How organizations can recruit and retain employees

As businesses and organizations across the country struggle to retain skilled employees, new research from the University of Minnesota shows that companies that rely on skilled employees who are highly mobile pay a significant wage premium and offer more equity-based incentive pay to attract and retain skilled labor.

In a new paper published in The Review of Corporate Finance Studies, Professor of Finance Tracy Yue Wang examined a firm’s skilled labor risk — defined as the risk of failing to attract and retain skilled labor — and the subsequent impact on a range of corporate policies.

The research creates a novel measure to quantify a listed company’s concern for skilled labor risk using information in the company’s 10-K filings. Using this measure, the research shows that skilled labor risk is prevalent in today’s economy, and is not just an issue in high-tech industries.

The research found:

• increasing a firm’s risk of retaining skilled employees from the 25th percentile to the 75th percentile would, on average, increase the salary for skilled labor by 22%, or about $16,000, and about $21,000 for jobs that require highly skilled labor;
• increasing a firm’s risk of retaining skilled employees from the 25th percentile to the 75th percentile would increase the fraction of equity-based incentive pay in total employee compensation by 129% relative to the average level; and
• corporate policies such as financial leverage, cash holdings, and mergers and acquisitions are also impacted by skilled labor risk.

“In recent years, skilled employees have become increasingly important to a business’s production. They are becoming the most important assets in a company,” said Wang, a professor in the Carlson School of Management. “This is no longer an issue only for tech companies, but something that businesses in every industry have to deal with. Overall, I believe our research is among the first to document how the risk of losing skilled labor has systematically changed corporate policies from compensation to financial decisions and investment decisions.”

Retaining employees has become especially important during the COVID-19 pandemic, with turnover increasing across the country as more workers return to the office.

“We are seeing organizations struggle with this both here in the Twin Cities and across the country,” said Wang. “Firms are going to need to take a look at their policies and make changes if they’re struggling to recruit and keep their skilled workers.”