Employee retention rates are a powerful indicator of an organization’s health. These rates can help employers and HR leaders determine how many employees are inclined to remain with an organization long-term and help project turnover.
In this article, you will learn:
how to calculate employee retention rate,
what constitutes a good retention rate,
how to improve your company’s retention, and
some interesting statistics and facts about retention rates.
What are employee retention rates?
What is an employee retention rate? The employee retention rate is a number that indicates the percentage of employees who remain employed over a certain timeframe.
Typically, the employee retention rate refers to voluntary turnover and attrition (people that quit as opposed to those who are terminated) and is should be calculated annually.
Employers often measure employee retention rates to determine what changes in policies, procedures, culture, and leadership development are necessary in order to retain talent. Poor rates often indicate endemic problems in the workplace culture, and should prompt leadership to investigate why the employee turnover rate is so high and determine how to address it.
Employee retention rate vs. employee turnover rate
Employee retention rate is often calculated at the same time as the employee turnover rate. The two measures are related, but there are important differences between them.
The employee retention rate does not include new hires. It factors in only employees who were employed at the beginning of the measuring period. Retention rates focus on the stability of the workforce. Because stability is a major factor in retention rate, it is frequently measured over a longer period than turnover rates.
By contrast, the turnover rate measures movement among your workforce and includes new employees. Turnover may be voluntary (such as for those who choose to leave a job or retire), it may include employees who have passed away, and it also includes involuntary turnover, (like those who were fired or laid off).
Turnover rate uses three figures.
Total employee headcount,which includes employees on the payroll, temporary workers, and those on temporary layoff, leave of absence, or furlough.
The average number of employees,which takes the total number of employees each month and divides it by months in the period.
Total separations, which includes both voluntary and involuntary separations during a timeframe (usually monthly).
To calculate the turnover rate, divide total separations by the average number of employees.
Why is employee retention rate important?
Understanding your employee retention metrics helps you improve the culture, efficiency, and bottom line. Among the top benefits of having a strong employee retention rate are:
More revenue
Better customer engagement and relationships
Increased employee productivity
Higher levels of employee engagement
Improved employee morale
Better corporate culture
Enhanced team dynamics
Workforce stability
More consistent performance, processes, and outcomes
Highly skilled workforce
Improved workplace safety
More employee loyalty
Lower costs for recruitment, search, and training
Stronger brand and employer reputation
How to calculate employee retention rate
Knowing how to calculate employee retention rates is an essential task for any small business owner (or among the larger organizations, any human resources team). By understanding your employee retention rate, you can make informed decisions about what needs to happen at your organization to improve it.
Retention rate formula
The first thing to do is determine the period for which you will calculate your retention rate. The standard measure is annually, but some organizations may choose a different timeframe.
Step 1: Begin by setting start and end dates for the period of measure.
Step 2: Determine the headcount (number of employees) at the beginning of the timeframe. Whether employed full- or part-time, each employee should be considered one employee for the purposes of this calculation.
Step 3: Next, count up how many of that group of employees remain at the end of the measuring period. Do not include anyone who was added as a new hire—only include employees who were included in your initial headcount in Step 2.
You should also exclude any employees those who were laid off, fired, or furloughed during the determined period. You want to measure only those who voluntarily left the organization to get your rate of retention.
Step 4: Now, take the number of employees who are left at the end of the period (that you determined in Step 3) and divide that by the number of employees you had at the start of the period (that you determined in Step 2).
Step 5: Multiply the number you got in Step 4 times 100 to get a percentage.
Employee retention rate examples
Here are a few examples of how to calculate an employee retention rate. Each uses different types of employee classifications that may or may not factor into the rate.
What is a good employee retention rate?
A good employee retention rate may differ depending on the industry and location of the organization. Also, the rates can be skewed for very small companies when a few departures can make a large dent in the percentage so that turnover looks high.
However, a retention rate of 90 percent or higher is generally considered a good rate.
Consider the examples above: The college, with an 85 percent retention rate, is doing an above-average job of keeping employees but could do better. The safe manufacturer, with a 92 percent retention rate, is in a strong position. The amusement park, with a 66 percent retention rate, likely has some issues with its organization that should be examined.
On the contrary, it’s important to note that a 100 percent retention rate is not always ideal. Some level of turnover within an organization is healthy, bringing new perspectives, ideas, and knowledge.
How to improve employee retention rate
Now that you know your employee retention rate, it may be time to determine how to improve it. Employee retention strategies used to improve a retention rate will vary based on the organization and its work environment, but you may want to consider the following:
improving hiring and onboarding,
surveying employees and incorporating their feedback into your organization,
investing in leadership and employee development,
offering a competitive compensation and benefits package, and
creating an engaging workplace culture.
Here is a closer look at the approaches listed above.
Hire and onboard the right people
Having the right employees on staff can help greatly with your retention. Each workplace has its own culture, and new employees are going to need to connect well with existing staff.
Consider examining what you look for in new hires and if recruitment speaks to the organization’s mission, vision, and values. Ensuring that your recruitment process reinforces what the organization prioritizes helps strengthen employee alignment.
Onboarding is another important component of establishing the workplace culture. By highlighting how employees are valued, organizations can create a connection. It’s important, however, that the messaging in the onboarding process is authentic and consistent with practices within the organization.
Trust your employees and listen to their feedback
Do you have a good sense of how employees feel about the organization? Seeking feedback is important. Your employees will have insights into work, the culture, and what’s needed to improve your retention rate and the employee experience.
Some organizations do regular employee sentiment or engagement surveys. These instruments can inform leadership about where there are opportunities to improve. Conducting exit interviews when an employee leaves can also give your organization insight into how to improve employee satisfaction.
You need to trust that employees will be truthful and are wanting to improve the workplace. Listen carefully to what they have to say, even if it seems unlikely or surprising.
Invest in your leaders
Leaders and managers play an important role in maintaining a good retention rate. People often stay or leave a job based not on the work but on their manager. Leadership that inspires others is going to help keep employees feeling valued and important.
While some managers have innate instincts for how to lead, not all do. That’s why it’s important that you invest in the leadership skills of your managers. Teach them how to lead, what inspires, and how to give constructive feedback.
The investment can have a multiplier effect. Not only will it help reduce attrition, but it will also help retain the top talent that has been elevated to leadership roles.
Offer competitive compensation and benefits
Are your salaries and wages competitive within your region and your industry? Are employees saying they are leaving for higher pay rates elsewhere?
A periodic review of your annual salary or hourly wages is an effective tool in retaining employees. Adjusting compensation to remain competitive will ensure that employees know they are being paid appropriately.
Employee benefits are equally important. In addition to standard offerings such as insurance and retirement plans, consider what other perks you could offer. Team members will tell you if there are offerings they would value. Some benefits may not add a lot of expense but will be greatly appreciated.
Regularly reviewing your benefit offerings along with compensation is a smart approach to improving retention.
Create an engaging company culture
What is the culture within your organization? Is it an environment that values teamwork, collaboration, and your organizational values? Is it a climate that prioritizes flexibility and preventing burnout?
You want a culture that engages your employees and helps them feel connected. Positive employee engagement has multiple benefits. Employees who feel engaged are more likely to speak well to potential employees, friends, and family.
Invest in employee development
Developing employees’ skills and talents is a valuable long-term investment. Employee development can take on many forms.
Organizations can train employees on critical technologies, equipment, systems and procedures that help improve their efficacy and efficiency. In addition, employers can pay for external training and professional development opportunities to support employees’ on their career paths. Conferences, networking opportunities, and workshops show employees their employer is invested in their professional growth and career development.
7 surprising employee retention statistics
The numbers around employee retention tell a startling story. Here are some statistics about employee retention to know:
The average employee tenure is 4.1 years, according to the U.S. Bureau of Labor Statistics.
A global survey by Ernst & Young showed that more than half of employees would quit if they did not have workplace flexibility.
The EY survey above also indicated that managers/leaders, finance and technology employees, and caregivers were most likely to leave.
Work-life balance, recognition, compensation, and satisfaction were the top reasons employees would stay, according to the Achievers Workforce Institute.
The Work Institute’s 2020 Retention Report indicated 75 percent of employee turnover was preventable. The top reasons for turnover were growth opportunities, work-life balance, job satisfaction, manager relationships, and the work environment.
A Gallup report shows that replacing an employee can cost up to two times their salary.
A Gartner study indicates that flexibility is of primary importance to workers when it comes to work-life balance.
The employee retention rate is a powerful indicator of what’s working within an organization. A healthy rate allows employers to be more productive and achieve important business goals. Improving your employee retention rate takes thought, planning, and persistence.
At Gusto, we help businesses boost retention rates with hiring and onboarding, employee benefits, and talent management tools. Connect with our team of HR experts, ready to help improve your employee retention rate.
