Matt Tenney, Contributor
Workers have been taking advantage of a very competitive job market. They know they can quit and get other jobs, often with better compensation, more flexibility, and opportunities for advancement.
The Great Resignation gained traction in April 2021. During that month, 4 million people quit their jobs. A year later, in March 2022, 4.5 million Americans, around 3% of the workforce, quit their jobs.
Companies in many sectors are continuing to experience record-high turnover and are scrambling for ways to stop bleeding workers. While the rate at which workers are quitting appears to be slowing down, The Great Resignation has, perhaps permanently, changed the landscape of employee retention.
And it should change how we go about the practice of retaining employees.
There are a variety of practices that can help reduce turnover, but any organization looking to energize their retention strategies should gauge the success of their current strategies to determine how big the problem is, where they may be going wrong, and where they need to make improvements.
One of the best ways for an organization to get a handle on how well their retention strategies are working is to calculate its employee retention rate.
A good employee retention rate is an indication that an organization has a strong retention strategy and is experiencing low turnover. A retention rate of 90% or higher is considered to be a good retention rate, meaning organizations should strive for an average employee turnover rate of 10% or less.
In this article, we’ll define employee retention rate, learn how to calculate it, and discuss ways to achieve a good employee retention rate in your organization.
Employee Retention and Its Benefits
Employee retention refers to an organization’s ability to retain its employees and prevent them from leaving. When employees leave, either voluntarily or involuntarily, it is called turnover.
High retention rates can indicate a high level of engagement, superior performance, and better customer service and customer retention.
It can also mean a business is more profitable because the cost of turnover can have a devastating effect on a company’s bottom line. It is much more efficient and cost-effective to retain skilled employees than to recruit, train, and onboard new employees.
Employee retention programs play a vital role in not just retaining employees, but they also help companies recruit talented and skilled employees. Having a high retention rate can help an organization build a positive reputation with potential job candidates and can make employees more likely to recommend the organization to others.
Retention vs. Turnover
A recent survey found that retention/turnover was the top workforce management challenge cited by 47% of human resource professionals. And it 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. By reducing turnover, you increase the employee retention rate.
What Is Employee Retention Rate?
Employee retention rate measures the rate at which employees stay with an organization. It can be measured 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 or some other significant change.
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 1,000 employees on January 1st of that year and 950 employees on the last day of that year, December 31st, this is how you’d calculate the employee retention rate:
(950 / 1,000) x 100 = 95% 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 set time period.
Employee retention rate measures the retention of employees who worked on the first day of the time period being measured, so avoid counting employees hired within that measurement period or new positions added during the measurement period.
This measurement can provide useful insight into how successful an organization’s retention strategies have been, but it is limited by the fact that it does not track the departures of staff who both joined and left during the measurement period.
What Is Employee Turnover Rate
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.
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.”
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
Say, for example, you wanted to calculate your organization’s turnover rate for 2021. If the organization had 50 separations during the measured time period, and the average number of employees during that same time period was 1,000, the organization would have an employee turnover rate of 5%:
(50 / 1,000) x 100 = 5% turnover rate
The resulting number can then be divided into voluntary and involuntary separations to measure the percentage of employees who left by choice, were fired, or laid off.
What Is a Good Retention Rate?
A good percentage for employee retention is 90% or more. That means keeping the turnover rate to 10% or less.
But, just as we haven’t seen significant improvements in employee engagement (less than one-third of employees are engaged—about the same level as a decade ago), we haven’t made real strides with retention.
While the individual rate varies by industry or sector, the average retention rate was around 52.8% in 2021. That’s bad.
This is proof that there’s a lot of room for improvement. But it’s not just about retaining employees; it’s about retaining the right employees.
Obviously organizations want to be in the 90% or more retention zone, but they also want to pay attention to the potential downsides to high retention. This is because not all retention is good.
While the high cost of turnover drives efforts to improve retention, retaining the wrong employees can also threaten the long-term financial success of an organization.
Ideally, companies want to retain engaged employees who are invested in their jobs and always give their best to every task. But when disengaged employees stay with an organization for a long time, they pose a threat to long-term, sustainable success.
Unfortunately, disengaged employees often stay in jobs for a long time, severely hurting productivity and morale.
The toxic work environments disengaged employees create will drive good employees away and make the organization less attractive to potential hires. It can also hurt an organization’s reputation when poor customer service results from disengagement.
High retention can also negatively affect a team’s adaptability because it can lead to less innovation and hinder diversity efforts eventually. On top of the stagnation that can sometimes come with high retention, when the team dynamic never changes, it can create a less inclusive work environment.
Retention policies should ensure that, when the organization does lose employees, it’s more likely to be the disengaged underperformers rather than the best workers.
How Do You Improve 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.
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.
Leadership plays such a vital role in employee engagement. It is essential 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.
We recently sat down with Dick Finnegan, a world-renowned expert on stay interviews, employee engagement, and cutting turnover and author of The Power of Stay Interviews for Engagement and Retention, and discussed how COVID-19 and the pandemic have changed the mindsets, needs, and wants of employees in today’s workplace market.
Finnegan says turnover issues usually don’t arise from the top of the org chart, but instead come from the bottom; most employees don’t leave because of the actions of the CEO, they leave because of the actions of their direct supervisor.
Finnegan suggests training leaders to forecast how long each employee will stay, using the same metrics that sales teams use to forecast and track turnover.
He says conducting “stay interviews” is a great way to change turnover prevention into an operational project that leaders are working on in an intentional way.
“With stay interviews we answer five key questions that lead to higher trust and higher engagement among employees. ‘What do you look forward to at work? What are you learning at work? Why do you stay here? When was the last time you thought about leaving, and what prompted it? What can I do as your manager to make work better for you?’ When managers learn to ask, listen, and probe with these questions they learn what is really important for their employees and how they can do better in serving them.”
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 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.
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 and reduce stress and burnout.
The key to successful retention strategies 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 the best talent and fostering the ideal work environment for high retention.
Matt Tenney is an active CEO who aspires to create the best workplace culture in the world. Matt is also the author of Serve To Be Great: Leadership Lessons from a Prison, a Monastery, and a Boardroom, and The Mindfulness Edge: How to Rewire Your Brain for Leadership and Personal Excellence. Matt is frequently invited to present keynote speeches at leadership conferences and meetings. His TEDx Talk has been viewed over 1,000,000 times since January, 2020.