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.
Below we’ll discuss what employee retention rate is and how to calculate it, as well as share some proven tactics to improve retention in your organization.
What Is Employee Retention Rate?
Employee retention rate refers to an organization’s ability to hang onto individuals in its workforce over a period of time. Internally, it also refers to the organization’s efforts to engage and retain its team members. Perks and benefits, types 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.
Employee Retention Rate Definition
Your employee retention rate offers insight into your company’s success and may help you understand the elements of your retention strategy and employee value proposition (EVP) that resonate 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.
Use our template to seamlessly calculate your own employee retention rate.
Why Is Tracking Employee Retention Rate Important?
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 percent 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 the business forward.
Employee Retention Rate Statistics
To further prove the importance of having a retention strategy, check out these employee retention rate statistics:
Employee Exits Cost Employers 33 Percent of the Individual’s Salary on Average
Losing an employee typically costs one-third of their annual salary. On top of losing a skilled worker, companies have to spend resources searching for and training a replacement. These financial costs can take a toll. Use our cost-of-vacancy calculator to find out how much attrition and open positions are costing you.
Top Performers Can Be up to 400 Percent More Productive Than Average Employees
Top performers deliver value that goes far beyond their job descriptions, exhibiting elite levels of engagement and production. For this reason, they would make for excellent candidates if they decide to reenter the job market. Businesses may have to invest extra resources to keep top performers, but it’s well worth the long-term impact they can have on a company’s health.
Ninety Percent of U.S. Employees Believe Empathetic Leadership Increases Job Satisfaction, and 79 Percent Believe It Decreases Turnover
Modeling positive behaviors and demonstrating empathy are important parts of a successful retention strategy. If leaders promote empathetic traits like fairness and compassion, they can cultivate a positive work environment that attracts top employees. Strengthening this sense of connection can be a powerful factor in convincing employees to stay.
Employees Are 23 Percent More Likely to Stay at Their Company if Their Manager Clearly Explains Their Roles and Responsibilities
An employee’s understanding of their manager’s expectations influences their loyalty to the employer. Transparency is key to earning the trust of a new hire and ensuring they enjoy a seamless onboarding experience. A lack of communication may taint the company culture in the eyes of an employee and leave them feeling frustrated, raising the possibility of turnover.
How to Calculate Employee Retention Rate
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 calculate your employee retention rate.
Employee Retention Rate Formula
We’ll use the following example to explain how to calculate your employee retention rate:
XYZ Tech 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.
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 XYZ Tech’s rate of retention for the entire year.
We’re looking to calculate XYZ Tech’s retention rate for the year of 2019.
Period of time = January 1, 2019 – January 1, 2020
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 XYZ Tech, there were 125 employees on January 1, 2019.
Total number of employees on the first day of the period = 125
3. Determine the 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
XYZ 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
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
XYZ Tech ended 2019 having retained 115 of the 125 employees they started with on January 1, 2019, which translates to a 92 percent 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 XYZ Tech in Q1 2019. Then, check your answer using our free employee retention rate calculator.
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 average annual retention rate was 47.2 percent in 2021, retention rates vary greatly by industry.
However, 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 percent, which is not the inverse of 90 percent.
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. Company culture, employee engagement and work-life balance, as well as leadership and management behaviors all influence an employee’s decision to stay at a job.
Implement the following four tactics into your retention strategy to keep your top performers around.
1. Take Intentional Steps to Build and Maintain Your Culture
Company culture plays a huge role in job satisfaction and whether employees decide to stay or leave. To improve your company 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 as you take steps to shift your company culture.
2. Create Two-Way Communication
Delivering and receiving feedback enhances your company culture. Encouraging upward feedback through means like employee engagement surveys can help employees feel comfortable sharing their ideas and concerns. Teams that reference this data to inform their retention strategies also appear more genuine and make employees feel appreciated.
In the same way employees want to feel like their voices are heard, they also want to receive constructive feedback from their direct supervisors. Meaningful performance reviews and frequent check-ins can build an employee’s confidence in their role while creating an environment of trust and transparency.
3. 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 percent of employees report leaving their jobs due to lack of recognition in the office.
Conversely, 79 percent 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.
4. Invest in Professional Development for Your Employees
One way to boost employee retention is to invest in professional development. A lack of professional development opportunities is the number one reason for employee turnover. Encourage conversations between managers and their direct reports, and ask your team members what kind of opportunities they’re interested in. Helping your employees grow professionally creates mutual respect and saves you from having to spend money on new employees with relevant skill sets.
Use our template to seamlessly calculate your own employee retention rate.