Skilled employees are in increasingly short supply. Yet companies have eroded non-pay reasons for staying. Here's how to hang on to your talent

What makes an employee jump from one company to another? I have followed the annual surveys on this question for nearly 20 years. Year after year, money was never among the top three reasons cited for changing jobs.

Until, that is, this week, when the Wall Street Journal cited a new study by Watson Wyatt Worldwide and Harris Interactive, in which 71% of the top performers in U.S. corporations now list better pay as one of the top three reasons they would quit their current job (results from average performers weren't significantly different). Yet in a related survey of 262 large employers, only 45% of employers cited pay as a top-three reason employees leave.

So what explains this difference in perspective between employees and employers? It may be that employers (especially large ones) are increasingly out of touch. True, for most of the past two decades employees have consistently said there are reasons more important than money that make a job attractive. The problem is, most of those reasons to stick around have gone the way of the manual typewriter.

The Maximum for the Minimum

Over the past decade (except for the Internet bubble hiring blip) the message from U.S. companies to employees has been clear: Don't count on us for anything except your next paycheck. If we find that we are not competitive, we may reengineer you out of a job. If we find U.S. labor costs to be too high—we'll outsource your job to India.

Interested in climbing the career ladder? Great, except we've removed all the middle rungs, so we hope you're a good jumper. And by the way, in addition to doing your job, count on doing the job of the folks above you whom we have eliminated as well. Health care? You'll be carrying a much higher portion of the costs. Pension benefits? As they say on The Sopranos, fugetaboutit.

Employees used to be willing to trade a few dollars today for the promise of things that were really important to them: Job security, career development, the ability to be a part of something bigger than themselves.

Shrinking Pool

Companies that are no longer able to provide such things should not be surprised when employees take a "show me the money" attitude. And this is going to affect not just the big institutions most responsible for fracturing the social contract between employer and worker—it will affect all of us. And it will affect us at a time when the competition for talent is going to be at its greatest.

We are headed for a talent crunch. We have already increased knowledge-worker productivity and know that downsizing and automating processes offer limited returns. The battle going forward will be attracting and retaining the best people who bring initiative, creativity, and commitment—people who can meaningfully add value.

Unemployment now stands at 4.4%, its lowest rate since 2001, according to the Wall Street Journal. More telling, unemployment of recent college graduates in the U.S. is 2%, according to The Economist, and that is before the boomers start retiring en masse. The demand for great people is likely to outstrip supply for the foreseeable future.

Survival of the Fittest

But isn't it likely that the dwindling supply of good people will be offset by an ever larger decline in U.S. jobs due to outsourcing? No. A new study by McKinsey estimates that while the number of jobs outsourced by the developed world will grow from roughly 1.5 million in 2003 to 4.1 million in 2008, the number in 2008 will still represent only about 1.2% of labor in the developed world.

Competition for talent will be not only with other companies but with employees themselves. Of the roughly 22 million U.S. companies in business today, around 16 million are one-person shops, and that number is growing rapidly. Why take a full-time job if you are likely to be out on the street in 18 months because your company has been purchased and integrated into a competitor? If you are one of the best in the field, why not set up shop yourself and control your own destiny?

As demand for talent grows, employees will become ever more finicky about jobs. And they'll have better information with which to make their career choices. Web sites such as vault.com provide the inside scoop on what it is really like to work for a company, and sites such as salary.com give prospective employees information on what comparable jobs pay.

The Best Value

So what should a small business do? First recognize that the race is on to find and retain the best talent. Expect your competitors to increasingly be willing to throw money at your people to try to coax them away. Develop a concrete value proposition in which you carefully analyze the benefits of working for your company (pay, benefits, career opportunities, stability, etc.) and communicate that value proposition clearly and often.

Tailor the value proposition to the needs and wants of your most talented, not to the least common denominator. Don't add benefits just because someone asks for something or because all of your competitors are offering something. Focus your scarce resources on those items which you know to be most important to your crew, and then continually educate the troops on why you made the tradeoffs you did.

Be the Best You Can

Finally, nothing is worse than working for a poorly run company. If your company is well-run, employees are less likely to take a big risk to jump ship to a company which (for all they know) is not as well run. Most won't do it for a few bucks more a month, and if they do, often they'll eventually come back and ask for their old jobs back. So the most important thing you can do to increase your company's shot at great talent.

Talented employees are smart enough to know that there is no better job security than working for a company that knows what it is doing (see BusinessWeek.com, 8/14/06, "Small Business Secrets to Hiring").