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Retention of talented employees can be a source of advantage for an organisation. But there are challenges in attempting to retain these employees (Barney [1991]; Wernerfelt [ 1984]; Pettman [ 1975]). In a perfect world the productive employees are encouraged to stay within the organisation and the nonproductive poor performers are encouraged to leave. In fact, if it were measurable a company would keep each employee 1) whose contribution produces a positive risk adjusted profit for the firm and 2) who will also have a more positive influence on the firm than any employee hired to replace him or her (taking into account the cost of hiring the new employee). But because of problems such as asymmetric information it is no easy task to carry out this goal. This article addresses the problems, costs and methods used to retain productive employees.
Costs of Employee Retention
The loss of talented employees may be very detrimental to the company's future success. Outstanding employees may leave an organisation because they become dissatisfied, underpaid or unmotivated (Coff [1996]), and while trying to retain employees within the organisation they may present other challenges as well. They may demand higher wages, not comply to organisation practices, and not interact well with their coworkers or comply to their managers' directions.
Asymmetric Information
Besides these problems asymmetric information or lack of information about the employees' performance may complicate an organisation's endeavour to retain productive employees. Without adequate information an organisation may not be able to distinguish productive workers from nonproductive ones. Employees often may take credit for the successes and deflect failures to other employees. This is known as a moral hazard problem. In many instances companies may reward or punish employees for an organisation outcome for which they had no impact (Kerr [1975]).
Insufficient information about employees' performance may result in adverse selection by them (Grossman & Hart [1986]). The better employees may move to other organisations for better opportunities. The coworkers who cannot improve their positions are more likely to stay. This is especially possible when due to inadequate information outstanding performance is not rewarded. Nonproductive and productive workers end up receiving the same or nearly the same compensation and package of perks because of management's inability to distinguish talented...