Retention and turnover are two of the hottest topics in business right now.
You may have seen a lot written over the past year about “The Great Resignation.” This trend gained traction around April 2021, when 4 million people quit their jobs.
As Business Insider points out, “Workers seem to know that they can quit and get hired elsewhere — and that’s exactly what they’re doing.” Companies are continuing to experience record-high turnover, with 4.5 million Americans quitting their jobs in March 2022. This amounts to 3.0% of the workforce.
This has prompted leaders and human resources departments to focus on employee retention strategies, since the cost of turnover can have a tremendous impact on an organization’s finances.
In an effort to address what could be going wrong and causing the high level of turnover, organizations can gain insight into what’s going right by examining their employee retention rate.
Employee retention rate is defined as the percentage of employees that remain at an organization during a specific time period, whereas turnover measures how many employees leave during a certain time period. A high retention rate indicates a low turnover rate and a high degree of employee engagement.
In this article, we’ll define employee retention rate, learn how to calculate it, and discuss the role it plays in an organization’s long-term success.
Defining Employee Retention
Employee retention can best be defined as an organization’s ability to retain its employees and prevent turnover. Organizations are particularly interested in employee retention during times of low unemployment and increased competition for talent.
Employee engagement and employee experience are viewed as drivers of employee retention. This is because an employee’s feelings about their job, their feelings of belonging, and the sense that their voice is heard and valued all play a major role in employee retention.
Organizations are better able to retain talented employees when they provide a positive, supportive work environment.
There are many factors that play a role in retention, including compensation, job clarity, recognition, development opportunities, flexibility, autonomy, work-life balance, and meaningful work.
Strong leadership and a caring organizational culture that values employees strengthen engagement and, therefore, lead to higher levels of retention.
High retention rates can indicate a high level of engagement, superior performance, and better customer service.
Perhaps the most important aspect of retention for an organization’s financial success is that high rates of retention mean lower rates of turnover—which is so important because the cost of turnover can have a devastating effect on a company’s bottom line.
Because of this, companies typically want to avoid turnover as much as possible.
On top of the high cost of turnover, the time and effort managers have to spend on dealing with attrition takes time away from the aspects of their roles they should be focused on. When retention is high, this allows managers to spend less time and effort on the recruitment process.
In addition to the financial impact of high turnover, it can also hurt employee morale.
Employees can become overworked due to increased workloads and responsibilities until those vacated roles are filled. Even newly hired employees may experience low morale as they struggle to quickly learn their new job duties.
Because it is so much more efficient and cost-effective to retain skilled employees than to recruit, train, and onboard new employees, having a high retention rate is good for an organization’s overall performance. It indicates that a team is highly engaged, performing well, and helping profitability.
Employee retention programs play a vital role in not just retaining employees, but they also help companies attract talented and skilled employees. High retention can help an organization build a positive reputation with customers and potential job candidates.
Recruiting and retaining talented employees is essential for an organization’s financial sustainability and for maintaining high levels of productivity, engagement, job expertise, and customer satisfaction.
Employee retention affects an organization’s culture, performance, productivity, customer satisfaction, and profitability in mostly positive ways.
However, while the high costs of turnover make retention necessary for an organization’s success, retaining the wrong employees can lessen its chances for sustainable, long-term success and financial stability.
High rates of retention can have unforeseen drawbacks when disengaged employees make up a significant portion of the overall number of retained employees.
The main downside to high retention is that disengaged employees often remain in their jobs for long periods of time, hurting productivity, creating toxic work environments, and driving away good employees.
High retention can also make teams less adaptive, less innovative, and less inclusive over time.
Defining and Measuring Employee Retention Rate
Employee retention rate, also referred to as the “stability index,” measures the rate at which staff members stay with an organization.
To calculate an organization’s retention rate, divide the number of employees who have remained with the organization for a specific period of time by the initial number of employees for the same period of time, and multiply that number by 100.
(Remaining employees during a set timeframe / Initial number of employees during the same time frame) x 100 = Retention rate
Say, for example, you wanted to calculate your organization’s retention rate for the year 2021. If the organization had 500 employees on January 1st of that year and 482 employees on the last day of that year, December 31st, this is how you’d calculate the employee retention rate:
(482 divided by 500) x 100 = 96.4% yearly retention rate.
To calculate how many staff members remained employed for the whole time period being measured only include staff who were employed on the first and the last day of the time period.
Since the goal is to track the retention of employees who worked on the first day of the time period being measured, do not count employees hired within that measurement period. New positions added during the year should also not be counted.
When determining your organization’s employee retention rate, you can measure it on an annual, quarterly, or even monthly basis, but it is usually calculated on an annual basis.
Shorter or longer time periods can be measured, depending on what is being measured, such as the short-term result of retention strategies or when calculating the retention of employees who remained with an organization after a reduction in the past.
While employee retention rate can provide a good snapshot of the stability of the workforce, it is limited by the fact that it does not track the departures of employees who both joined and left during the time period being measured.
The Retention/Turnover Connection
In the SHRM/Globoforce survey Using Recognition and Other Workplace Efforts to Engage Employees, retention/turnover was found to be the top workforce management challenge cited by 47% of human resource professionals.
Turnover is the number of employees who leave a job, either voluntarily or involuntarily, during a certain period of time. According to Gallup, voluntary turnover costs organizations over a trillion dollars each year
Studies have indicated that every time an organization has to replace a salaried employee, it can cost them the equivalent of 6-9 months of salary.
For a real-world scenario, imagine replacing a manager making $60,000 a year. This can cost $30,000-$45,000 in recruiting, onboarding, and training costs.
Employee retention is closely tied to turnover because high levels of retention lead to lower rates of turnover (or vice versa). By reducing turnover, which is the number of employees who voluntarily or involuntarily leave a job during a specific period of time, you boost the employee retention rate.
While retention and turnover are closely linked because they are both tied to employee experience, engagement, and satisfaction, they aren’t measuring the same thing. One is the inverse of the other. Retention measures who stayed; turnover measures who didn’t.
Employee Turnover Rate Defined
Because employee retention rate alone is limited in what it tracks, calculating both the employee retention rate and employee turnover rate can be more useful.
Employee turnover rate is defined as the number of employee departures divided by the average number of employees during that same time period. This is done by dividing the ending number of employees by the initial number of employees, and multiplying by 100:
(number of separations during the specific time period / average number of employees during that same time period) x 100 = Employee turnover rate
The resulting number can then be divided into voluntary and involuntary separations to measure the percentage of employees who left by choice or were fired or laid off.
According to SHRM, “retention rate… measures the retention of particular employees over a specified period of time and complements the turnover rate metric, giving a more complete view of worker movement than calculating either metric alone.”
Retention and turnover metrics can provide insight into how well an organization is delivering on culture in terms of employee experience (is it a positive experience for employees?), employee engagement (are most employees engaged), and job satisfaction (are employees happy?).
Boosting Your Organization’s Employee Retention Rate
Since turnover can be so costly, retention efforts should always be a part of an organization’s strategy to engage the best talent and remain profitable.
A recent survey by Willis Towers Watson revealed that 53% of employees said they were “open to leaving their employer” and 44%, said they were actively looking for a new job or were planning to begin looking for a new one.
The pandemic has shifted employees’ expectations and needs, and they are seeking jobs that offer different and better benefits, whether monetary or less tangible, than previously.
Compensation and culture, as usual, are still impacting engagement and retention, but so many of these “Great Resignation” job seekers are looking for work situations where they can improve their mental and physical well-being and experience greater overall job satisfaction.
In a recent article by Business Leadership Today contributors Karin Hurt and David Dye, they suggest the key to retaining employees is investing in the development of human-centered leadership at all levels of the organization.
This means that, if you expect to retain talented employees, there needs to be leadership development that leads to a real culture change that then leads to employee buy-in and engagement.
Hurt and Dye recommend a three-step approach for developing this type of leadership in your organization:
- Identify and teach a consistent set of behaviors at every level.
- Accelerate performance and connection by helping leaders serve as coaches for their teams.
- Give your leaders practical ways to encourage the contribution of new ideas and processes.
Since leadership plays such a vital role in employee engagement, it’s important to have leadership in place who let employees know they’re valued, model core values and behaviors, provide coaching and mentoring opportunities, and foster healthy communication.
Organizational culture, along with leadership, has a huge impact on retention and turnover rates. Organizational culture sets the tone for an employee’s experience, which, in turn, affects employee engagement and retention.
Having a caring organizational culture in place that puts people over profits is key to maintaining high retention rates, even as we see the shifting needs of workers we’ve witnessed during the pandemic. Meeting those shifting needs helps retention.
Hiring for cultural fit is another good way to start your retention efforts early on in an employee’s experience with your organization. When you hire for cultural fit, it’s more likely those employees will stay.
Employee experience starts at recruitment and has a major impact on retention. Helping to ensure a positive employee experience for your organization’s employees should be part of any retention strategy.
Other ways to drive retention include offering development and growth opportunities, providing autonomy, being flexible where possible, utilizing a well-designed onboarding process, offering regular feedback and recognition of employee contributions, and offering programs that improve employee well-being.
Many workers are also placing more emphasis on purpose and want to work for organizations that have a mission they feel passionate about. To retain workers with this mindset and these job-seeking behaviors, leaders and recruiters should pay close attention to what workers are asking for.
The key to successful recruiting efforts and retention is to recognize these shifts in employee needs and expectations and determine where your strategies can be improved so that your organization is hiring and retaining top talent.
Matt Tenney has been working to help organizations develop leaders who improve employee engagement and performance since 2012. He is the author of three leadership books, including the groundbreaking, highly acclaimed book Inspire Greatness: How to Motivate Employees with a Simple, Repeatable, Scalable Process.
Matt’s ideas have been featured in major media outlets and his clients include numerous national associations and Fortune 500 companies.
He is often invited to deliver keynote speeches at conferences and leadership meetings, and is known for delivering valuable, actionable insights in a way that is memorable and deeply inspiring.