Employee retention rate: Calculation, tips & best practices

Your employee retention rate is adirect 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 moreproductive, motivated, and engaged.

Employee retention hasnever been so important, especially considering the recent effects of theGreat Resignationon employer turnover. In fact, according to a recentfederal JOLTS report, approximately50.5 million people quit their jobs in 2022, representing thesecond consecutive year of record-breaking resignations. As a result, organizations in all manner of industries are now struggling tounderstand and improve their retention ratesso that they can build astronger and more committed workforce.  

But what is retention rate and how do you calculate it?

Let’s find out in today’scomplete retention rate guide for employers.

What is retention rate? 

Retention rate and turnover are often used interchangeably but they are actually two opposing but equally importantHR metrics. 

So, what is retention rate exactly?

Whereasturnover 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 adirect 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 yourattrition rate, your rate of employee retention gives you a much morecomplete evaluation of employee transitionthan simply counting heads that walk out of the door. You can use it todetect areas of improvement and improve the overall health of your company. This is especially true in terms of youremployee experienceand your ability toretain a stable workforce. 

For example, if you have a low rate of retention, it could suggest that there is anissue in your hiring process, and you need to work on yourselection, interviewing, and onboarding strategies. Or there might be an issue relating to alack of training or development. It could even suggest that there is acultural issueor that yourmanagers 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 canboost employee productivity, buildstronger and more cohesive teams, andsave 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 tomore strategic matters that help your business grow.

Employee retention rate formula 

Regularly calculating your employee retention rate can give youvaluable insights into how effective your internal processes are, but it can also help you determinehow 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 totrack 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 calculateseparate retention rates for voluntary andinvoluntary termination. This will help you understand how many employees areresigning by choice rather than being terminated.

How to calculate retention rate 

Let’s break down this formula into steps to help you understandhow to calculate retention rates in your business.

Determine your time period 

The first step in calculating your retention rate is determiningthe time period that you want to measure. This will depend on how often you want to track this metric. You can choose to do itannually, 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 includeseasonal fluctuations, contract renewals, or performance reviews, for example. That’s whywe recommend tracking it monthlyinstead. You get a clearer image of theimpact of any changes in your business, and it makes it much easier toidentify 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 toquantify and compare your progress and detect patterns, nuances, and trends. Regular data can also serve as anearly warning signso 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 thetotal 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 onMarch 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 thetotal 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 onMarch 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 simplysubtract your end headcount from your start headcountto determinehow many employees left during your defined period:

100 – 98 = 2 employees left your business

Calculate retention 

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 toconvert the decimal into a percentageas 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 fewworking examplesto help you understandhow 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

Then:

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

Then:

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 of90% or higheris considered to be good. This, historically, has been the average rate for US companies. However, this average hasdropped somewhat in recent years, reflecting the high number of voluntary terminations that many US businesses have seen since the pandemic andThe 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 industriestend 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 toresearch 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 becauseit’s good for businesses to have a degree of turnoveras this facilitates succession planning; employees are able todevelop and rise through the rankswhen someone leaves. It’s also beneficial to occasionally hire externally as this allowsnew energy to enter the businesswhich can fuelcreativity 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 turnoverinclude:

• 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 isidentifying potential causes and implementingemployee retention strategiesto address them. The right strategies can help youimprove 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:

• Createdetailed job descriptionsso that employees understand the exact roles and responsibilities of a position.
• Conductthorough candidate screenings, including references and background checks.
• Make sure candidates have therequired skills and qualificationsbefore 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 theright 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 bea 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 averagecost 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 withaverage salaries for your industry and for the various roles within your organizationto ensure that you are offering competitive salaries. Sites likePayScalecan be a great tool for this. 

The same goes for anyfringe benefitsthat you might offer. Are there anylow-cost perksthat you could offer to enhance your compensation packages? You’d be surprised how far benefits likeflexible PTO policiesor even the oddoffice partycan go in improving workplace morale andemployee satisfaction.

Support employee development

Employees need to feel that there is room forgrowth and developmentin the organizations where they work. In fact, LinkedIn’s 2018 Workplace Learning Report found that94% of employees would stay at a company longer if employers invested in their careers. 

If you don’t already have one, implement alearning and development programand get everyone involved. Speak to employees to find out what theirgoals and aspirationsare and offer them support to help them get there. If an employee has aclear 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 witheducational 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 tocreate 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 thattheir work is importantand that they aredirectly contributing to the success of your organization. Make sure your employees understand yourpurpose and objectives. Focus on building avalues-based cultureandgetting 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 oforganizational commitment.

Collect regular employee feedback

Finally, make sure youcollect regular employee feedbackto keep track of how your employees feel and how satisfied they are with their roles and your organization as a whole.Employee satisfaction surveyscan be a great tool for this. They don’t have to be long – a simpleemployee net promoter scoresurvey can be a great way to keep track of employee satisfaction levels. You can thenuse 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 byusing an HRIS to automate and streamline your data collection processes. That way, you will have easy access toreal-time insightswhenever you need them. Aside from employee retention, a comprehensive HR metrics dashboard can also help you keep track ofother KPIs that might impact retention, such asemployee performance metrics,diversity metrics, turnover, employee satisfaction, organizational growth rates, and attrition rates. You can then use all this data topredict 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 solutionautomatically 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 ownHR metrics dashboard. All this makes it much easier to stay on top of your employee retention rate so that you cancontinuously improve your employee experience and retain the talent you need to grow your business.