Employee retention rate is a crucial measure of overall employee satisfaction and engagement. This article will tell you how to calculate your employee retention rate and what steps you can take to improve it.
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Good employees are the backbone of your company’s success. Employees who have been with you the longest often have the most knowledge and highest productivity rates. Yet, when they leave, training new employees to do their job is expensive and time-consuming.
Key Takeaways:
- Employee retention is crucial for business success.
- Measuring employee retention and turnover rates is essential for tracking employee engagement and satisfaction.
- Low retention rates have hidden costs that impact productivity and morale.
- Regular measurement of retention rates is important to identify issues and make meaningful changes to retain top talent.
In today’s competitive labor market, many businesses struggle to fill open roles left by departing employees. A high turnover rate is expensive — resulting in lost productivity, increased recruiting costs, and decreased morale. Tracking your employee turnover rate can give you a powerful tool to make the necessary changes to retain top talent and keep your business running smoothly.
What Is Retention Rate, and Why Does It Matter?
The employee retention rate refers to the number of employees who stay with your company over a specified period of time. It is a significant key performance indicator (KPI) of the employee experience you’re providing. When used along with your turnover rate, the employee retention rate can help give you a high-level overview of employee engagement and satisfaction.
When your employees are happy and engaged, it affects every aspect of your business operations. The benefits of employee engagement include:
- An 81 percent decrease in absenteeism
- A 28 percent decrease in theft
- An 18 percent increase in sales
- A 23 percent increase in profitability
- A 10 percent increase in customer engagement and loyalty
- An 18 to 43 percent decrease in employee turnover
Although your employee retention rate isn’t a direct measure of employee engagement, it’s an important barometer for measuring the atmosphere you’re creating for your employees.
💡Pro Tip:
You might also want to read about 6 Best Employee Retention Software Tools.
How to Calculate Retention Rate
It’s fairly simple to calculate the retention rate.
- Decide on a certain time period for which you want to calculate the retention rate
- Take the number of employees at the beginning of the period as well as the number of employees remaining at the end. Don’t include employees hired during this time.
- Divide the number of employees remaining at the end of the period by the number of employees you started with and multiply it by 100.
The simple formula for calculating the retention rate is:
# of individual employees who remained employed for entire measurement period /# of employees at start of measurement period) x 100
For example, using this retention rate formula, if you had 100 employees on June 1st and 80 employees on June 30th, you’d divide 80 by 100 (0.8) and multiply it by 100. In this case, your employee retention rate for June would be 80 percent.
Cost of Employee Turnover
Employee turnover rate
Total cost to onboard new employee
Total cost of lost productivity
How often should you calculate retention rate?
Although many organizations measure employee engagement annually, that’s often not enough to identify issues and make meaningful changes.
Just like a leaky water pipe can cause significant damage over time, changes in company culture and policies can negatively impact employee satisfaction and ultimately, your productivity, profitability, and customer loyalty.
By tracking your employee retention rate monthly, you can quickly identify issues and make adjustments before they become major problems. This will not only provide you with valuable insights on your investment in improving employee satisfaction but also help you stay ahead of the competition.
Measuring employee retention regularly provides early warning signs, reveals hidden trends, and gives you feedback on your investments in improving employee satisfaction.
Retention Rate Vs. Turnover Rate
Although retention rates and turnover rates are related, they’re not the same. The employee retention rate measures how many employees are staying with your company. On the other hand, the employee turnover rate measures how many employees are leaving your company. Measuring both will give you a more complete picture than either one alone.
There is currently no standardized way to calculate the turnover rate, and a quick Google search will show you several different approaches. One approach, in line with the description given in ISO 30414, a 2018 norm for Human Capital Reporting, goes as follows:
Divide the number of employees who left your company in a given period by the number of employees at the beginning of that period and multiply times 100.
For example, if 20 people quit during a particular month, and you started the month with 100 employees, you’d divide 20 by 100 (0.2) and multiply that by 100 for a turnover rate of 20 percent.
# of individual employees who left your company in the entire measurement period /# of employees at start of measurement period) x 100
The High Cost of Low Employee Retention
Voluntary turnover costs US companies a trillion dollars yearly. While that number is hard to comprehend, replacing an employee who leaves costs between one-half and two times their yearly salary. And that’s if you can replace them. In today’s tight labor market, many businesses are losing money because they can’t find workers to fill open positions.
Although the immediate financial cost of replacing valuable employees is obvious, there are also many hidden costs associated with a low employee retention rate, including:
Decreased Productivity
It can take one to two years for a new hire to reach the productivity levels of existing employees. This decrease in productivity will negatively affect your bottom line for a long time.
Lost Knowledge
When good employees leave, they take their knowledge with them. For instance, you may not find out until weeks after an employee leaves that they were the only one who knew how a particular program worked. Even further, top-performing employees have often developed strategies for sales or customer service that drive their results. This information could have been shared with other employees had they stayed.
Lack of Innovation
Because of their deep knowledge about your industry and particular company, employees who have been with you for a while are often the best source for innovative ideas and products. Without their creativity and problem-solving abilities, you may miss out on substantial growth opportunities.
Lower Morale
A high turnover rate lowers the morale of the employees who stay behind. They’re left to deal with the increased workload, chaotic environment, and disgruntled existing customers. This negative environment bleeds into all areas of business operations and is one of the reasons your employee retention rate affects your customer retention rate.
Improving Your Employee Retention Rate
Once you know your employee retention rate, you can focus on improving it. The upheaval of the pandemic created a dramatic shift in work culture. Many people moved to remote work, took on new responsibilities, and faced unprecedented challenges. These factors led to a widespread reevaluation of priorities.
Workers are looking for jobs that offer more flexibility and a greater work-life balance. There’s an increased recognition of the importance of mental health, and people are willing to walk away from work environments that aren’t positive and supportive. These factors will continue to reshape the business landscape and labor market for years to come.
As an employer, you’ll need to create an employee retention strategy that values your workforce if you want to keep your top talent. You can do this in many ways, including:
Offer Competitive Compensation and Benefits
While it’s true that pay is not the sole factor people consider when deciding whether to take or leave a job, it ranks pretty highly. If you want to attract and keep skilled workers, you must pay them well and provide good benefits. Although perks such as gym memberships and lunchtime food trucks are nice, it’s the basic benefits of health insurance, retirement savings, and time off that are critical considerations.
Including benefits and salary ranges in your job listing will help you attract more qualified candidates, while not including compensation can be a red flag. In this era of big data, standard pay rates are only a click away, so there’s no upside to omitting them. If you do, potential applicants will either do their own research or cross you off their list.
You should also evaluate whether you’re paying your existing employees enough. Unlike in decades past, when employees expected to work for the same company throughout their careers, today’s workers know that one of the most effective ways to get a pay raise is to change jobs. The majority of people who left a job in 2021 — 63 percent — cite low pay as the main reason they quit.
Provide Opportunities for Advancement
Employees who are motivated and ambitious want to advance in their careers. These are the types of workers you want. They show up early and go the extra mile. You might want to keep them in their current position because they’re producing great work, but they won’t be satisfied with that for long.
Let your employees know you care about their careers by implementing a talent development program. When you invest in your employees by providing opportunities for them to learn new skills, make more money, and take on advanced roles, they’re more likely to stay with your company and align with your values.
In addition to improving your employee retention rate, a talent development program can help you fill roles that might otherwise sit empty. Due to the rapid pace of digital transformation and technological innovation, skills that were highly sought after just a few years ago are now obsolete.
Gartner Research found that 58 percent of employees will need new skills to do their jobs effectively. If you don’t offer training programs for upskilling and reskilling, you’ll soon end up with a workforce filled with unsatisfied employees with obsolete skills.
Offer Flexible Working Conditions
When offices had to shut down due to COVID-19, businesses adjusted by creating ways for their employees to work from home. While many workers — particularly parents of young children who couldn’t attend school — were stressed from balancing work and family obligations, they also valued the increased flexibility.
Employers noticed and responded by offering hybrid working options. A McKinsey & Company survey showed that 58 percent of employees could opt to work from home at least one day of the week, while 35 percent have the option of working from home every day. And when offered the chance for flexible working conditions, 87 percent of people take it.
Although widespread work flexibility was born out of a desperate reaction to a global crisis, now that employees have experienced it, most of them want to keep it. Offering your employees flexibility in where and when they work will give you a competitive advantage in attracting and retaining top-notch talent.
Flexibility doesn’t have to be an all-or-nothing proposition. If you value having employees on-site, you can let them choose to work from home some days and come into the office on others. Depending on your business needs, you may designate certain hours as mandatory and allow employees the freedom to work other hours when it suits them.
Solicit Employee Feedback
Before implementing policies to improve employee satisfaction, take the time to listen to your employees. Finding out what your employees want from their jobs is the best way to provide a positive experience. However, to get their honest opinion, you have to create a feedback-positive culture.
Let your employees know that you value their feedback, whether positive or negative. Your leaders and managers should communicate to employees that your company trusts them and wants to know what they think to continually improve the company. They’ll value that their opinion matters to your company.
Provide multiple pathways for your employees to give their opinions. Some of the most effective methods include:
Regular One-on-One Meetings
When your managers meet regularly with their direct reports, they can give and receive feedback that benefits both parties. Establishing a personal connection will facilitate open and honest communication. Employees can raise concerns as they arise, and managers can handle small issues before they become large ones. One-on-one meetings also offer a great opportunity to recognize your employees’ big and little wins.
Surveys
Sending out company-wide employee retention surveys periodically can give you a high-level overview of employee satisfaction. Employee engagement surveys give your employees a voice to express their thoughts on company culture, work environment, and management performance.
Design your surveys to address core concepts relating to employee engagement. Your survey won’t be useful if you solicit opinions on topics that aren’t relevant. The most significant questions will ask about:
- Empowerment and autonomy
- Career planning and progression
- Leadership performance
- Communication and collaboration
- Recognition and rewards
- Resource allotment
- Pay and benefits
- Work-life balance
Your surveys should provide avenues for anonymous feedback. No matter how positive your culture is, some employees won’t feel comfortable providing negative feedback face-to-face or in surveys that identify them.
Once you get results from your survey, you can extract insights from the data and use it to drive changes. You can also follow survey trends over time to measure the effectiveness of these changes.
Read our in-depth review of the best employee survey tools to track employee satisfaction.
Conduct Exit Interviews
When an employee leaves, it can be a tense and awkward situation for everyone. However, conducting an exit interview lets you learn from the situation and make improvements for your remaining employees.
The exit interview should be relaxed and pleasant. No one likes being put on the spot or interrogated by HR. Taking the departing employee out for coffee may make them feel more comfortable.
It’s also a good idea for someone other than their direct manager to conduct the interview. You should aim to listen, not defend your company. If they were a valuable employee, a well-executed exit interview can leave the door open for them to return.
Act on the Results
There’s no point in soliciting employee feedback if you aren’t going to act on it. You’ll actually end up harming your integrity in the eyes of your employees if you’re made aware of a problem and don’t do anything about it. That sends the message that you don’t value your staff.
Managers should personally follow up on employee concerns expressed during one-on-one meetings. During the next meeting, addressing feedback should be the first item on the agenda.
For company-wide surveys, it’s a good idea to share your results and let employees know what changes are being implemented as a result. This will not only lead to a more positive work environment but will also make employees more willing to share their feelings in the future.
Next Steps in Improving Your Staff Retention Rate
The good news is that improving your employee retention rate is a manageable obstacle. If you want your employees to stay with you, focus on creating a positive, rewarding work environment. You’ve undoubtedly invested a tremendous amount of time and money into understanding your ideal customer and meeting their needs. Yet, your employee retention strategy deserves equal consideration.
Although your employees aren’t your customers, when you understand what they want and need and what factors drive optimal performance, you can provide those conditions and motivate them to stay.
And building a better workplace doesn’t just benefit your employees, it also saves you money and fosters innovation and creativity in your business. It’s a win-win situation for everyone involved.