Accounting for Time - Additional Material

Evaluation of Three Strategies To Increase Retention

By Steve Bates Sep 1, 2003
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HR Magazine, September 2003

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.

Option Time This year + 1 year + 2 years + 3 years + 4 years NPV
Continue Current Policies Expected Revenue $3,500,000 $3,657,500 $3,822,088 $3,994,081 $4,173,815
1. Raise Salaries New Cost -$96,000 -$99,840 -$104,832 -$110,074 -$115,577
New Revenue $182,875 $152,884 $119,822 $83,476
Net Gain -$96,000 $83,035 $48,052 $9,749 -$32,101 $6,224
2. Add Benefits New Cost -$35,000 -$38,500 -$42,350 -$46,585 -$51,244
New Revenue $54,863 $38,221 $19,970 $4,174
Net Gain -$35,000 $16,363 -$4,129 -$26,615 -$47,070 -$79,115
3. Provide Special Training New Cost -$250,000 $50,000 $52,500 $55,125 $57,881
New Revenue $146,300 $210,215 $219,674 $229,560
Net Gain -$250,000 $196,300 $262,715 $274,799 $287,441 $586,417
4. Combine Options New Cost -$346,000 -$49,840 -$52,332 -$54,949 -$57,696
New Revenue $336,490 $371,507 $346,087 $319,923
Net Gain -$346,000 $286,650 $319,175 $291,139 $262,227 $616,987


Ass
umptions

  1. Beyond the initial increase, salary costs increase 4 percent in the first year and 5 percent annually thereafter.
  2. Training costs are highest in the first year and drop to maintenance levels thereafter but increase at a 5 percent annual rate.
  3. Raising salaries adds 5 percent to revenue at the end of the first year, but the additional new revenue drops by 1 percent each year thereafter.
  4. Adding benefits adds 1.5 percent to revenue at the end of the first year, but the additional new revenue drops 0.5 percent per year thereafter.
  5. Special training adds 4 percent to revenue at the end of the first year, but the additional new revenue increases by 5.5 percent each year thereafter.
  6. The combination of raising salaries and providing special training raises revenue an additional 5 percent in the first year beyond each option separately, because employees given both advantages can be expected to be more serious and more excited about their work. The extra increment drops 1 percent each year thereafter.

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