Acountable: Blog for CFOs - 11/14/2022
Thinking About Leaving: Maintaining Employee Retention During Leadership Change
By David Peters, CPA, CFP, CLU, CPCU
When it comes to financial services, employees are the face of the business. While many people probably have the technical skill set to do the work, the relationships that employees build with clients are often what keeps business coming in – and keeps it from leaving. What gives an organization its unique culture, approach, and personality is its employees. This concept may be seen most clearly in small financial services organizations, where clients often know and have relationships with nearly the entire staff. In many ways, it is not so much a company culture that employees adapt, but rather a company culture that they help shape.
Given the overwhelming importance of employees to a company’s success, it is truly baffling that employee retention is not an integral part of the succession planning conversation. Even the smallest of companies spends much time, effort, and energy recruiting, training, and developing talent. However, when we begin to tackle how to transition leadership, we often only concern ourselves with how to calculate price points, leadership personality tests, and building executive training programs. This is not to say that these aspects of succession planning are not important. However, it is questionable whether anything could be more critical for an organization to maintain its value during the leadership transition process than its employees. The value of the firm is integrally tied with the people currently employed there. Therefore, new leaders within an organization have a vested interest in keeping current talent in place.
While there are many articles and opinions discussing the concept of addressing corporate change, research in the area of employee retention during succession specifically is almost non-existent. This could be due to the fact that succession planning research is still a relatively new topic. Firms don’t transition leadership often, so finding good sample sets to perform quantitative research can be difficult.
However, this does not mean that academic research provides no insight. While succession planning affects all companies of any size, it would seem to be more impactful on small businesses. Small businesses are often cultivated and built up by one or a few people, the founders, who have almost exclusively shaped the personality of the organization. For this reason, transitioning out a small business founder can result in massive change. This is not to say that this could not be the case with larger companies too, but rather that the impact of leadership change is arguably amplified within small businesses. Therefore, it would seem logical to look at studies that examine employee retention during organizational change in small businesses as a proxy for how to better retain talent during leadership transition. That is, since succession is the largest change an organization will ever face, it seems only natural to look at studies of organizational change within the amplified setting of the small business workplace.
A review of the literature in this area quickly reveals that employee retention within small businesses is driven more by relationships, rather than incentives. For example, a study of 151 full-time small business employees (defined as 500 employees or fewer) enrolled in part-time MBA programs revealed that the perception of unfulfilled promises can lead to negative workplace attitudes, lowered organizational commitment, and stronger intentions to leave an organization (Kickul, 2001). In short, retaining talent is strongly correlated to the idea of leadership coming through on directly stated, as well as implied, promises. This seems to be particularly relevant for succession planning. The news of a founder leaving an organization can have profound effects on someone who feels that they are being fast-tracked under the current regime. It may also have damaging effects on the sense of camaraderie throughout the organization. Employees could equate a leader transitioning out as a type of betrayal of an implied commitment to keep fighting alongside them within an organization. Similarly, a recent study Mishra, Mishra, and Grubb links the idea of organizational justice to stronger trust, and thus, reduced employee turnover within small franchise-based businesses (2015). In other words, employees’ sense of fairness can materially affect their decision to stay or leave an organization. In terms of succession planning, these results would seem to indicate that employees may look at their position within the organization both before and after leadership transition with closer scrutiny. If they are in a worse position than before the change, this could lead them to look for other opportunities.
A closely related idea that runs throughout academic research on employee retention in small businesses is the concept of harmony. A recent study on family business dynamics points to harmony among employees as being more important than skill diversity when it comes to creating small business teams (Schjoedt, Monsen, Pearson, Barnett, & Chrisman, 2013). In short, employee fit within the organization is a key consideration for company sustainability. One can’t just throw together a diverse group of people with complementing skill sets and expect the business to run flawlessly. There is an intangible factor of harmony among teammates that allows a small business team to thrive. If this concept is applied to succession planning, it would seem imperative that future leaders be aware of the harmony already existing within the organization, and attempt to complement it – rather than immediately implementing new team structures that may upset this dynamic.
If we believe these concepts can be applied to succession planning, a few observations can be made. First, if organizations want to hang on to the talent after a transition in leadership, consideration needs to be given to how individual employees’ roles change as a result – not just groups of employees. This is not to imply that an organization needs to stay exactly the same after a change, but rather that focused conversations with specific employees about how their role will change need to happen before the new leader steps in. Second, when considering organizational structure under the new regime, consideration needs to be given to not only skill sets, but also how employees work together. New leadership needs to be aware of what was promised to employees under previous management to ensure that harmony and positive organizational perception remain intact.
The bottom line in all of this is that keeping employees in the midst of changing leadership is heavily dependent on new leadership looking below the surface – beyond organizational charts and functional areas – to individual’s feelings, goals, and expectations. Make no mistake about it. This takes time. However, if done well with a sensitivity towards each individual feelings, it can help new leadership to avoid the damaging effects of employees walking out.
Kickul, J. (2001). Promises made, promises broken: An exploration of employee attraction and retention practices in small business. Jorunal of Small Business Management, 39(4), 320-335.
Mishra, A., Mishra, K., & Grubb, W. (2015). Reducing turnover in franchise-based small business organizations: The role of trust, justice and commitment. Small Business Institute Journal, 11(1), 6.
Schjoedt, L., Monsen, E., Pearson, A., Barnett, T., & Chrisman, J. J. (2013). New venture and family business teams: Understanding team formation, composition, behaviors, and performance. Entrepreneurship Theory and Practice, 37(1), 1-15.