Smart preventative measures can keep employee theft from hurting your store's bottom line.

A few years ago, Bruce Kaminsky, owner of Big N Little Shoes, caught a long-time employee stealing from his Chicago boutique. For some retailers, the solution would be cut and dry: hand the employee his walking papers, and possibly call the police. But for Kaminsky, it was a tough decision and he decided to keep the staffer. "Finding good employees, even when unemployment is high, is so hard," he explains. "We had a stern conversation and a real heart-to-heart." Nevertheless, Kaminsky admits he's been left thinking, "This is a great salesperson and a great shoe person, but also a thief. It put his reputation right out the window."

Unfortunately, Kaminsky's tale isn't uncommon. Employee theft accounts for about half of retail shrinkage annually—and the numbers are on the rise, says Richard Hollinger, a criminology professor at the University of Florida. According to preliminary figures from the National Retail Federation's annual security survey, which Hollinger conducts, inventory retail shrinkage rose to more than $37 billion, up from $33.5 billion in 2009. "This is the largest form of property crime in the United States, bar none," Hollinger maintains.

The reason behind the increase is not easy to pinpoint, but the slowly recovering economy might be playing a role, Hollinger says, noting that employee theft actually decreased during the recession. "When the economy goes down, people who lost jobs turn to retail jobs as their sole source of income," Hollinger explains. "People are trying to keep these jobs to keep food on the table." Now that the economy is slowly rebounding, people may feel comfortable enough to slide back into bad habits.

Just what is the typical profile of a light-fingered staff member? "It could be anybody but your mother," says Gary Weiner, owner of Saxon Shoes in Richmond, VA. "Somebody that has worked for you a month or for 15 years." David Shelist, owner of Madison and Friends, a children's shop in Chicago, says he's found that "part-timers are more apt to steal." But security experts warn that full-time employees can be just as dangerous since they often feel entitled to the items they're taking. "They rationalize stealing if they think they're giving, giving, giving to the company," says Terrence Shulman, director of the Schulman Center for Compulsive Theft, Spending & Hoarding in Detroit.

Retail and security experts agree: Vigilance is key to keeping theft at a minimum. Although there are no guarantees, the following tips can help keep employees in check.

1. Hire and Train Your Staff Carefully

"An ounce of prevention is worth a pound of cure," Shulman says. "If employers can do a good job on the front end—with background checks and multiple interviews—it will save a lot of time and money on the back end." While a thorough hiring process won't weed out every bad egg, experts say it will help you spot obvious red flags, like previous criminal activity. More and more companies are also requiring credit checks for new employees. "People with low credit scores might be more likely to take money to help them with their bills," Shulman notes. During the interview, Shulman advises to spot poor eye contact and to keep an eye on employees whom "make excuses for little errors rather than owning up for it and seem afraid to ask for help."

Allan Bachman, education manager at the Association of Certified Fraud Examiners (ACFE), advises retailers to emphasize the consequences of stealing during employee training. "State that you are serious about employee theft and fraud, that you are watching and will prosecute to the fullest extent of the law." Kaminsky at Big N Little's says that's exactly what his experience taught him. After he caught his long-time staffer stealing, he stressed the potential consequences: "The police would have taken you away in handcuffs, you would have had to pay bail and for an attorney, you would have lost wages since you're no longer employed here, you would have had to find a new job, and you wouldn't be able to use us as a reference. And it's all because you stole $50." When spelled out this way, Kaminsky says his employees appear to understand that it's "ludicrous" to steal.

The problem, says Abe Rogowski, owner of the Shoe Parlor in New York, is that most employees know the threat to prosecute is an empty one. "Unless it's a major amount, no one is going to go through the trouble, because by the time you've hired a lawyer, what's the sense?" he says. "You're better off letting the person go, and most employees know that."

2. Keep a Close Watch

"We have cameras in every section of our store, including the back room," says Shelist. "No matter where we are, we can bring up our stores on our iPad to see what's going on." In fact, technology is helping retailers monitor their stores more closely than ever. Rogowski also uses cameras, which he watches via his cell phone. "We've caught people through our cameras," he confirms. "It made everybody aware that we had cameras; it's cut out a lot of things." Hollinger notes that new POS exception monitoring programs can be linked to cameras, so when exceptions occur—like a ‘no sale' is rung up—retailers can monitor exactly what happened.

"It's all about the technology now," Rogowski explains. Shelist even monitors social media. "We look on our employees' Facebook pages to make sure they're not selling any items that don't belong to them. We actually caught someone doing that once," he says. In addition, credit card technology has helped cut down on staff members skimming cash from the register. "The advent of 90 percent of customers using charge cards is a big advantage," Kaminsky says. But Weiner warns to watch out for staff members that credit themselves, using the new merchandise machines, for something that was never purchased. To combat this, Weiner advises: "Call your credit card processor to check your business and see if they notice multiple credits to the same account without corresponding purchases."

While technology can help catch crimes at the cash register, another problem for retailers is employees snagging inventory. According to a study by the ACFE, stealing of merchandise is the most common type of fraud in retailing. To that end, old-fashioned detection measures are an owner's best bet, experts say. "Use clear plastic trash bags to prevent staff from taking merchandise out with the trash," Weiner suggests. "Periodically, we do a bag and purse check on the way out," Shelist offers. He also asks his employees to conduct periodic spot checks on certain categories "to make sure what we have on the floor matches our POS system."

According to the ACFE study, these types of surprise inventory audits can be one of the most effective measures against employee theft. Although the audits are time consuming and have limits, they work as a deterrence. "All a surprise audit can do is tell you something is missing. It can't tell you where it went or when it went," Bachman acknowledges. "But it would give you enough predication to start a full investigation, depending on the magnitude. And it lets everyone know that you're paying attention."

3. Keep Your Staff Smiling

While technology and inventory audits play a large role in preventing theft, it's not the silver bullet that will erradicate the problem. "You can't just throw money at it and hope it will go away," Hollinger says. The biggest deterrent, he adds, is to keep the staff happy. "The focus should be on making sure you don't have substantial numbers of disgruntled employees," he says, noting that it's often better when sales are off to cut down on the number of employees rather than trying the share the burden among the staff. "A lot of retailers don't like to lay people off and, instead, lower everyone's hours. That loss of 10 hours a week can be a major hit to somebody's wallet. They tend to feel disgruntled, and it allows them to rationalize their theft as a jusified fringe benefit."

Hollinger says another problem is that many workers see retail as a temporary job without the possibility of promotion or as a long-term career. "If you look at low shrinkage companies, one of the best predictors is low turnover," he notes. "The employees see that their vested interest is tied to that of the company." Bachman agrees that fostering a positive staff environment is key to cutting theft. "A good, ethical and honest corporate culture goes a long way to creating awareness," he says, adding it also makes it more likely that staff members will report coworkers who steal. According to the ACFE study, tips from fellow employees are the most common ways fraud is detected. To that end, he suggests setting up an anonymous tip line, or creating an open-door policy that encourages staff to come forward when they feel like something is amiss. Hollinger agrees that a positive environment is key: "Retailers need to focus more on making sure employees feel that their vested interest is linked to the success of the company." —Audrey Goodson