group Inc. tied 8% of Chief Executive Roger Penske's 2007 bonus to holding employee turnover below 31%, according to a March proxy statement. Mr. Penske earned his $240,000 reward. The company, which owns 300 dealerships world-wide, posted 30.8% attrition in 2007, down from 31.2% a year earlier and more than 80% in 1999 when Penske Corp. acquired a controlling stake.

Chad Deaton of Baker Hughes Inc.

Other companies that recently factored employee retention into executive-pay plans include Pep Boys and Extreme Networks Inc.

A study by management consultancy Hay Group suggests that the practice is gaining popularity. In the 2007 survey of 182 organizations, 8.2% of respondents said they use turnover as a performance measure in executive-incentive plans, more than three times the 2.3% who responded similarly in 2005.

"It is a recognition, on the one hand, of people as a driver of business success," says Hay Group consultant Mark Royal. "It also reflects a recognition that turnover is costly."

Recruiting and training a replacement employee can cost the equivalent of six to 18 months' pay, he says. Moreover, attrition can hamper customer service, product development and employee morale.

Experts say a strong retention record can be an advantage for employers competing for skilled workers, and in "revolving door" industries such as retail, technology and nursing.

The attention to turnover is part of a broader trend of employers focusing on talent management, as well as financial metrics, in evaluating company leaders.

Mark Canepa of Extreme Networks Inc.

In the 2007 Hay Group survey, 55% of respondents said they incorporate "employee performance" criteria into executive-bonus plans, more than double the 23% who said so in 2005. Such criteria included turnover, workplace diversity and employee satisfaction.

Other companies hold middle managers accountable for turnover, reasoning that front-line attrition is beyond the control of top executives. ExlService Holdings Inc. ties as much as 30% of lower managers' compensation to specific targets for employee turnover. But executives at the New York outsourcing company are judged on its financial performance and a wider set of employee-based goals, including retention.

Numerical attrition targets make less sense for executives, says ExlService investor relations director Jarrod Yahes. "People come and go within organizations, but people stay for their managers," he says. ExlService says attrition has fallen in recent years, even as its work force has grown.

Pep Boys links 10% of three executives' bonuses to turnover of middle managers. Troy Fee, senior vice president of human resources, says retaining middle managers leads to better team-building, less front-line attrition and more consistent customer service.

Ira Kay, director of compensation consulting at Watson Wyatt, says companies should distinguish between voluntary and involuntary turnover. "You don't pay more to have your bad employees stay," says Mr. Kay.

For instance, technology vendor Extreme Networks based 15% to 20% of several top executives' bonuses on "undesirable attrition" during the 2007 fiscal year. The former senior vice president of sales had half of his potential $50,000 bonus riding on unwanted turnover of sales personnel. Extreme Networks declined to comment.

Penske Automotive doesn't distinguish between voluntary and involuntary turnover in grading executives. Senior Vice President Tony Pordon says the company cares about the "total cumulative effect" of turnover among its nearly 16,000 employees. Turnover is crucial for customer satisfaction, he says.

"Our business is one that is based upon people," says Mr. Pordon. "There has to be a tone at the top."

At lower levels, the auto dealer evaluates branch managers on a broad customer-satisfaction index, rather than attrition. "We believe that employee turnover is a symptom of bigger problems at the dealership level," says Mr. Pordon.

Among the Penske leaders who are judged on turnover, at least one didn't make the grade last year. Former President Roger Penske Jr. lost out on $30,000, or 10%, of his potential bonus because turnover at Eastern U.S. dealerships was 36%, above his 35% goal, according to the company's proxy. He left the company in March.

Some companies find that measuring attrition works well enough that they don't need to do it for very long. Baker Hughes Inc. graded its top seven executives on voluntary turnover in 2006, when the company added 5,600 employees. But the Houston oil-services company eliminated the measure last year after attrition fell.

"We can build the equipment, but if we don't have crews and people to run the equipment, we're in trouble," says Gene Shiels, assistant director of investor relations.

Write to Cari Tuna at cari.tuna@wsj.com

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