It is a common dilemma for small businesses: you value your staff, but committing to paying an extra £5,000 a year to six people is more than a little daunting. Lindsay Williams looks at ways to ensue staff value the job they have.

It is worth stating that losing good staff is extremely costly for all businesses. Simon Howard, who runs Work Communications - an employment consultancy whose clients include Ford, the AA and The Guardian - says straightforward replacement costs run between ten per cent and 30 per cent of salary. That is simply the advertising and recruitment process, but he says there are considerable hidden costs too.

"How often do you replace someone departing with a more expensive person? More frequently than any employer would like to admit," Howard says. "Then there is the cost of having the job open, either in overtime for other staff, or in temp or agency fees. Very often we find that ten to 30 per cent can be doubled." In reality Howard finds very few employers even monitor these costs, although they generally understand that high staff turnover is bad news.

So what can be done? Well the good news is that, from the employer's point of view, a job change is rarely prompted only by money. Tim Osborn-Jones, senior tutor at the Henley Management College, has been researching the issue of managing talent for more than five years. He bases his conclusions on detailed work with 476 Henley alumni from both qualification and non-qualification management courses.

Although the evidence is from managers, he believes there are lessons in the research for retention of all staff grades. "Past a certain point, quantative reward, salary and benefits, become less important; qualitive rewards become more important," he says. But he adds: "That is not to say a company can get away with not paying competitive rates, but given competitive rates, given reasonable level of benefits, what really motivates individuals becomes more and more qualitative." Howard agrees. "The reason people leave one organisation and join another is rarely solely to do with money," he says.

Osborn-Jones believes employers should learn to understand what academics call the psychological contract. "The psychological contract is the unspoken, unspecified, subjective deal that sits alongside the formal contract of employment," says Osborn-Jones.

When his sample was asked in a straightforward way what sort of contract of employment they would prefer, only 11 per cent expressed a preference for a "transactional psychological contract", one based purely on money. From his research Osborn-Jones has identified what makes a strong psychological contract and has formulated a number of basic rules.

First, he says, an employer should check corporate values. "Would you want to work for this company?" asks Osborn-Jones. "Would you recommend a friend to work for this company? If not why not?" He thinks employees care that the company is useful to society in general. A small businessman may be sceptical about the benefits of a company social mission for receptionists and cleaning staff, but supporting evidence comes from one very big business, TPG.

TPG was once the Dutch Post Office. It was privatised in 1989 and the Dutch government still retains a 34.8 per cent stake. The company has gone on to make a string of acquisitions in 60 countries, including the world's fourth-largest express delivery service, TNT. In total it has about 164,000 staff.

"I guess more than 90 per cent of our staff are mail-delivery people or truck drivers," says director Tanno Massar, head of media relations at TPG. In December 2002 TPG forged an alliance with the UN World Food Programme. It has many facets; volunteers are sent on full pay to help with projects in the developing world. There are many staff fund-raising schemes, with money raised often matched by the company. Some employees are lent to the World Food Programme to help with logistical issues. Massar says anecdotal evidence suggests that the alliance has done wonders for staff morale. "It certainly has raised morale, absolutely. We are in concept a very simple business, a delivery service. All of a sudden through this partnership we are contributing to one of the main issues in the world."

External confirmation of the value of the alliance for staff came from Fortune Magazine. Each year it identifies ten of the best places to work in Europe by interviewing a cross-section of staff. In 2004 TPG made it into the list with the WFP alliance given as the main factor in employee satisfaction.

A small UK organisation that seems to have found a formula for keeping staff happy is a PR company called Communications Management, based in St Albans. Staff here are quick to volunteer how much they enjoy working at the company, particularly compared to London PR agencies. They like the flexible start and finish times and the friendly atmosphere. In 2004 Communications Management was short-listed for the Orange National Business Awards as Employer of the Year and has seen only a handful of people leave since being founded.

"One of the things I have been absolutely hung up about since I started the business 17 years ago is staff retention," says founder Pam Calvert. "There is nothing that makes the client more irritated than having a constant round of new people working on their account and having to induct them into their business."

Calvert does a number of other things that completely fit with Osborn-Jones's academic theories. He emphasises that self-esteem of employees is a key issue. His research shows that when people feel valued they are less likely to be looking for a job elsewhere. Calvert runs what she describes as a very consultative business. There are daily and weekly meetings with everyone expected to pitch in, and three times a year she hosts what she calls 'knowledge days', taking the whole staff off-site and designing a day where they can share experience and lessons learnt. Even the most junior staff make presentations at these days. There is also a constant to-ing and fro-ing of consultation. "If you walked round the office here you would hear people asking questions of one another all the time. There is an awful lot of collaboration and support one-to-one," says Calvert.

Another key point emphasised by Osborn-Jones's research is the need for personal development: "The two things organisations have to offer are development opportunities and up-to-date relevant experience. So in the modern world the deal goes something like this: we cannot guarantee your job security but we can do certain things which will improve your chances of moving on to another satisfactory job once this one is finished. It's the concept of Me plc."

Simon Howard of Work Communications agrees but puts a slightly different spin on it. He talks about the employer's brand, saying people want to work for an acknowledged market leader: "They also want to work with talented colleagues, people they can learn from." Again, that is seen to be adding value to the individual's CV.

Calvert builds personal development into bi-monthly one-on-one meetings with staff and managers where personal goals are set by the staff. "Individuals drive these discussions with their manager, will look at whether they can achieve these performance objectives, what development they need and where they want to go," she says. Because the business is growing she is able to offer the opportunity of promotion or advancement.

Howard, whose consultancy employs 120 people, says: "So many of these things cost nothing, it is just behaviour, the behaviour of the management". His formula for retaining his own staff is pretty simple; he offers share options in the business, a good working environment with natural light and outside space, and regular social events at which the company meets the bar bill. Socialising is also encouraged in the office.

"Every Friday night at 5pm, out comes the booze and the nibbles," says Howard. But he is rather dismissive of an academic study of such things, saying: "It's not rocket science. A lot of consultants try to over-complicate the whole thing; actually it is moderately simple to keep people happy."

Biography

Lindsay Williams spent 13 years at the BBC with local radio, regional television, Radio 4 and Radio 5 Live before moving to Reuters Financial Television. She has also worked as an executive producer for Bloomberg Television and with Sky Business Unit and at CNBC. She has written for Sunday Business, The Business, The Times and other publications.