Employee Retention Rate: All You Need to Know

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We’re in the middle of a revolution in the workplace. The way we work and where we work is constantly being challenged and changed. It’s also forcing employers to rethink their talent acquisition and employee retention strategies to keep up to pace with these constant changes. This means that employee retention rate is one of the most important HR metrics that can help you understand how well your organization retains its employees.

It goes without saying that employers want to hold onto their top talent. Not doing so only causes disruptions in the workplace but is also detrimental to overall business outcomes. Some level of turnover is inevitable, as employees will always move on. This may be due to retirement, or an employee may need to relocate or can’t continue to work, for example. And, then, of course, employees are sometimes in search of better opportunities.

Getting highly talented employees in the organization is challenging as the war-for-talent continues. That’s why keeping them on board should be a priority for any organization. Why and how do you calculate employee retention rate? Let’s dive in.

Contents
What is the employee retention rate?
Employee retention formula
Why is knowing your employee retention rate important?
How do you calculate employee retention rate?
What is a good employee retention rate?
How to improve employee retention rate

What is the employee retention rate?

Employee retention rate is a measure of an organization’s ability to retain a stable workforce. It shows the number of employees who stay in a company for a certain period of time compared to the total number of employees in that period.

Employee retention formula 

Below is the formula to calculate employee retention: 

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Here are a few simplified examples of how you would use the formula:

Example 1

A digital marketing company has 300 employees. During the last year, 15 employees left. 

Employee retention rate = ((300 – 15) / 300) x 100 = 95% employee retention.

Example 2

At the start of the COVID-19 pandemic, a live events company had to retrench over 2,000 employees. At the time, their headcount was 5,000. 

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Employee retention rate = ((5000 – 2000 ) / 5000 ) x 100 = 60% employee retention

Example 3

Over the last year, a multi-national bank decided to move towards a digital bank, and as a result, closed down all their bank branches. As a result, over 10,000 employees (bank tellers, receptionists, etc.) lost their jobs. They had an average headcount of 200,000. 

Employee retention rate = ((200 000 – 10 000) / 200 000 ) x 100 = 95% employee retention

Why is knowing your employee retention rate important?

There are a few reasons why knowing your employee retention rate is crucial:

  • Reducing company costsStudies show that replacing an employee costs 6 to 9 months’ salary on average. So understanding retention rates to reduce costs is vital. 
  • Increasing employee productivity – The longer someone stays with the organization, the more productive they become. This is because employees understand how to do things much faster, are able to make connections faster, and get things done better. High employee turnover rate also leads to disruption in continuity and, thus, productivity.
  • Improving employee engagement – Understanding your retention rate allows you to work on aspects crucial to employee engagement – such as building your organizational culture, improving employee morale, developing talent pipelines, and creating effective teams.
  • Addressing recruiting issues – Your retention rate will indicate your areas of focus as an organization. You’ll understand if you are at risk in certain roles and in certain departments. As a result, you’re able to work proactively to address any problems that might occur. 

More importantly, understanding employee retention rates helps you identify factors that are critical to any organization. Typically, employees that have critical, in-demand skills are constantly being recruited and are hard to come by. Often referred to as ‘high-potential employees’, these employees are crucial to any organization from technical skills and leadership perspectives.

As more data is collected, organizations are able to make strategic development initiatives. For example, take a look at this study Deloitte conducted in 2020 to understand what would encourage employees to look for new employment:

Employee Motivation to Leave Chart

Having such internal data combined with looking at retention rates will allow organizations to make smart strategic movies. For example, the above graph indicates employees are likely to move due to a lack of career progress. While creating vertical employment opportunities may not always be possible, organizations can look at creative solutions, such as creating horizontal moves, secondments, mentorship and coaching, and giving high-potential employees important projects to work on. Such initiatives can help fight the low retention rate.

The same study also asked what would make employees stay. These were the results:

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Employee Motivation to Stay Chart

It’s interesting to note that the factors that would make employees leave and what would make them stay are not the same. Therefore, it’s important to understand retention from several data points. As an example, and unsurprisingly, additional financial incentives came out as the top reason as to why employees would stay with their current employer. While it may not always be possible to always pay employees more, you can match this with relevant rewards data to understand if your compensation program is affecting your retention rates. 

How do you calculate employee retention rate?

Let’s have a look at employee retention rate calculation in more detail.

Step 1

Define the time period for your calculation. This requires you to understand the need for what you are trying to calculate. If, for example, you’re trying to calculate how many IT staff members have left your organization over the last five years, then given years would be the time period. Or, for example, you want to compare how your retention rate has been affected by the pandemic. You may want to do a comparative analysis of your retention rate then.

So, you might calculate the time period of the pandemic period ( e.g., 1 Jan 2020 – June 2021), which is 17 months. Then, to make a comparison, you might want to calculate another period of 17 months prior to the pandemic (e.g., 1 Jan 2018 – June 2019).

Step 2

Determine the number of employees on the first day of the time period. You can extract the data on the number of employees at the start of the time period from your employee database.

Step 3

Determine the number of employees on the last day of the given period. This is also data you can extract from your employee database. 

Step 4

Use the employee retention formula to calculate your employee retention rate. See above on how to use the formula. 

Step 5

Compare your retention rate to a previous period, industry standards, and/or different groups of employees

Let’s take a look at an example of how you might measure retention rate:

Date#of employees first day#of employees last dayDifference
1 Jan 2018 – June 201950041090
1 Jan 2020 – June 2021510250260

Calculation: 

1 Jan 2018 – June 2019 

Employee retention rate = ((500 – 90 ) / 500 ) x 100 = 82% employee retention

1 Jan 2020 – June 2021

Employee retention rate = ((510 – 260 ) / 510 ) x 100 = 49% employee retention

It’s clear that there is a substantially lower retention rate in the period of 1 Jan 2020 – June 2021. This might be due to external factors (such as COVID-19) or internal factors, such as employee job dissatisfaction, engagement rates, or other internal factors affecting employee retention.

What is a good employee retention rate? 

A retention rate of 99% may not always be good. Some turnover is helpful to allow for opportunities for growth within the organization and also opportunities to bring in external talent. You might also want to get rid of low-performing employees through voluntary turnover.

In general, your organization should be aiming for high functional retention and reasonable functional turnover.

Types of Employee Retention and Turnover

The average retention rate in the US is at 90% – however, it does vary by industry and sector. It’s important to calculate the retention rate per position or department, as some positions can be in more demand than others, depending on the labor market. For example, LinkedIn found that user experience designers had a higher turnover (23%) than most positions, so retaining employees with this skill would be an obvious priority.

How to improve employee retention rate

What can HR professionals do to increase employee retention at their organization?

1. Hire with retention in mind

This is especially important in high turnover industries like retail, hospitality, or contact centers. For example, provide your candidates with a realistic job preview and manage their expectations in the recruitment process so that they are aware of what the job and the company are like. Also, hire candidates that resonate with your company values. During the interview process, get a realistic understanding of the candidate’s expectations and intentions. You may also want to look at a candidate’s previous tenure with other employers.

Recruiting with retention in mind will help you ensure higher new hires’ job satisfaction, as well as a lower turnover rate in the first year.

2. Listen to and act on employee feedback

This is feedback gathered from engagement surveys, employee focus groups, but also from exit interviews. What can you do to make employees stay? It’s essential to act on engagement surveys, as a lack of action can cause employee resentment and dissatisfaction and also a generally negative attitude towards engagement surveys going forward.

You need to act on feedback on an organizational level (such as possibly investing in a new platform) but also on an individual level (such as sending employees on specific development programs or giving certain high-potential employees stretch projects). It might also be helpful to pay special attention to high-potential and critical skill employees because they are in high demand and low supply. You also need to keep tabs new employees to prevent early turnover.

3. Boost employee engagement

Engaged employees are likely to stay with the company longer. That’s why you need to put a solid employee engagement plan in place. Small things you can do to improve employee satisfaction and engagement including an increase in learning and growth opportunities, transparent promotion procedures, health insurance, parental leave policy, diversifying rewards, recognition, and perks, and providing meaningful work.

What’s more, encouraging a healthy work-life balance helps prevent employee burnout.

4. Work on your company culture

Organizational culture and values have an impact on employee retention. Always look for ways to make your organizational culture more inclusive and promote belonging. To improve company culture, always look at results from your engagement surveyed and be aware of the external environment you’re operating in. Company culture and work environment take a long time to develop and then transform, so it’s important to always be consistent and work on long-term plans. 

5. Promote professional and personal development

Employees who see that their employer invests in their training and development are more likely to stay with the organization. That’s why you should focus on developing your employees’ skills and competencies and chart clear career paths for them. Most of the time, organizations invest heavily in learning and development opportunities and resources; however, when reviewing the stats from learner management systems, usage can be quite low. Learning and development opportunities, therefore, need to be purposeful and just-in-time.

If an employee acquires a new skill through learning/development, it should impact their career and the opportunities they get to display this skill. Leaders in the organization are also responsible for creating a learning culture by showcasing their intent on developing themselves through various programs.

A final word

Calculating and improving your employee retention rate enables your organization to operate more effectively and ultimately positively impact its performance. It’s not one of those ‘nice to have’ stats, but a business imperative to remain competitive. 

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