How to Calculate Your Employee Retention Rate (and Why It is Important)
Creating a highly engaged and productive workforce starts with a clever employee retention strategy. But before you can identify challenges and set targets for improvement, you must first understand your employee retention rate thoroughly. This metric can help improve the employee experience and build a workforce of motivated employees who positively contribute to healthy company culture. In this article, we’ll discuss what employee retention is and how you can calculate this crucial HR metric in five easy steps.
- Intro: The Hunt for Your Rock-Star Employees is On
- What is an Employee Retention Rate?
- How to Calculate Employee Retention Rate
- A 5-Step Approach To Formulating The Employee Retention Rate
- How are Turnover and Retention related?
- What is a Good Retention Rate?
- How to get Better Retention Rates
1. Intro: The Hunt for Your Rock-Star Employees is On
Recruiting the right talents is hard enough. But when the labor market is tight – like it is right now – retaining them is a whole different ball game, and the stakes are even higher. As the War for Talent continues, the competition for attracting the best employees is getting tougher. Many companies are going to great lengths to persuade potential job candidates to work for them. They offer better salaries, throw in dazzling perks, and grant endless growth opportunities – anything to position themselves as a great place to work. On top of that, recruiters are actively approaching talent that is already employed elsewhere. Yes: that means that your rock-star employees are also being chased. As a result, today’s talents can choose from an elaborate menu of companies that want to hire them. That’s why it shouldn’t come as a surprise they won’t think twice about moving to the next employer when this fits them better. Who could blame them?
Losing your top employees can have a detrimental effect. Not only on your company’s overall business, but also on the department and the team the person leaving was managing or working for. An unexpected departure of a valued staff member can lead to lost revenue and expertise, but it can also have consequences for the motivation and morale of the people that remain. This, in turn, affects productivity and engagement. It can even influence your company’s brand perception negatively. If you’re constantly putting out vacancies on LinkedIn, job boards or the websites of recruitment agencies, that will tell the outside world something. Sure, your business could be growing, but it might also raise eyebrows: is there perhaps something wrong with this company? Moreover, if employees leave because they are disgruntled or unhappy, they probably won’t hesitate to leave a negative review on Glassdoor or social media. This, combined with today’s competitive candidate market and the high costs of employee turnover, makes employee retention a hot topic for Human Resources.
2. What is an Employee Retention Rate?
Simply said, the definition of employee retention is the ability of a company to hold on to its most valuable asset: its employees. It encompasses all the different efforts an organization can make to prevent their people from leaving, for instance by providing interesting career opportunities, creating a healthy, safe and inclusive work environment, and offering a competitive salary and fringe benefits. However, before HR can formulate a strong retention strategy, they first need to be able to calculate and understand the data that are related to employee retention.
Therefore, the employee retention rate is an important HR metric that measures the number of people who stayed employed at a company periodically and is usually represented as a percentage. A retention rate of 80% indicates that an organization retained 80% of its employees and lost 20% over a given amount of time. By measuring retention rates and comparing them over multiple time frames, HR leaders can gain insight into the trends and factors affecting employee retention and take action.
3. How to Calculate Employee Retention Rate
The employee retention rate calculation is relatively straightforward: it’s the number of individual employees who remained employed throughout the whole measurement period divided by the number of employees at the beginning of the measurement period x 100. Be sure to include only those employed on both the first and last day of the period, and leave out the ones hired in between.
Take a look at this practical example:
- Say you had 1.277 employees on January 1st 2022
- On December 31st 2022 a number of 1.242 employees still worked for you
- To find out the yearly retention rate, divide 1.242 by 1.277 = 0,972
- Multiply the result by 100 to convert it into a percentage
- This will get you the following outcome: (1242 / 1277) x 100= 97.2% yearly retention rate
4. A 5-Step Approach To Formulating The Employee Retention Rate
As with any analysis, you first need to determine what you exactly want to know before you start measuring data, and drawing conclusions. Therefore, let’s take a closer look and dissect the retention rate formula step by step.
Step 1: Determining the time period you want to measure
To start, you must decide which time period you want to measure. The retention rate is often calculated on an annual basis, usually a fiscal year, but can also be measured quarterly or even monthly.
Step 2: Deciding which group of employees you want to measure
Most commonly, CHROs want insights into the overall employee retention rate. To find out this figure, HR has to include all employees in the equation, from junior staff to the C-Suite. On top of that, it can also be interesting to take a closer look at the following retention metrics:
- The retention rate per manager: this is the percentage of employees who stay employed under an individual manager. It’s an important indicator, as it tells you something about an employee’s motivation and engagement while working for this particular manager. If this percentage is low, it can imply leadership is unstable, which can affect the entire team
- The executive retention rate: this represents the number of people in the executive team that remained at the organization. It’s another crucial metric, as these people are usually highly skilled and experienced, and have a solid understanding of company culture and its values. Needless to say, you want to hold on to them. Besides, replacing, recruiting and hiring leaders can be very expensive. Centric HR states that for executive positions, you can expect to pay up to 213% of the employee’s yearly salary to replace them
- The retention rate of high/low performers: this number reveals what type of employees stick around. Star employees tend to stay longer at an organization when they feel appreciated and recognized for the added value they bring to the table – so when their retention is high, it means you’re doing a great job keeping them happy and engaged. When there is high employee retention amongst low performers, that issue needs to be addressed. They may be comfortable holding their position, but it can have toxic effects on their colleagues and business in general
- The retention rate per country or region: this is another interesting number, as it says a lot about the way different regional and country offices are performing in terms of employee engagement, talent management, and overall employee happiness
Step 3: Making a headcount
The next step is to count the number of staff members present at the beginning of the period you want to measure, for instance, the 1st of January 2022. Then, count the number of people left at the end of the period, in this case, the 31st of December 2022. Make sure you only include employees who worked for you during the entire period and leave out those who were hired in between.
Step 4: Calculating employee retention rate
Now, it’s time to do the math. You can use an employee retention rate excel formula or simply apply the above calculation to determine the retention rate. You will end up with a percentage representing the rate of employees that continued working for you over 2022.
Step 5: Evaluating the outcome
Depending on the outcome, you can begin to see patterns, evaluate how your company’s HR department is doing with regard to retaining employees, and establish benchmarks. Which positions have low retention rates? How long do employees, managers, and executives stay on? Is there enough room for growth or internal mobility? Finding out the ‘why’ behind retention is just as important as the percentage itself. It’s the basis for creating a solid retention strategy.
5. What is the Relationship Between Turnover and Retention?
The opposite of employee retention is employee turnover. They are closely related – in fact, they are two sides of the same coin. Where retention rates define how many employees stayed, the turnover rate indicates how many people left the company at a period of time. It’s the number of employees who left the company divided by the average number of employees in a given period x 100. Today, driven by the tight talent market and phenomenons like The Great Resignation, both turnover and retention have become considerable challenges that companies and their HR departments face.
6. What is a Good Retention Rate?
Overall, 90% is an excellent score to aim for as an average employee retention rate in a one-year time frame. Why not higher? Well, a 100% retention rate is not necessarily healthy for your business. Rates that high may implicate low performers and disengaged employees– the so-called quiet quitters – are holding on to their position.
Plus, there are other disadvantages of a high employee retention rate. Implementing change and innovation might be difficult with a low influx of new talent, and it can also lead to a lack of diversity and inclusion.
It’s important to note that retention rates vary per industry. According to Linkedin Insights, government jobs show high retention. So are airlines, construction, and real estate companies.
On the other hand, turnover is high in the professional services sector: accountants, consultants, and lawyers, among others. The same research shows that job-hopping is more common in the field of tech & media, entertainment, and hospitality. Let’s have a closer look at these prominent tech companies:
- Google employee retention rate: a recent study conducted by Resume.io shows the average time a Google employee stays on is only 1.3 years. This includes people in critical leadership roles. Why is that? First of all, high turnover is not uncommon in Silicon Valley, as the competition for talented software engineers and top executives is fierce. However, reviews by former Google employees indicate that their low retention rate is partially caused by a highly competitive environment and a lack of a healthy work-life balance
- Apple employee retention rate: this iconic company currently employs over 164.000 employees worldwide. It may seem like an impossible challenge to keep such a large, global workforce happy, but the numbers say something different. Not only did they see employee retention rates improve from 61% to 89% when SVP Retail Angela Ahrendts came on board, but according to Glassdoor, they consistently rank high in the 100 Best Places to Work list. Their secret? They prioritize L&D as the key to engaging their staff and building long-lasting loyalty
- Amazon employee retention rate: the release of leaked, confidential documents revealed that Amazon churns through workers at an astonishing employee turnover rate of 150%, which is well above industry averages. Interestingly enough, the company itself claims to have a steady retention rate of 73%
7. How to get Better Retention Rates?
When the retention rate is low, it’s time to step up your game. Improving the retention rate does not always have to be difficult and expensive. Here are some key strategies to consider:
- Offer interesting career perspectives: offer your employees attractive options for career progression. What steps can they take, and how can you help them to get here? If people cannot grow within an organization, they will quickly look for another job. It doesn’t necessarily mean they want to make a vertical step to a higher-level position. People can also develop horizontally, by becoming an expert in a particular area or moving to a different department
- Invest in training and development: for talent to develop, it’s important to create a learning culture and tap into your people’s potential for personal and professional growth
- Set the stage for a feedback culture: providing regular and specific feedback is a cost-effective way to retain top talent. Set up one-on-one meetings with employees, talk with them about their short- and long-term goals and help them visualize their future with the company. Then, lay out a realistic plan and make the necessary steps to reach those goals
- Support workplace inclusion: to retain talent, many companies offer competitive salaries, fun office perks (like a ping pong table in the lobby), and employee recognition programs. Now, not to say this isn’t great, but your people will leave in the blink of an eye if they do not feel accepted and included. They need to be able to feel comfortable and be able to be their authentic selves, or you’ll lose them
- Support a healthy work-life balance: a healthy work-life balance is essential to job satisfaction. Encourage employees to set their boundaries, reduce workloads, and provide the right resources and support to promote a culture of self-care
You might also like: The State of Skills – Solving the Talent Retention Puzzle in 2023
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