Don’t Underestimate the Value of Employee Tenure

Don’t Underestimate the Value of Employee Tenure

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People are living and working longer and the implications for areas such as health care and government entitlement programs are profound. But what about employers? Is there value to companies if they engage an aging workforce? It depends on how you define experience. Employee has no impact on business performance, whether performance is measured by financial, operational, or customer outcomes. Tenure, however, has a significant positive and sometimes very sizeable impact on financial performance and operational excellence.  This suggests that there is no place for ageism at work. It also suggests that gig or temporary workers should not replace tenured staff.

People are living and working longer and the implications for areas such as health care and government entitlement programs are profound. But what about employers? Is there value to companies if they engage an aging workforce?

We recently addressed this question with unique data covering workforce characteristics, management practices and business performance. Our findings were clear: Employee age had no impact on business performance, whether performance is measured by financial, operational, or customer outcomes. Tenure, however, had a significant positive and sometimes very sizeable impact on financial performance and operational excellence.

Aging employees bring two types of experience to an organization. The first is “general human capital” and it consists of such things as knowledge, skills, learned capabilities, and patterns of behavior acquired through a lifetime of work and working. Individuals can take this type of human capital with them from employer to employer because it has value to many, and employers who seek it can “buy” it in the labor market. A second type is “firm-specific human capital.” It consists of knowledge, social networks, mastery, and know-how generated through the experience of working in one organization with its suppliers, customers, technology, proprietary processes and intellectual capital and, of course, with one’s co-workers. Firm-specific human capital has value to one organization and it is “built” through tenure (years of service) with the employer.

We examined the business impact of general human capital, measured by age, and firm-specific human capital, measured by tenure, in 23 organizations operating across of variety of industries such as financial services, healthcare, retail, manufacturing, distribution, hospitality, business services, and mining. Business performance, the specific measures of which were appropriate to an organization’s industry and circumstances, was measured in three ways: financial (e.g., revenue growth, profit), operational (e.g., error rates, speed), and customer reactions (e.g., referrals, retention rates). The performance of work units in each of the 23 organizations was studied for extended periods, tracked monthly or annually. Overall, the impact of age and tenure was assessed on the basis of nearly 1.25 million employee-years of performance in the workplace.

While tenure and age are correlated — we age as we accumulate experience — it is possible to separate the effects of tenure (firm-specific) from age (general) human capital. Our analyses did exactly that and showed that, after statistically accounting for the correlation between age and tenure, age has no statistically significant effect on performance, but tenure does. The positive effects of tenure vary in size from organization to organization, with the implication that well-managed tenure can return greater-than-average value to the employer. Additional analyses also showed that the tenure of leaders and managers also positively impacted the financial performance of the units they lead and that mixing older and younger worker (“age diversity”) within work units does not affect performance.

There are three important consequences of these findings for employers.

One is that there is no place for ageism at work. It is a commonplace view among business leaders that older workers are a liability to the business because of their higher cost and a presumed decline in productivity. Our research upends that stereotype. Prejudices that devalue older workers and antagonisms that can isolate or drive them out are bad for business.

Another implication is that employer practices — sometimes referred to as age-friendly or age-inclusive — that enable older, “retirement age” workers to stay in the organization can be good for the business. These practices not only extend the opportunity for older workers to contribute but also can accommodate non-work interests that often emerge late in one’s career, such as engaging in service work or pursuing long-delayed hobbies. Reduced hours, flexible work times, switching from full- to part-time without loss of benefits, and various formal and informal phased retirement programs are ways that businesses can capture of the value of their tenured, older employees by keeping them motivated, engaged, and in the workplace.

The third implication is perhaps the most important: Traditional forms of employment — that is, businesses with employees who build tenure — are competitively advantaged relative to organizations that opt for alternatives such as contract, gig, and platform workers. These organizations miss out on the business value that tenure and longevity with an employer bring.

Decisions to rely on non-employee labor often are made for reasons of costs. But costs are only one half of the equation; the other half is value created, and while traditional employment arrangements likely have higher costs by way of wages and benefits the value created by stability and tenure will often exceed those higher costs, as the evidence shows. This is not to say that there is no place for gig or temporary workers. However, today’s businesses should be wary of a growing trend in some HR circles to regard traditional forms of work organization as passé and wary of those who tout the virtues of platform work and the “deconstruction” of work systems into elements such as discrete tasks that can be performed by substitutable individuals.

Organizations exist for good reasons, reasons that are well documented in the economics and management literatures, and technology innovations that support platform and contract work have not upended all or even most of them. Our research adds an important reason: Organizations create economic value and competitive advantage by facilitating the accumulation of employee tenure. Decisions to adopt non-employee workforces should be made only after pitting the potential cost savings against the value created by traditional forms of employment.

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