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Evaluation of Three Strategies To Increase Retention
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A hypothetical company is considering three ways to increase employee retention: raising salaries, adding fringe benefits or providing training designed specifically for the jobs.
The following analysis comparing the net present value (NPV) of the three alternatives was prepared by Robert A. Connolly, an associate professor of international finance and economics at the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill.
He estimated costs and revenue for each option over five years, with revenue estimates including productivity associated with more experienced workers. He then converted the results to a single net present value measure for each option.
The first line shows the companys baseline forecasts of its annual revenues, starting at $3.5 million and projected to grow 4.5 percent a year. Other assumptions are listed below the chart.
In this scenario, Option 1 is barely sensible on financial grounds. NPV is positive, but not by much. Option 2 is senseless on financial grounds. NPV is negative. Option 3 is very attractive on financial grounds. NPV is substantially positive, reflecting substantial impact from special training. Combining Options 1 and 3, higher salary and special training, seems especially productive.
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