If your revenue is growing quickly, the chances are good that your team is growing at an even faster pace. Intellectual capital is a startup’s most valuable asset. Recruiting and ramping new team members is incredibly time consuming, especially at scale, but the cost of making a bad hire or spoiling a good one is too great to take shortcuts.
Compared with growth rate, gross margin, and CAC ratio, little emphasis is placed on metrics that help managers to gauge the health of a growing team. Here are three that can serve as reminders, diagnostic tools, or both. I like that each can be calculated for an entire company, for a single department, or even for an individual manager or recruiter.
Zero Year Ratio
The zero year ratio is the percentage of employees that have yet to reach the one-year anniversary of their start date. For example, a company has 100 employees, 30 of which have yet to reach the one-year anniversary of their start date. The zero year ratio is 30%.
This is a more useful metric than average employee tenure because it specifically quantifies the risk of “new.” New employees are less effective and aren’t yet assimilated into company culture. The larger the zero year ratio, the more susceptible the cohort is to execution risk and to company culture not taking hold. This vulnerability needs to be managed.
Consider the following example:
Average employee tenure is 2.3 years. It would be reasonable to assume the company is out of the proverbial new hire woods, but that’s incorrect. The average tenure is 27% higher than the median tenure, i.e., the typical employee has been with the company for only 1.8 years. More importantly, the fact that a full one third of employees are in their first year is hidden. That’s a large ratio for a more than six-year-old company.
The higher the zero year ratio, the more emphasis the executive team needs to place on orientation and training. Ensure that ownership of these activities is clear. Hire people dedicated to the task. Tie manager compensation to achievement of specific, measurable milestones by new employees. Regularly solicit feedback from these employees.
One-Year Survival Rate
The one-year survival rate is the percentage of employees that reach the one-year anniversary of their start date. For example, 15 employees start in a quarter. Four quarters later, 12 of them are still with the company. The one-year survival rate for the cohort is 80%.
Unavoidably, this is a lagging indicator. I still think it’s valuable because it helps to answer two important questions:
- Are the right people being hired? No one hires a full-time employee with the intention of that person staying for less than a year, so I argue that whatever the reason, such hires are wrong. A low one-year survival rate indicates that the wrong people are being hired.
- What’s the real cost of filling a position? Most capacity plans somewhat naively assume that filling a position is permanent, or that turnover is “balanced out” by other things. The one-year survival rate allows you to model the cost of hiring with surprising accuracy.
Companies with a low one-year survival rate are living dangerously, if they’re still living at all. There are many possible root causes. You may be hiring too quickly. A lack of clarity regarding the role precludes screening well for the required skills and behaviors. Maybe a bad manager is driving good hires away. Identify and address the root cause, or causes, quickly.
The attrition ratio is the percentage of employees that leave the company voluntarily (i.e., that resign) rather than involuntarily (i.e., are terminated). For example, three employees resign in a quarter and two are terminated. The attrition ratio for the cohort is 60%.
If you’re going to lose an employee, it had better be because you terminated him or her. Putting aside death and retirement (uncommon among startups, thankfully), think about the alternatives:
- You didn’t want the employee to leave. Shame on the manager for not doing more to retain the employee. Maybe the company is paying below market or isn’t providing enough professional development and career growth opportunities. Everyone knows how much it hurts to lose someone good. Make a priority of getting ahead of this.
- You wanted the employee to leave. Why didn’t the manager terminate the employee? Keeping underperformers around until they choose to resign is bad for performance (duh!), bad for culture, and bad for the manager’s mental health. Make the hard choice.
There are exceptions, but they’re just that: exceptions. Managers need to be held accountable for influencing these outcomes. One of my best friends worked for a company that tied manager compensation to voluntary attrition. That’s a great model that I intend to use in the future.
Apropos of the above, this metric is particularly helpful in identifying specific departments and managers that are most effective at retaining top talent. The best will have near-zero voluntary attrition. Share their behaviors and success stories with others in the organization.
It’s often said that what separates the most successful startups from the crowd is their ability to recruit and retain top talent. These metrics give a good view into that intellectual capital engine. Sadly, insufficient data is available to provide benchmarks. Please contact me if you’re willing to share your company’s anonymized data for inclusion in a future post.