Your employee retention rate is a direct reflection of the health of your organization. Why? Because the longer an employee stays at your business, the better they will understand your objectives and the more committed they will be to their role. As a result, they will be more productive, motivated, and engaged.
Employee retention has never been so important, especially considering the recent effects of the Great Resignation on employer turnover. In fact, according to a recent federal JOLTS report, approximately 50.5 million people quit their jobs in 2022, representing the second consecutive year of record-breaking resignations. As a result, organizations in all manner of industries are now struggling to understand and improve their retention rates so that they can build a stronger and more committed workforce.
But what is retention rate and how do you calculate it?
Let’s find out in today’s complete retention rate guide for employers.
Table of Contents
Table of Contents
What is retention rate?
Retention rate and turnover are often used interchangeably but they are actually two opposing but equally important HR metrics.
So, what is retention rate exactly?
Whereas turnover is the rate at which employees leave your company, employee retention is the rate at which they stay. Staff turnover focuses on employee departures and divides the number of leavers by the average headcount at the start and end of a given period. It also takes into account new starters. Retention, in contrast, is only concerned with the proportion of employees who have remained at your company over a given period. In other words, the metric is a direct reflection of the length of time that employees remain at your organization after you hire them.
What does your employee retention rate reveal about your processes?
So, why is regularly tracking your employee retention rate so important?
For one thing, as with your attrition rate, your rate of employee retention gives you a much more complete evaluation of employee transition than simply counting heads that walk out of the door. You can use it to detect areas of improvement and improve the overall health of your company. This is especially true in terms of your employee experience and your ability to retain a stable workforce.
For example, if you have a low rate of retention, it could suggest that there is an issue in your hiring process, and you need to work on your selection, interviewing, and onboarding strategies. Or there might be an issue relating to a lack of training or development. It could even suggest that there is a cultural issue or that your managers are not providing a sufficient level of support and leadership, which is impacting employee morale and engagement.
By tracking your retention rate and implementing strategies to help you retain more employees for longer, you can boost employee productivity, build stronger and more cohesive teams, and save on hiring and training costs. And, instead of focusing your time, money, and effort on recruiting replacements for departing employees, you can shift your attention to more strategic matters that help your business grow.
Employee retention rate formula
Regularly calculating your employee retention rate can give you valuable insights into how effective your internal processes are, but it can also help you determine how you measure up compared to your competitors. If you have a lower rate than your industry average, then it suggests that something is not working well in your business. That’s why it’s so important to track this metric on a regular basis and determine benchmarks for continuous improvement.
There are a few formulas that you can use to calculate employee retention. However, the most commonly used formula is this one:
(# of employees at the end of a set time period / # of employees at the start of a set time period) x 100 = retention rate percentage
If you want to take things a step further, you could also calculate separate retention rates for voluntary and involuntary termination. This will help you understand how many employees are resigning by choice rather than being terminated.
How to calculate retention rate
Let’s break down this formula into steps to help you understand how to calculate retention rates in your business.
Determine your time period
The first step in calculating your retention rate is determining the time period that you want to measure. This will depend on how often you want to track this metric. You can choose to do it annually, every six months, or every quarter. However, if you use a larger timeframe then it can be harder to identify factors that might be impacting retention. This might include seasonal fluctuations, contract renewals, or performance reviews, for example. That’s why we recommend tracking it monthly instead. You get a clearer image of the impact of any changes in your business, and it makes it much easier to identify processes that you need to improve to increase retention.
Most importantly, whatever time period you use to measure your retention rate, make sure you stick to it for future calculations. This makes it much easier to quantify and compare your progress and detect patterns, nuances, and trends. Regular data can also serve as an early warning sign so that you can address potential issues before they become a bigger problem.
Calculate employee headcounts
Once you’ve determined your timeframe, there are two additional data points that you’ll need.
The first of these is the total number of employees that you had on the first day of your defined period. For instance, if you are calculating retention for the month of March, work out how many employees you had on March 1. Let’s say, for example, that you had 100 employees on this date. Your total headcount at the start of the period is therefore 100.
The second data point is the total number of employees that you had on the last day of your defined period. Don’t include any new starters that may have joined your business during this time. We’re only concerned with the employees who have been with you since the first day of your defined period. Following on from the above example, this would be how many employees you had on March 31. Let’s say, for example, that you had 98 employees on this date. Your total headcount at the end of the period is therefore 98.
Then simply subtract your end headcount from your start headcount to determine how many employees left during your defined period:
100 – 98 = 2 employees left your business
The next step is to use these figures to calculate your employee retention rate. For this, you simply have to divide the number of employees that stayed with your company through the entire time period (your total headcount at the end of the period) by the number of employees you started with on day one (your total headcount at the start of the period):
98 (end headcount) ÷ 100 (start headcount) = 0.98
This decimal represents your retention rate for the month of March.
Convert to a retention rate percentage
You might prefer to leave this rate as a decimal. However, most businesses choose to convert the decimal into a percentage as it’s easier to understand and compare over time in this way.
To convert this decimal into a percentage, you simply need to multiply it by 100:
0.98 * 100 = 98% employee retention during the month of March
Generally speaking, the higher this rate is, the better. We’ll explain a bit more about this below.
Once you understand how to calculate employee retention rates, you can start investigating processes in your business that might be impacting your rate.
Retention rate calculation examples
Let’s take a look at a few working examples to help you understand how these calculations work in practice.
Employee retention rate example 1
A high street supermarket had 20 employees at the start of Q1 2023 (January 1). On the last day of Q1 (March 31), 15 of the original 20 employees still worked at the supermarket. The supermarket hired 3 new replacement employees during this time. However, as this metric only focuses on retention, then we will ignore these 3.
From this information, we can determine that:
The headcount at the start of the defined period is 20
The retained headcount at the end of the defined period is 15
5 employees ended their employment contract (voluntary or involuntary termination)
The calculation would therefore be:
15 (end headcount) ÷ 20 (start headcount) = 0.75
0.75 * 100 = 75% employee retention rate percentage for Q1
Employee retention rate example 2
Let’s take a look at one more example.
A multinational marketing company had 480 employees at the start of 2022 (January 1). On the last day of 2022 (December 31), 220 of the original 480 employees still worked at the company. The company hired 23 new replacement employees during this time, which we will ignore.
From this information, we can determine that:
The headcount at the start of the defined period is 480
The retained headcount at the end of the defined period is 220
260 employees ended their employment contract (voluntary or involuntary termination)
The calculation would therefore be:
220 (end headcount) ÷ 480 (start headcount) = 0.46
0.46 * 100 = 46% employee retention rate percentage for 2022
What is a good employee retention rate?
As a general rule, an employee retention rate of 90% or higher is considered to be good. This, historically, has been the average rate for US companies. However, this average has dropped somewhat in recent years, reflecting the high number of voluntary terminations that many US businesses have seen since the pandemic and The Great Resignation. In fact, according to the U.S. Bureau of Labor Statistics, the average retention rate in 2021 was around 52.8%.
You also need to account for your industry average as this can vary. For example, retail, service, and restaurant industries tend to have much lower retention rates because of their high turnovers and seasonal employment fluctuations. Government, finance, insurance, and education industries, in contrast, tend to have a much higher employee retention rate. The best way to determine if your retention rate is good or bad is to research average employee retention rates for your industry.
It’s also worth noting that an extremely high turnover rate (99%, for example) is not necessarily a good thing either. This is because it’s good for businesses to have a degree of turnover as this facilitates succession planning; employees are able to develop and rise through the ranks when someone leaves. It’s also beneficial to occasionally hire externally as this allows new energy to enter the business which can fuel creativity and innovation. The key is finding the right balance for your organization. You want to retain as many employees as possible, without reaching a creative stalemate.
How to improve your employee retention rate
There are many reasons why your retention rate might be low.
Causes of high turnover include:
- Management issues
- Ineffective hiring processes
- Low salaries
- A lack of employee development, growth opportunities, and succession planning
- A negative workplace culture and environment
Once you’ve calculated your employee retention rate, the next step is identifying potential causes and implementing employee retention strategies to address them. The right strategies can help you improve your internal processes, enhance your employee experience, and retain more staff. As a result, you will reduce overall turnover costs, increase employee productivity, and improve employee engagement and organizational commitment.
Here are a few strategies to get you started.
Hire the right people
Employee retention starts with who you hire. The better you are at hiring the right people for each role and for your organization as a whole, the less likely that they will leave your business.
Here are a few tips to help you improve your hiring process:
- Create detailed job descriptions so that employees understand the exact roles and responsibilities of a position.
- Conduct thorough candidate screenings, including references and background checks.
- Make sure candidates have the required skills and qualifications before moving them to the interview stage of the hiring funnel.
- When you conduct interviews, get to know candidates so that you can get a sense of whether they’re the right fit for the role, your organization, and the team they’ll be working with.
- Don’t forget to consider your company culture too. Aside from skills and experience, candidates need to be a good cultural fit. They should align with your organization’s values and have the right personality to thrive in your working environment.
The better you are at doing all the above, the more likely you will retain new starters, reduce your average cost per hire, and increase your employee retention rate.
Offer competitive compensation and benefits packages
Your compensation and benefits packages will also have a big impact on your retention levels. If you’re not paying employees fairly, then it won’t be long before they start looking for better opportunities elsewhere. Keep up to date with average salaries for your industry and for the various roles within your organization to ensure that you are offering competitive salaries. Sites like PayScale can be a great tool for this.
The same goes for any fringe benefits that you might offer. Are there any low-cost perks that you could offer to enhance your compensation packages? You’d be surprised how far benefits like flexible PTO policies or even the odd office party can go in improving workplace morale and employee satisfaction.
Support employee development
Employees need to feel that there is room for growth and development in the organizations where they work. In fact, LinkedIn’s 2018 Workplace Learning Report found that 94% of employees would stay at a company longer if employers invested in their careers.
If you don’t already have one, implement a learning and development program and get everyone involved. Speak to employees to find out what their goals and aspirations are and offer them support to help them get there. If an employee has a clear career path in your business, they will be far less likely to look to your competitors for growth opportunities. This is especially true if you are also providing them with educational opportunities to help them develop.
Improve your workplace culture and environment
One of the best ways to retain top talent and increase your employee retention rate is to create a culture and environment where employees feel valued, appreciated, and empowered. The more comfortable and at ease your employees feel, the happier they will be working for you. A toxic working environment, in contrast, is likely to result in high turnover rates and very low retention.
Employees need to feel that their work is important and that they are directly contributing to the success of your organization. Make sure your employees understand your purpose and objectives. Focus on building a values-based culture and getting your employees on board with your corporate values and mission. If employees feel that they matter – that they belong – then they will have a much stronger sense of organizational commitment.
Collect regular employee feedback
Finally, make sure you collect regular employee feedback to keep track of how your employees feel and how satisfied they are with their roles and your organization as a whole. Employee satisfaction surveys can be a great tool for this. They don’t have to be long – a simple employee net promoter score survey can be a great way to keep track of employee satisfaction levels. You can then use the feedback you collect to improve your employee experience and boost your employee retention rate.
Visualize key HR metrics in one, centralized platform
The easiest way to keep on top of your HR metrics is by using an HRIS to automate and streamline your data collection processes. That way, you will have easy access to real-time insights whenever you need them. Aside from employee retention, a comprehensive HR metrics dashboard can also help you keep track of other KPIs that might impact retention, such as employee performance metrics, diversity metrics, turnover, employee satisfaction, organizational growth rates, and attrition rates. You can then use all this data to predict future behaviors, measure the impact of any changes you make to your HR processes, and make informed strategic decisions about your business.
Factorial’s comprehensive HRIS gives you easy access to all this data. What’s more, our solution automatically generates these metrics from the information already introduced by you and your employees. And, best of all, you can visualize your KPIs straight from your own HR metrics dashboard. All this makes it much easier to stay on top of your employee retention rate so that you can continuously improve your employee experience and retain the talent you need to grow your business.