Improving Employee Retention

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The problem of improving employee retention is examined with a particular emphasis on the retail sector. Through the use of two case studies, the paper examines how such factors as financial incentives, working conditions, overall staff treatment, and an absence of substantive employee participation in a firm's objectives can contribute to employee turnover. It also examines how incentives can be used to improve both employee retention and performance. In addition, the paper examines the kind of rewards that might work best to achieve employee retention. The paper's conclusions are the employee retention will likely not improve in most retail sector companies. This is because the costs involved in making improvements could reduce shareholder and senior management compensation.


This paper will discuss the problem of employee retention in the retail industry sector. It's recognized that employee retention in this particular sector is noted to be challenging. As such it will be the argument of this paper that, even in the retail sector, employees can best be retained through the right mix of extrinsic and intrinsic rewards.

This paper will be divided into four main sections. The first section will include a discussion of the use of incentives as a means to retain and motivate employees. The second section will include a briefcase study discussion involving how the wrong incentive structure leads to significant employee turnover. This will be followed by the third section, which will present another case study discussion. This section will examine how a firm using the right mix of incentives can considerably reduce turnover. The fourth and final section will be the conclusion.

Employee Incentives: An Overview

In order to improve employee retention, firms should look more closely at the financial incentives they provide. These incentives can take the form of many different forms of compensation in a firm, such as cash bonuses, commissions, stock options, and profit-sharing. Incentives can be targeted on individuals, teams and entire organizations. Thus an organization's employee retention policies can be targeted either very specifically or very broadly. They are generally implemented with particular goals and ceilings in mind. One type of incentive is the use of cash bonuses. These bonuses can be disbursed either quarterly or annually, and the frequency of disbursement can affect performance and the likelihood of retention (Steenburgh & Ahearne, 2012). The number of bonuses can also vary as percentages of income or a single flat bonus. These can be disbursed to all employees regardless of performance or role in the organization (Hope & Fraser, 2003; Hochberg & Lindsey, 2010). Some firms offer flat commissions which can fluctuate with the value of revenues.

Thus the rationale for the use of incentives is to motivate employees to attain particular goals over a given period (Copeland & Monnet, 2009; Dzuranin & Stuart 2012). As Steenburgh and Ahearne (2012) point out sales force compensation is the single largest marketing investment by most B2B firms and totals $800 billion each year. This averages out to three times the aggregate advertising budgets of these firms. The generosity and types of incentives can be limited by the budgets of organizations. As a result, firms with wealthier budgets and larger revenues can afford to be more generous. But smaller or less profitable ones will place limits on how much managers can spend on incentives. Banker, Huang and Nataranjan (2011) report that income-based compensation can lead to managers cutting back on expenditures that can add future value to the firm. It is often believed that smaller incentives mean lower motivation and performance by the workforce and possibly weaker retention. So budget constraints can be a source of frustration for managers trying to boost performance and improve employee retention.

Douglas McGregor's the Human Side of Enterprise (1960) expounded, in his "Theory X" perspective on human resources, that in general people hated to work. They needed to be told what to do. They didn't like responsibility and wouldn't do any more than the absolute passable minimum to get a job done. Their performance will only improve with the use of added incentives. This theory should be contrasted with the "Theory Y" view. Under this view individual motivations are rooted in self-esteem and personal improvement. Firms will achieve better results by encouraging its workforce to be creative in their jobs, continue to learn and develop, and derive a high level of personal satisfaction from their jobs. This will also greatly enhance the potential for greater employee retention. While Theory Y sounds more appealing to most people, Theory X is the more prevalent method of management in modern US firms (Hope & Fraser, 2003).

However, there is another side to using incentives to retain employees. Kohn (1993) reports 70 studies that show rewards undermine interest in the task being incentivized. He adds that incentives don't work because they only achieve temporary compliance. This is because once the rewards have ended, workers return to their usual behaviors. Therefore, incentives are unable to establish a lasting shift in any outcome that it's targeted to achieve. Argyris (1998) argues that using incentives actually creates a type of dependency rather than substantive change. Incentives don't work because they can often create a climate of fear based on failure (Hope & Fraser, 2003). Moreover, they stifle innovation or experimentation because the risks are too great. The methodology employed on incentives for individuals is a type of quid pro quo. In this sense, the incentive is widely conceived in the literature to function exactly like a bribe.

This highlights the difference between extrinsic and intrinsic motivation. Extrinsic motivation refers to a type of motivation that originates outside the control of the individual. Many individuals will only be motivated to complete a particular task if some reward or incentive is involved. This indicates that workers are only interested in the reward and not the task, in and of, itself. It can be contrasted with intrinsic motivation. With intrinsic motivation, individual workers are motivated by means of factors internal to the individual. Intrinsic motivation means workers gain a great deal of personal satisfaction from the job or task to be completed. They would remain on their job and perform at a high level of production and efficiency, regardless of the presence of incentives (Hope & Fraser, 2003; Steenburgh & Ahearne, 2012).


A critical trend in human resource management, to retain and reward the best employees, is to develop an inclusive company culture. Inclusivity means allowing all staff members to participate in the planning and implementation of the firm's objectives. Many top companies, and even government agencies, are asking employees in all occupations, to voice their opinion on topics related to the issues most pertinent to the firm’s future success. This approach is very much a “backward mapping” or “bottom-up” type approach to corporate management. This approach allows policy ideas about improving the firm’s performance and workplace culture, to flow up from to management. This is promoted because staff whose views are often ignored, also often occupy strategic places within the firm or organization (Elmore, 1988). From such strategic places, these staff members can sometimes spot troubling issues or make useful suggestions that would escape the attention of most in management. The use of participation is an example of how not all incentives need to be compensation-based.

McDonald's Case Study

Although the fast food business is good for shareholders, conditions for the average worker at McDonald's are not. Turnover over in the fast food retail industry is quite high and estimated to average around 150 percent per year. However, turnover at some McDonald's outlets is reportedly twice that. The bulk of the firm's workers are employed on an hourly contract basis and this includes workers who are considered as management. Production at McDonald's follows the Taylor principle of heavy automation with routinized operations. This allows the company to hire mainly unskilled workers. At the same time, the firm employs a high degree of worker surveillance. As Royle notes, the work is routinized but also very demanding and many workers feel it is not worth it for the money they are being paid (Royle 2010, p. 252). This encapsulates the high turnover problem at the firm's restaurants.

Although McDonald's offers opportunities for advancement, a worker typically has to stay at the firm for a very long time to even position themselves for a promotion. This suggests that the few workers who advance to management have stuck with the firm despite the exploitive working conditions. Even when promoted, workers find they have little freedom as managers and the pay is also not that much better (Royle 2010, p. 253). Indeed most in-store decision making rests with the firm's software programs, automated tills, and very detailed procedure manuals (Royle 2010, p. 253). Nor are there really that many management opportunities in the firm's outlets. Thus advancement opportunities for long-term employees are in actuality quite bleak.

McDonald's acknowledges that their wages are low. But the commonly heard counter-argument is that most of its staff are very young, just starting their careers, and will eventually switch to better-paying jobs. Thus the low pay and exploitive working conditions are justified because it's only a temporary entry-level job for most workers. However, Royle (2010) reports research which suggests that workers in unskilled, low-paying jobs tend to remain locked into this type of employment for the long term. Thus in many instances, any job shift tends to be a lateral move, rather than a move up to a job with better pay and working conditions. Also, not all McDonald's workers are young. There are older workers with few employment options besides lower-skilled retail sector workers who are in the fast food industry (Royle 2010, p. 253). Migrants from other, poorer countries may seek employment at McDonald's as well. They may also view its pay scale as an upgrade and such workers may come from across the age spectrum from young to middle-aged (Royle 2010, p. 253).

Most retail enterprises pay very little. In the case of McDonald's, the pay is either set at the minimum wage or very close to it. At Wal-Mart, a worker remarked that she had been with the firm for four years and made less than $12 per hour (Greenhouse 2011). This is particularly concerning when one realizes that wages for average workers, when adjusted for inflation, have been flat since 1973 (Royle 2010, p. 254). It's also said that, in the US, only migrant agricultural workers earn less income than workers in the fast food industry. The pay differential between the shift worker and the top executives is also quite large at these firms. McDonald's sometimes advertises that it offers stock options and company vehicles to its employees. But these benefits are only an option for senior management (Royle 2010, p. 254).

There has been much discussion of unionizing the workforce at McDonald's to raise wages through collective bargaining. But it is notable that all efforts to do so have so far failed (Royle 2010, p. 257-258; Greenhouse 2011). When management at either firm learns of such organizing drives, workers are subjected to a campaign of harassment that may lead to termination or willful resignation if there's no compliance. There is considerable push back against any attempts to raise wages at these firms.

Instead of raising wages both firms would rather engage in a typical behavior modification. This involves positive reinforcement that offers little in the way of cost to shareholders. Such tactics include giving away free movie tickets or employee of the month type celebrations, designed to boost morale without involving any real cost to the firm (Royle 2010, p. 255). Workers can also be harassed by management for taking sick time or working extra hours. They may even be compelled to work off-the-clock during what should be break time. Managers who want to impress their superiors will try to reduce labor costs as much as possible. This, unfortunately, involves labor practices that are sometimes illegal and have resulted in lawsuits (Royle 2010, p. 255-256).

Costco: An Alternative Example

Costco is often offered as an example of a firm that pays its workers well, experiences high employee retention, and provides consumer goods at a low price. Cascio (2006, p. 28) points out that the average wage of Costco employees is about $17 per hour. In contrast, the author (2006, p. 28) notes, Wal-Mart employees are estimated to make only about $10 per hour, which is still above minimum wage, but very low pay. Also turnover at Costco is only 17 percent in the first year and 6 percent afterward. However, turnover at Wal-Mart averages 44 percent for the first year.

The difference between the two firms is most critically the type of customer base. The average annual income of a Costco customer is estimated at $74,000 per year (Cascio 2006, p. 27). This allows the firm to target the much higher-end consumer items such as diamond jewelry. These times would not be available for sale such competitors as Wal-Mart or its affiliate Sam's Club stores. Costco also stocks a smaller selection of the same brand name items than at Wal-Mart. It consequently spends less on inventory and can thus afford to charge its customers less.

Conversely, Wal-Mart targets the much lower-end customer and is able to remain profitable only by keeping labor costs low (Cascio 2006, p. 26). This is because labor costs are the largest single expense at firms like Wal-Mart and McDonald's. If labor costs were to increase, the ability to pay shareholders and turn a profit would decline considerably. Thus this explains the well-known hostility of these firms to any sort of pay equity for its workers.


In conclusion, employee retention problems are likely rooted in certain key factors. These factors include the type of compensation, the working conditions, the overall treatment of staff, and the lack of substantive employee participation in a firm's objectives. Those firms seriously interested in increasing employee retention will target these areas for improvement. However, as the case studies above note, in many cases, there are firms willing to live with high turnover. This is because improvements in employee retention may involve adjustments to compensation to shareholders and senior management. As long as all the firm's members are not seen as equal partners of the organization, this differential will likely continue indefinitely.


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