Employee retention rate is a crucial HR metric that measures how effectively companies retain their staff over time. This article breaks down the formula, its importance, and strategies to improve retention and reduce costly turnover.
By Brad Nakase, Attorney
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A workplace revolution is currently underway. There is continual pressure and change to change both the nature and location of our work. As a result, businesses are reevaluating how they attract and retain top personnel in order to stay up with the rapid speed of change. This means that the employee retention rate is a key HR indicator for understanding a company’s capacity to hold on to its staff.
Employers naturally aim to retain their most valuable employees. Failing to do so has negative effects on both workplace productivity and the company’s bottom line. Having people come and go is a given, therefore any company will have some turnover. Reasons for this could include an employee’s retirement, a need to move, or an inability to continue working. And then, naturally, workers do occasionally look for greener pastures.
The ongoing war for talent makes it difficult for organizations to attract and retain highly qualified individuals. For that reason, it is imperative that any company make retaining them a top priority. Who or what determines the staff retention rate, and how? Alright, let us plunge right in.
The rate of employee retention indicates how well a company is able to hold on to its current staff. This metric displays the percentage of an organization’s workforce that remains with the company over a certain time frame as a percentage of the overall workforce.
The formula for calculating employee retention is shown below:
Employee retention rate = Total number of workers – Total number of workers who left / Total number of workers x 100
Here are some simple examples that demonstrate the formula in action:
Example 1
One digital marketing agency employs three hundred people. Fifteen workers departed a year ago.
The staff retention rate is 95%, which is calculated as ((300 – 15) / 300) x 100.
Example 2
A live events firm laid off more than 2,000 workers when the COVID-19 pandemic broke out. They had 5,000 employees at the time.
Using the formula ((5000 – 2000) / 5000) x 100, we get an employee retention rate of 60%.
Example 3
A multinational bank has shuttered all of their branches over the past year in an effort to transition to an online-only model. This led to the layoff of more than 10,000 people who worked as bank tellers, receptionists, etc. On average, they employed 200,000 people.
The staff retention rate is 95%, calculated as follows: (200,000 – 10,000) / 200,000 x 100.
What are the benefits of being aware of your employee retention rate?
It is essential to know your employee retention rate for several reasons:
Even more crucially, knowing the staff retention rate allows you to pinpoint elements that are essential for every business. Critically skilled workers are in high demand but can be difficult to find because of the ongoing recruiting efforts. From a leadership and technical standpoint, these individuals—sometimes called “high-potential employees”—are vital to any company.
Organizations can launch strategic development efforts with the help of more data. By combining this internal data with retention rates, companies will be able to make wise strategic decisions. A lack of opportunities for advancement is one reason why employees may look for employment elsewhere. If companies are having trouble finding ways to promote from within, they should consider other innovative alternatives, such as allowing for secondments or horizontal movements, providing mentorship and coaching, or assigning significant projects to individuals with high potential. Such programs can be useful in the battle against a poor retention rate.
It’s worth noting that there is a difference between the things that would encourage employees to stay and those that would make them depart. Consequently, knowing retention from many data sources is key. For instance, and not unexpectedly, financial incentives ranked highest among the reasons employees would remain with their present job. Paying employees more isn’t always an option, but you may use this information in conjunction with rewards data to see if your compensation program is having an effect on retention rates.
Let’s take a closer look at how to calculate the employee retention rate.
Step 1
Set the duration of your calculation. You have to understand the necessity of the calculation you are attempting to perform. For instance, if you want to know how many IT employees have departed your company in the past five years, you would use the supplied years as the time frame. Alternately, you may be interested in contrasting the impact of the pandemic on your retention rate. At that point, it could be wise to compare your retention rate to others.
For this reason, you may determine the 17-month pandemic period (for instance, from January 1, 2020, to June 20, 2021). If you wish to create a comparison, you might also compute a period that was seventeen months before the pandemic (for example, from January 1, 2018, to June 1, 2019).
Step 2
On the first day of the time period, find out how many employees there are. From your personnel database, you can retrieve the information regarding the initial headcount for the specified time frame.
Step 3
On the last day of the specified period, find out how many employees there were. You can also get this information from your personnel database.
Step 4
How can you determine your employee retention rate? By using the employee retention formula. The formula’s application is detailed above.
Step 5
Examine your employee retention rate in relation to prior periods, benchmarks in the industry, and/or other employee groupings.
A 99% retention rate isn’t necessarily excellent. A certain amount of employee turnover is healthy since it opens the door for new hires and promotions from inside the company. Also, voluntary turnover is an option to consider when dealing with underachievers in the workforce.
High functional retention and acceptable functional turnover should be the overarching goals of your business.
Although it varies by business and sector, the average retention rate in the US is 90%. Because different jobs could have different demand in a given labor market, it’s useful to break down the retention rate by department or job title. Keeping personnel with this talent would undoubtedly be a priority, as LinkedIn discovered that user experience designers had a higher turnover rate (23% compared to most positions).
How can human resources experts help their company retain more of its employees?
Industries with a high rate of employee turnover, such as retail, hospitality, and contact centers, place a premium on this. In order to prepare candidates for the job and the organization, it is important to provide them an accurate picture of what it’s like to work there and to manage their expectations during the hiring process. Equally important is finding employees whose beliefs align with your own. Learn the candidate’s goals and expectations in a practical way during the interview. A candidate’s length of service with prior employers is another factor to consider.
Hiring with an eye toward retention can help you keep more of your new staff and reduce attrition in the first year on the job.
This data comes from a variety of sources, including exit interviews, focus groups, and engagement surveys. Do you know what to do to keep your employees? It’s essential to respond to engagement surveys, as doing nothing might lead to discontent among employees and a bad outlook on such polls in the future.
Both the company and individuals must take action in response to feedback. This includes considering organizational level actions, like investing in a new platform, and individual level actions, such as sending employees on development programs or assigning high-potential employees stretch projects. Due to their high demand and low supply, high-potential and essential skill employees could also benefit from extra attention. To avoid early turnover, it is important to monitor new hires as well.
Engaged workers tend to remain with the same employer for a longer period of time. That’s why it’s crucial to establish a robust strategy for engaging your employees. A few simple measures can go a long way toward making workers happy and invested in their jobs: more chances for professional development, open communication about promotions, health insurance, a policy for paid maternity leave, a variety of awards, recognition, and benefits, and challenging and rewarding work.
Additionally, promoting a good work-life balance aids in avoiding burnout among employees.
Employees are more likely to stay with a company whose values and culture they identify with. You should always be on the lookout for methods to foster a more welcoming and inclusive culture in your organization. Always keep an eye on the external environment you’re operating in and review results from your engagement surveys to improve business culture. Consistency and long-term planning are critical during the development and transformation of company culture and the work environment.
Workers are more inclined to remain put if they perceive that their company cares about their professional growth and development. That’s why it’s so important to invest in your employees’ professional growth by providing them with opportunities to learn new skills and advance in their current roles. Organizations often pour a lot of money into training and education, but when you look at the numbers from LMSs, you’ll see that not many people really use them. Opportunities for learning and growth must, therefore, be timely and well-targeted.
It is only fair that a worker’s career and the chances presented to them reflect the value of any new skills they may have gained from training and education. It is the responsibility of the organization’s leaders to foster a culture of learning by actively seeking out opportunities for personal development.
Your company may run more efficiently and boost its performance by calculating and boosting its employee retention rate. Instead of being a “nice to have,” this statistic is vital for the company’s survival in the market.
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