Employee Retention Rate: How to Calculate It and Make Improvements
In today’s candidate-driven job market, recruiting great candidates is tough, which makes retaining the top performers you do have all the more vital. Your employee retention rate provides invaluable insight regarding your ability to keep great people around.
Competition between tech recruiters is at an all-time high as they battle a 1.3% unemployment rate. Smart recruitment strategies are a must, and so is an effective retention plan. In this article, we’ll discuss what employee retention rate is, how to calculate it and seven proven tactics to improve retention in your organization.
*This document was built using Google Sheets. It will be best used with a Google account.
Table of Contents
- Recap: What Is Employee Retention Rate?
- Why Is It Important to Track Employee Retention Rate?
- How to Calculate Employee Retention Rate
- How to Improve Your Employee Retention Rate
Recap: What Is Employee Retention Rate?
An organization’s employee retention rate refers to its ability to retain employees over a period of time. Internally, it also refers to the organization’s efforts to engage and retain its team members. Perks and benefits, type of organizational culture and work-life balance are a few of the many contributing factors to an employee’s decision to stay at a company.
Your employee retention rate will offer insight into your company’s successes and help you understand which elements of your retention strategy and employee value proposition (EVP) resonate most with your team members.
Retention rate and turnover rate go hand-in-hand and offer a holistic view of your current workforce’s stability. The rate of turnover at a company refers to the percentage of employees who leave over a given period of time. While retention and turnover are related, turnover is not always the inverse of retention.
For example, when multiple separations within the same position occur over a set period of time, your rate of turnover will increase while your retention rate will remain the same. Still, in addition to tracking your retention rate, monitor your turnover rate to spot weaknesses before they become problems.
Why Is It Important to Track Employee Retention Rate?
Tracking your employee retention rate helps measure the success of new initiatives, as well as employee engagement tools and ideas. Additionally, it can help you gauge employee quality-of-hire — 20% of new hires leave within their first 45 days on the job and a quick turnover has more to do with the shortcomings of your recruitment efforts than your long-term retention strategy.
Keep in mind that turnover is an unavoidable part of any business, but it’s how you respond to unnecessary turnover and try to mitigate it that matters. Your retention strategy should focus on retaining top performers and engaged employees, the individuals who enhance your culture and drive business forward.
To further prove its importance, check out these employee retention rate statistics:
Employee exits cost employers 33% of the individual’s salary on average.
Losing an employee typically costs one-third of their annual salary. However, the actual financial loss can be significantly more. Use our cost-of-vacancy calculator to find out how much attrition and open positions are costing you.
A top performer can be worth 10-100x their salary for every year they stay at their job.
Retaining your best employees has a serious payout, making every penny you invest in your retention strategy worth it.
92% of employees say empathetic leaders are huge factors of retention.
Modeling positive behaviors and demonstrating empathy is an important part of a successful retention strategy.
Employees are 23% more likely to stay at their company if their manager clearly explains their role and responsibilities.
An employee’s understanding of their manager’s expectations influences their loyalty to the employer.
How to Calculate Employee Retention Rate
Determining your employee retention rate is fairly straight-forward. Retention rate is calculated by dividing the number of employees on the last day of a given time period by the number of employees on the first day. Below, we’ve outlined the process of calculating your employee retention rate step-by-step. Follow the guidelines below and use our free calculator to seamlessly calculate your employee retention rate.
We’ll use the following example to explain how to calculate your employee retention rate:
ABC Tech — a Chicago-based tech company — had 125 employees on January 1, 2019. By the end of Q1, there were 130 employees, 10 of which were new hires. 25 more people were hired over Q2-Q4. There were a total of 150 employees on January 1, 2020.
Step 1: Define the period of time
Employee (EE) retention rate is often calculated on an annual basis. If you want to track your retention rate more regularly, simply define shorter time period parameters. For the purpose of this example, we’ll calculate ABC Tech’s rate of retention for the entire year.
We’re looking to calculate ABC Tech’s retention rate for the year of 2019.
Period of time = January 1, 2019 – January 1, 2020
Step 2: Determine the number of employees on the first day of the period
How many people were in your employment on day one of the time period you’ve defined? This information should be easy to acquire — simply check your payroll to determine the number of individuals in your employment on the given date.
In the case of ABC Tech, there were 125 employees on January 1, 2019.
Total number of employees on the first day of the period = 125
Step 3: Determine number of retained employees
This seems obvious, but you cannot count any employees hired during the period. The goal is to track retention — the percentage of people who remained in your employment from the first day of the period until the last. Including new hires within your calculations will interfere with the results.
To determine the number of employees you retained, subtract the number of employees hired over the time period from the total number of employees on the last day of the period.
(Total number of EE on last day) - (Number of new hires) = Number of EE retained
ABC Tech ended 2019 with 150 employees. 10 employees were hired in Q1, and 25 were hired during the remainder of the year. That means 35 of the 150 employees were not employed on the first day of the year and should not be included in the calculations.
150 - 35 = 115 employees retained
Step 4: Calculate your employee retention rate
To calculate your employee retention rate, divide the number of employees on the last day of the given period by the number of employees on the first day. Then, multiply that number by 100 to convert it to a percentage.
[(Total EE on last day of set period) / (Total EE on first day of set period)] x 100 = EE retention rate
ABC Tech ended 2019 having retained 115 of the 125 employees they started with on January 1, 2019, which translates to a 92% employee retention rate for 2019.
115 / 125 = 0.92
0.92 x 100 = 92%
Following the steps above, test your knowledge by calculating the employee retention rate for ABC Tech in Q1 2019. Then, check your answer using our free employee retention rate calculator.
Step 5: Compare your retention rate to industry standards
Before you freak out over or celebrate your employee retention rate, take stock of how your performance stacks up against industry competitors. While the Society for Human Resource Management estimates that the average annual retention rate is 81%, retention rates vary greatly by industry.
This SHRM article shows the average turnover rates for several industries, which were used to estimate the average retention rate for each as shown in the chart below. However, this is simply a quick-and-dirty calculation; you cannot fully understand the health of your organization by tracking just your employee retention rate or turnover rate.
Furthermore, turnover rate may not always be the inverse of retention rate. Why? Because retention rate accounts for only separations involving original employees, whereas turnover rate accounts for all separations occurring within a given period and uses the average headcount.
For example, while you may retain nine members of your 10-person staff over the period of a quarter (retention rate=90%), you could turnover a single position three times during that quarter, giving you a turnover rate of approximately 30%, which is not the inverse of 90%.
How to Improve Employee Retention Rate
Now that you know how to calculate your employee retention rate, you can regularly track your performance and use the data to modify your retention strategy. As aforementioned, company culture, employee engagement, work-life balance as well as leadership and management behaviors all influence an employee’s decision to stay at a job.
Implement the following seven tactics into your retention strategy to keep your top performers around.
1. Recruit smarter
Retention starts with recruitment, and the most sure-fire way to keep top employees around is to get the right people in the door. Before writing your next job description, talk with hiring managers to create accurate candidate personas.
Tailoring your recruitment strategies to customized candidate personas will improve the quality of your applicant pool and help you spot great candidates among good ones. This is an especially important practice to follow considering the close overlap between high-demand tech roles, as with software engineers vs. developers.
2. Implement an employee referral plan
Furthermore, one of the best ways to improve your employee retention rate is by building a better talent pipeline and increasing the quality of your applicant pool. Lean on your current employees for vetted referrals. After all, good people know good people.
Create an employee referral program to incentivize your people for their recommendations. Ensure that bonuses are only distributed after the referred individual has been hired and employed for a few months.
3. Don’t assume employees are happy
Make upward feedback a central part of your company culture so employees feel comfortable sharing their ideas and raising concerns. Implement regular employee engagement surveys to keep a pulse on engagement levels across the office.
Use the data you collect from pulse surveys to inform your retention strategy. Asking your employees for their input and subsequently ignoring what they have to say will make your leadership team appear disingenuous and make employees feel undervalued and unappreciated.
4. Create two-way communication
In the same way employees want to feel like their voices are heard and their opinions matter, they want to receive constructive feedback from their direct supervisors. It might come as a surprise, but annual performance reviews are far from frequent enough.
One-third of employees rate performance reviews as unhelpful and unproductive. In order to excel in their role and feel confident in their work, employees require regular feedback opportunities. Implement more frequent check-ins between managers and their direct reports, but allow each team to establish a cadence that works for them.
5. Implement an employee recognition program
In addition to providing constructive feedback, recognize your team members for their accomplishments. Failing to do so will make employees feel unappreciated by their employer — 27% of employees report leaving their jobs due to lack of recognition in the office.
Conversely, 79% of employees would be more loyal to their employer if they were regularly recognized for their work. Create a platform for managers to recognize their reports and for employees to celebrate their peers. This can be done during an all-hands meeting or via a company-wide communication platform like Slack.
6. Build a better company culture
Employees who don’t like their organization’s culture are 24% more likely to quit. Not only that, but 77% of job seekers consider company culture before applying for a job. In short, company culture impacts how well you retain your current employees and attract new talent.
Before you start to make changes to your current culture, revisit your core values and ensure your guiding principles are still relevant to your team. Then, talk with some of your most-tenured employees to get their sense of how the culture has evolved over the years, and where they still see room for growth. Improving company culture is taxing, but don’t worry: use these five steps to change your culture.
7. Promote professional development
Feeling stagnant in their career is a huge source of demotivation for employees. In fact, employees who report feeling a lack of support for their professional development are three times more likely to be looking for another position.
Make employee development a focus of your employee retention strategy. Encourage conversations between managers and their direct reports, and ask your team members the kind of opportunities they’re interested in. Helping your employees grow professionally fosters a learning environment built on trust and mutual respect. Furthermore, cultivating skills internally rather than hiring new employees or outsourcing can save you money.
Regularly tracking your employee retention rate will give you the information you need to make improvements to your employee engagement strategies, which will help keep your top performers engaged and around. Remember that turnover is par for the course, but that doesn’t mean you can let it get out of hand. Keep tabs on how your retention rate fluctuates and use our tips to make productive adjustments.
*This document was built using Google Sheets. It will be best used with a Google account.