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An Employee Retention Strategy Designed to Increase Tenure and Profitability in the Fast Food Industry

Dissertation
Author: Michael J. Harris
Abstract:
The purpose of the quasi-experimental quantitative study was to investigate the effectiveness of a strategic retention process called the Employee Extended Tenure Plan, which has five tactical elements, has on the job tenure and retention of hourly restaurant workers. Within the retail industry in general and the food service industry in particular, leaders have concentrated on controlling wages as a cost cutting strategy. The result of this approach is an industry that has the highest rates of employee turnover. The results of the study indicate that the experimental retention strategy used had the effect of decreasing turnover rates and, in so doing, decreased overall labor costs, resulting in opportunities to gain added profitability for the business.

Table of Contents List of Tables ....................................................................................................... ix

Chapter 1: Introduction ......................................................................................... 1

Background of the Problem ............................................................................ 1

Statement of the Problem ................................................................................ 4

Purpose of the Study ....................................................................................... 5

Significance of the Problem ............................................................................ 6

Significance of the Study to Leadership ......................................................... 7

Nature of the Study ......................................................................................... 7

Research Questions ......................................................................................... 9

Hypotheses .................................................................................................... 11

Theoretical Framework ................................................................................. 12

Definition of Terms....................................................................................... 16

Assumptions .................................................................................................. 19

Scope ............................................................................................................. 20

Limitations .................................................................................................... 20

Delimitations ................................................................................................. 21

Summary ....................................................................................................... 22

Chapter 2: Review of the Literature .................................................................... 24

Documentation .............................................................................................. 25

Historical Overview ...................................................................................... 26

The Independent Variable and Current Findings .......................................... 31

Research Variable: Employee Extended Tenure Plan (EETP) ..................... 35

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The Dependent Variable and Current Findings ............................................ 44

Gap in Literature ........................................................................................... 50

Conclusion .................................................................................................... 50

Summary ....................................................................................................... 52

Chapter 3: Method .............................................................................................. 54

Research Design............................................................................................ 55

Appropriateness of Design ............................................................................ 56

Research Questions and Hypothesis ............................................................. 59

Population ..................................................................................................... 63

Informed Consent.......................................................................................... 64

Sampling Frame ............................................................................................ 65

Confidentiality .............................................................................................. 69

Geographic Location ..................................................................................... 69

Instrumentation ............................................................................................. 70

Data Collection ............................................................................................. 74

Validity and Reliability ................................................................................. 75

Data Analysis ................................................................................................ 79

Summary ....................................................................................................... 81

Chapter 4: Results ............................................................................................... 83

Research Questions and Hypotheses ............................................................ 84

The Research Experiment and Instrumentation ............................................ 86

Data Collection Procedures and Analysis ..................................................... 93

Hypotheses Test Results ............................................................................... 96

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Findings....................................................................................................... 107

Summary ..................................................................................................... 108

Chapter 5: Summary and Recommendations .................................................... 110

Hypotheses, Research Questions, Results, and Conclusions ...................... 110

Significance of the Study to Leadership ..................................................... 117

Study Limitations and Recommendations for Future Research ................. 120

Summary ..................................................................................................... 122

References ......................................................................................................... 126

Appendix A: Permission to Use the Premises .................................................. 137

Appendix B: Extended Employee Turnover Model Flowcharts....................... 139

Appendix C: Informed Consent ........................................................................ 142

Appendix D: Hiring to Win Assessment Form ................................................. 144

Appendix E: Answer Sheet ............................................................................... 155

Appendix F: Permission to Use an Existing Survey ......................................... 158

Appendix G: Structure Orientation Presentation .............................................. 160

Appendix H: Performance Update Format ....................................................... 166

Appendix I: Exit Interview Tool ....................................................................... 168

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List of Tables Table 1 Assessment Coding for the HTW Tool

................................................... 72 Table 2 Pre-, During, and Post-experiment Turnover Rates

.............................. 99 Table 3 Employee Replacement Cost

................................................................ 106

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Chapter 1: Introduction The cost of labor is the second highest operating cost in the fast food industry (K. Williams, 2001). To meet their fiduciary responsibility to stockholders, fast food industry leaders seek to control labor costs by controlling wage increases. Leaders in the fast food industry depressed employee wages by opposing systematic increases, including federally mandated wage increases (Bernstein, 2004; Chasanov, 2004). Inadvertently, the labor-cost-cutting strategy led to an increase in turnover rates of employees within the industry (K. Williams, 2001). The high rates of turnover increased operating costs (Milman, 2001). The focus of the study was determining how to reduce turnover costs in the fast food industry by applying a retention strategy aimed at decreasing employee turnover rates in the first 90 days of employment. Due to high employee turnover rates, fast food business leaders must continually replace workers, which has proved to be costly for the industry as a whole (K. Williams, 2001). Chapter 1 begins with a presentation on the background of the retention problem in the food industry. Chapter 1 includes a discussion of the purpose of the study, the general significance to the body of knowledge, significance to leadership, and nature of the study. Presented in chapter 1 are the research questions with corresponding hypotheses, conceptual framework, specific definition of terms used, limitations of the study, delimitations of the study, and scope of the study. The chapter concludes with a summary of the relevant issues of the study. Background of the Problem The largest growth industry in the United States has been the retail industry (Prince, 2003). Within the 10-year period between 1987 and 1997, the industry

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experienced exceptional growth of 35.4% in gross retail sales, moving the industry from $1,541 billion to $2,087 billion in sales (Monthly Labor Review, 2007). Within the same period, the number of retail establishments grew by 100,000, from 1.5 million to 1.6 million, which is a 6.7% increase, while employment in the industry grew from 20.1 to 23.4 million, a 16.4% increase (Prince, 2003). Su (2007) projected that the service industry growth will continue to lead the economy until 2016. Because the level of tenure and retention within the fast food industry is the lowest of all industries, the growth in sales and employment is likely to be accompanied by growth in retention- related operating costs (Calkins, 1999; Milman, 2001; K. Williams, 2001). According to Calkins (1999), turnover rates in the service industry are greater than those of any other industry. Turnover rates in the food preparation industry in particular were as high as 250% in the late 1990s. K. Williams (2001) examined the fast food sector of the services industry and indicated annualized turnover rates were as high as 250% to 300%. McDonald’s Corporation, the leader in the industry, calculated its system-wide average hourly employee turnover rate to be157% (McDonald’s Corporation, 2006). As the service industry has grown, industry leaders have maintained profitability by focusing on cutting labor costs by keeping wages low in the industry. In doing so, service industry leaders have exacerbated high turnover rates within the services industry in general and the fast food industry in particular (K. Williams, 2001). Bernstein (2000, and 2003) and Chasanov (2004) noted two concerns, which prompted leaders in the food industry to oppose wage increases. First, Chasanov suggested that the primary concern of business leaders was the impact of wage increases on labor costs, resulting in higher

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costs of products to consumers. The second concern was the perception that the workers whom higher wages were designed to help would be harmed by wage increases. This could occur as businesses adjusted to higher labor costs through lower levels of employment (Chasanov, 2004; Bernstein, 2000). Few researchers have studied retention strategies as a means of lowering labor costs. The focus of industry leaders on labor cost cutting, as opposed to employee retention, indicates that the cycle of high turnover rates will continue. Calkins (1999), Milman (2001), DiPietro and Milman (2004), and K. Williams (2001) indicated that the lack of focus on retention in the past led to the high rates of turnover. Su (2007) noted that along with the current trend of high turnover in the industry is a projected shift in demographics in the traditional workforce of the industry. Growth rates between 2006 and 2016 in the 16-24 age group, those workers traditional employed by the services industry, are expected to decline. Serious labor shortages will result as demographics and the economy shift even more toward the services industries (Su, 2007). A lack of focus on retention in the industry will result in an acute demand for leaders to adjust their operations to compete effectively in the marketplace (Milman, 2001). Increases in labor costs negatively impact profitability; however, organizational leaders who focus on retention can lower overall labor costs by reducing the costs of employee replacements. K. Williams (2001) noted that reductions in employee turnover produced savings in replacement costs averaging $750 per employee. The fast food industry leader, McDonald’s, reported a system-wide average turnover rate of 157% with an average cost per termination of $788, equating to an average annual turnover cost per restaurant of $51,264 (McDonald’s Corporation, 2006). K. Williams noted that the

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majority of industry turnover occurs during the first 90 days of employment. Therefore, decreasing turnover rates, particularly in the first 90 days of employment, can result in significant reductions in labor costs. Specific research on the food preparation industry relative to retention and the reduction of turnover is minimal. Studies by Milman (2001), DiPietro and Milman (2004), K. Williams (2001), Calkins (1999), Ellenbecker (2004), Wildes (2005), and Wildes and Parks (2005) added to the body of literature related to the turnover trends of the food preparation industry. Previous researchers focused on the existence of a relationship between high turnover rates and poor job satisfaction (Milman, 2001; DiPietro, 2004). Milman established a link between the lack of overall job satisfaction and dissatisfaction with work environment and organizational culture, job content, and overall employee motivation. Statement of the Problem Service industry leaders, particularly fast food restaurant leaders, implemented labor cost cutting as opposed to cost control strategies in an effort to maintain profitability. Such strategies focused on limiting wage growth, particularly among minimum wage employees. The general problem is that industry leaders concentrated on controlling wages as a cost cutting strategy and did not address high employee turnover (Bernstein, 2006). The effect has been significantly higher rates of turnover within the food preparation than in other industries (Su, 2007). Broadbridge (2002) noted that the strategy of cutting labor cost via wage control produced a twofold negative effect. Overall, labor costs increased due to the need to replace workers with the added effect of decreases in customer service and job satisfaction. Business leaders’ lack of focus on

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worker retention and tenure has caused organizations to fail in their fiduciary responsibility of maximizing profitability. The specific problem is that few research efforts have addressed the high turnover rates of hourly employees in the fast food industry, a problem that has plagued the industry for decades and that has resulted in high replacement and training costs (Su, 2007). The excessive turnover rates in the industry have led to significant increases in costs with subsequent erosion in profitability (Calkins, 1999). McDonald’s reported the system-wide average turnover to be 157% with the average cost per hourly worker termination of $788; the yearly estimated cost per restaurant is $51,264 (McDonald’s Corporation, 2006). McDonald’s has developed various tactics to address the issue of turnover; however, the effectiveness of the tactics have been inconsistent. The current study involved a combination of retention tactics to test a strategy called the Employee Extended Tenure Plan (EETP) aimed at improving short-term retention and increasing tenure within the hourly employee base. The research method for the study was a quasi-experimental quantitative analysis. The general population examined was the employees of a group of restaurants operating under the McDonald’s national brand in southwest Georgia. Purpose of the Study The purpose of the quasi-experimental quantitative study was to investigate the effectiveness of a strategic retention process with five tactical elements on the job tenure and retention of hourly restaurant workers. Previous researchers addressed issues of wage increases as a retention strategy and found positive results (K. Williams, 2001). The dependent variable of the study is employee tenure rate within the study locations.

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The independent variable in the study was a strategy comprised of five tactical retention elements. The study showed how the implementation of the retention strategy influenced the high rates of turnover. The five tactical elements of the strategy are (a) the Hiring to Win assessment tool, (b) scripted structured employee orientation, (c) the implementation of a 30-day follow-up orientation with a performance update, (d) a 90-day wage increase for workers rated good or better, and (e) exit interviews for all employees leaving the organization. The quantitative study involved examining the impact of this retention increasing strategy had on reducing turnover rates of hourly employees. The quantitative approach was appropriate for the study because it enabled a comparison and quantification of the results and because it allowed the researcher to use an intervention process to induce a change and then measure the change. The specific population for the study was the hourly employees in six McDonald’s restaurants in Albany, Georgia. Significance of the Problem The focus of the study was on the effects that a multifaceted worker retention strategy had on the turnover rates of hourly workers in the study groups. The implementation of a labor retention strategy decreased turnover rates, allowing business leaders to reduce the short-term labor costs associated with labor replacement. In the long term, higher productivity gained from a trained, tenured workforce may also mitigate overall increases in labor workforce costs and provide increased benefits to workers and employers. DiPietro and Milman (2004), Ellenbecker (2004), Milman (2001), Morrell, Loan-Clarke, and Wilkinson (2001), and Wildes (2005) noted that increases in the levels of tenure of employees lowered overall labor cost in the long run.

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The results of the research study indicated that a viable method exists for business leaders to increase retention and thus control labor replacement costs. The subsequent cost savings that originate from lower turnover rates produce greater profits for organizations. The use of a strategy aimed at increasing retention and tenure is a departure from approaches to the issue of high turnover rates in previous studies. Researchers who studied retention predominantly targeted issues relative to overall job satisfaction (March & Simon, 1958), wage increases as incentives (Campbell, 1994; Kim, 1999; Stiglitz, 1974), and methods to predict potential turnover (Lee, 1996; Morrell et al., 2001). Significance of the Study to Leadership Little to no research has addressed increasing employee tenure as a method to control labor costs in the fast food industry. No extant research includes an approach to employee turnover in which selection, wage, and labor theory are used strategically to mitigate turnover rates, increase tenure, lower overall labor costs, and increase organizational profitability. The significance of the current study to research was that the results of the retention strategy showed a significant decrease in employee turnover for the test period with the effect remaining posttest. The holistic retention approach had not been studied previously. Service industry leaders can use the new knowledge gained from the current study to guide them in making organizational decisions relating to retention. Nature of the Study The methodology used in the study was a quantitative approach. The quantitative approach is a method that can numerically measure the level of relationships between the

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independent variable and the dependent variable (Ramos-Alvarez, Moreno-Fernandez, Valdes-Conroy, & Catena, 2008). Prior researchers (DiPietro & Milman, 2004; Ellenbecker, 2004; Milman, 2001; Morrell et al., 2001; Wildes, 2005) used the quantitative approach to measure the effects of varying retention strategies on employee turnover. The design used for the study was quasi-experimental, which provided the researcher with a control element with which to examine the effect of the EETP on turnover rates of the control group. The quasi-experimental design allowed the researcher to test the effect of the retention strategy on the treatment group pre- and post-experiment (Ramos-Alvarez et al., 2008). The design approach provided the opportunity to compare experiment results to the control group in the study (Ramos-Alvarez et al., 2008). In a quasi-experimental quantitative design, a researcher evaluates the impact of an intervention used on a treatment group compared to a control group that does not receive the treatment (Ramos- Alvarez et al., 2008). The current study involved investigating the effects the implementation of EETP retention strategy had on the tenure of hourly employees. The focus of the quasi-experimental quantitative study was to investigate the effects of a retention strategy on the turnover rates of approximately 260 hourly employees in six McDonald’s restaurants in Albany, Georgia. Officials of the McDonald’s restaurant group granted permission to conduct the study (see Appendix A). The retention strategy includes the following five elements: (a) the McDonald's Hiring to Win assessment tool, (b) a scripted structured employee orientation, (c) a 30-day follow- up orientation with performance update, (d) a 90-day wage increase, and (e) exit

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interviews. The retention rates of employees in the treatment and control groups were tracked before and after the experiment. Retention tactics such as the Hiring to Win assessment tool, focused orientations, exit interviewing, scheduled merit reviews, bonus programs, and referral programs are recommended to the franchisees of the McDonald’s chain. Franchise leaders use the elements individually or as a package, at their discretion. A retention strategy was implemented in the study that employs all five tactics to develop a holistic tenure-based plan referred to as the EETP. The EETP may provide other retailers and restaurateurs with a mechanism to mitigate the costs associated with high rates of turnover by increasing retention. Individual elements of the plan have had a positive effect on lower turnover rates (McDonald’s Plan to Win, 2007). A quasi-experimental design approach allowed the investigator to test the effects of implementing the EETP on the treatment group of employees in comparison to the control group that did not receive the treatment. Employees who participated in the study were new hire applicants in the treatment locations. Participation was voluntary. The results of the experiment could provide a generalized approach that leaders in similar business environments may want to implement based on the results. Research Questions The study included the following two research questions: RQ1: What is the proportional difference in the turnover rates of participants (new hires only who elect to participate in the study) between treatment and control groups for each period of measurement (pre-experiment to post-experiment)?

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RQ2: What is the difference in the costs of turnover in terms of hiring costs, training time, orientation time, uniform costs, and other personnel replacement costs for participants between treatment and control groups for each period of measurement? The focus of the research questions centers on the impact of the experiment on turnover rates in the treatment group as opposed to the control group. Specifically, the study seeks to ascertain that when EETP is implemented in a workplace environment are there significant differences between the rates in turnover between the treatment group and the control group. If there is a significant difference between the two groups that can yield savings to the organization, could the EETP be a viable alternative or addition to current retention strategies and tactics. The results of the study indicated that the retention strategy does decrease turnover rates and overall labor costs. The total population for the experiment, which was the number of newly hired employees working in the six McDonald’s test restaurants located within five miles of each other in Albany, Georgia, was 466 employees. The restaurants were separated into treatment and control groups, reflecting the demographics of the study area. The sample treatment group for the experiment consisted of 168 newly hired employees. The initial control group of newly hired employees who opted in for the study was N = 286 employees. Turnover rates affected all employees in the sample groups to some degree as their work schedules reflected not only the business environment but also the availability of staff to meet those needs. The geographic location was southern Georgia, and a four-county population of approximately 161,532 people (Georgia Population, 2006).

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Hypotheses The independent variable for the study was the group of five retention tactics designed to influence turnover rates of the treatment group employees. The dependent variable of the study was the change in retention levels and tenure. Ramos-Alvarez et al. (2008) noted that the null hypothesis suggests no relationship or difference exists between the variables under consideration. Alternative hypotheses for a study suggest that a relationship exists between the stated variables (Ramos-Alvarez et al., 2008). The alternative hypotheses for the study indicated that the implementation of the EETP would positively affect turnover rates. The following statements of null and alternate hypotheses correspond to the research questions: H1 0 : There is not a significant change in turnover rate by group (treatment vs. control) measured at pre-experiment. H1 a : There is a significant change in turnover rate by group (treatment vs. control) measured at pre-experiment. H2 0 : There is not a significant change in turnover rate by group (treatment vs. control) measured during the experiment. H2 a : There is a significant change in turnover rate by group (treatment vs. control) measured during the experiment. H3 0 : There is not a significant change in turnover rate by group (treatment vs. control) measured at post-experiment. H3 a : There is a significant change in turnover rate by group (treatment vs. control) measured at post-experiment.

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H4 0 : There is not a significant change in personal replacement costs between groups (treatment vs. control) and within each period of measurement (pre-, during, post- experiment). H4 a : There is a significant change in personnel replacement costs between groups (treatment vs. control) and within each period of measurement (pre-, during, post- experiment). Theoretical Framework The current study adds to the literature base of labor retention and employee practices. Labor retention studies beginning with March and Simon (1958) have focused on examining the connection between employee turnover behavior and job satisfaction. The connection between low job satisfaction and high rates of employee turnover is well documented in labor retention studies, yet no research specifically addresses increasing employee tenure. The current study included the psychological theory of March and Simon (1958), wage efficiency theory, turnover theory, and search theory to develop an approach to influencing hourly worker retention. The elements of the different retention theories were designed to develop a holistic approach that would be preemptive to the high turnover rates of hourly employees. Researchers have advanced a multitude of theories to explain worker turnover. Various theories evolved from March and Simon’s germinal thesis on turnover in 1958, which indicated that a link existed between employee turnover and job satisfaction. Lee (1996) and Morrell et al. (2001) extended the research by refining methodology to predict the likelihood of employee turnover behavior. These predictors have not aided the

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services industry in general or the food preparation industry in particular. The food preparation industry’s turnover of 200% to 300% far exceeds that of any other (Su, 2007; K. Williams, 2001). March and Simon’s research (1958) represented a psychological approach to turnover models in asserting that employee turnover levels increase or decrease with levels of job satisfaction and with perceived alternatives for workers. The process begins with employee dissatisfaction, a search for alternative employment, and an evaluation of the alternatives. Lee, Mitchell, Wise, and Fireman (1996) proposed an unfolding model in which an employee’s decision and actual act of quitting occur after a series of shocks to the individual, forcing a psychological examination of the employee’s employment status. The model includes a decision path for a worker’s decision to quit, studies the actual act of quitting as it unfolds over an unspecified period, and is linked to a series of job or non-job-related shocks (Lee et al., 1996). The model is significant in turnover theory. If decisions to leave the employment unfold over time, managers can anticipate the decision to quit and alter the outcome through influencing employee satisfaction and commitment (Lee, 1996). Morrell et al. (2001) noted that predictor models were somewhat successful in warning organizations of quit intentions. Stiglitz (1974), Campbell (1995), and Kim (1999) examined wage efficiency theories as retention tools. Kim (1999) noted that wage was a key element used to retain employees in lower wage industry jobs. Wage levels and the consideration of costs associated with their job search and transfer affect employees’ decisions to seek new employment or to secure additional employment (Parsons, 1973). Early turnover models

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used educational level, marital status, race, job complexity, and previous employment status as bases for predicting the likelihood that an employee will quit (Weiss, 1984). Kim (1999) maintained that firms experiencing higher rates of turnover might find it effective to adopt strategies that include wages higher than market rates. Higher rates of pay induce lower turnover rates, resulting in reduced costs associated with replacing workers. Wage efficiency theorists have established a relationship between increasing wages and lowering turnover, but the use of wage increases as a single strategy to achieve reductions in turnover has shown mixed long-term effects (Kim, 1999). Kim (1999) noted that an examination of relative and absolute wages of hourly workers in comparison to others in the industry was essential in assessing the effectiveness of wage as a sole inducement to lowering turnover. Kim indicated that increases in wages had a positive impact on worker tenure. Kim also noted that the labor market would adjust, eliminating the competitive advantage gained from increasing wages as others in the market adjust to meet the new wage rate. As wage rates change, the benefits of using wage increases as a single retention strategy become short-lived. Other theoretical approaches target employee behavior as opposed to incentives. Lee (1996) and Morrell et al. (2001) examined methods to lower turnover rates, targeting employee behavior as a predictor of turnover. Milman (2001), K. Williams (2001), DiPietro and Milman (2004), Ellenbecker (2004), and Wildes (2005) were search theorists who used various selection assessment tools. The theorists proposed that if data on turnover behaviors existed prior to selecting candidates for hire, managers could use

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the data as a mechanism for selecting individuals who displayed characteristics that were conducive to increasing job tenure. Search theorists explored selection as a mechanism to reduce high turnover rates with selection strategies focused on the right person for the right job. Ours and Ridder (1992), Griffeth et al. (2000), Barrick and Zimmerman (2005), and Scullen et al. (2005) focused their employee retention efforts on search theory. Specifically, they all examined potential employees’ job fit, experience, and adaptation as methods of extending employee tenure. Ours and Ridder (1992), Griffeth et al. (2000), Barrick and Zimmerman (2005), and Scullen et al. (2005) examined job fit, experience, and potential employees’ ability to adapt to the organizational culture as key elements in the development of their selection models. DiPietro and Milman (2004), Ellenbecker (2004), and Wildes (2005) used personnel inventories, referred to as biodata inventories, which aimed at predicting turnover potential. Hartline and De Witt (2004), Sanford (2005), O’Connell and Kung (2007), and Studer (2006) advocated a combined selection strategy that utilized the new employees’ skill sets, which indicated job fit, cultural adaptation, and assimilation. Studer (2006) noted that a path to reducing turnover involves ensuring that all prospective candidates brought into an organization possess the willingness to support and model organizational values. Current approaches used to predict or explain turnover are not managing turnover effectively (Morrell et al., 2001). A research gap in the study of retention models is evident. None of the theories, including labor and wage efficiency, search theory, selection theory, or predictor theories, singularly provides adequate ways to retain

Full document contains 181 pages
Abstract: The purpose of the quasi-experimental quantitative study was to investigate the effectiveness of a strategic retention process called the Employee Extended Tenure Plan, which has five tactical elements, has on the job tenure and retention of hourly restaurant workers. Within the retail industry in general and the food service industry in particular, leaders have concentrated on controlling wages as a cost cutting strategy. The result of this approach is an industry that has the highest rates of employee turnover. The results of the study indicate that the experimental retention strategy used had the effect of decreasing turnover rates and, in so doing, decreased overall labor costs, resulting in opportunities to gain added profitability for the business.