7 Tips for Small Business Employee Retention

Written by: Christina Merhar
Originally published on July 5, 2013. Last updated July 13, 2020.

Most businesses, even the smallest ones, have a strategy for attracting and hiring employees. These recruitment strategies may include outlining job requirements, interviewing, and training and on-boarding over the first 90 days. But once a key employee is on board, how does a small business keep him or her from jumping ship? As our workforce becomes increasing mobile, a well-thought out employee retention strategy becomes just as important as recruitment (if not more). This is especially true for small businesses who are competing with larger businesses for top talent.


Here are seven (7) tips for small business employee retention.

Tip #1: Understand Why Employee Retention Matters

Employee turnover costs small businesses time and money.
  • Turnover disrupts the flow of a functioning workforce. When an employee leaves there can be a significant knowledge gap left, creating more work as the remaining team members pick up the pieces. 

  • Recruiting and training a new employee requires staff time and money. Every time a business replaces a salaried employee, it costs on average 6 to 9 months in salary. For a manager making $40,000 a year, that's $20,000 to $30,000 in recruiting and training expenses, along with other intangibles. 

While some turnover is inevitable, having an intentional employee retention strategy in place mitigates the turnover, and these costs, for a small business.

Tip #2: Benchmark Your Employee Retention Rate 

Do you know small business's current employee retention rate? Before you start thinking about formal employee retention activities, calculate your employee retention rate and track it periodically, such as quarterly or bi-annually. 

The calculation is simple. Divide the number of employees who left during a period by the total number of employees at the end of a period to get the percentage.

Here's an example:

Sample Inputs Sample Calculation
Period of Time: Fourth Quarter
Total Employees at Beginning of Q4: 24
Total Employees Terminated in Q4: 3
24 – 4 = 20 
20 / 24 = .88
.88 x 100 = 88%

According to industry standards, 85% or higher is considered a healthy employee retention rate.

Tip #3: Use Retention Strategies, Not Guesswork

There are several theories in employee retention strategies. Here's a sample of four common theories: 
  1. Positive Organizational Behavior is defined by Luthans as "the study and application of positively-oriented human resource strengths and psychological capacities that can be measured, developed, and effectively managed for performance improvement in today’s workplace"

  2. Valence, in Victor Vroom's Expectancy Theory, is the extent to which an employee's goals match the company's goals. The more aligned these are, the higher the employee retention rate.

  3. Abraham Maslow's Hierarchy of Needs theorizes that companies should first take care of an employee's basic needs, such as job security, payment, and health benefits, and then advance to bigger aspirations, like his or her place in the company.

  4. How important is it that employees feel they are being treated fairly? According to John Stacey Abrams' Equity Theory, if a worker feels he is getting what he considers to be fair for the job he is doing in return, he will be happy and remain in the position.

Click here for more on employee retention strategies.

Tip #4: Don't Assume Employees Are Happy

One of the worst mistakes a small business can make is to assume that, because an employee is still there, he or she is happy. 
  • Schedule regular, one-on-one reviews with employees. These review meetings serve as a forum where the employee can receive constructive feedback. 

  • Feedback is important. Even the most productive employees should be given feedback as a part of the retention strategy. Studies show employees not only want acknowledgment for work done well, but also want constructive criticism and routine review of goals and expectations. This makes an employee feel valued and helps keep morale high.

  • Conduct regular, formal evaluations. Employee evaluations are also a good time to get feedback from employees on what will make them happy. With a retention strategy, always keep a balance between what the employees want and what's best for the business. 

Tip #5: Health Benefits Are A Key Part of Employee Retention

Health benefits are a vital part of an employee's compensation package, and thus an important strategy for employee retention.
  • Work with an insurance agent or broker to evaluate your small business health insurance options including group health insurance and defined contribution health benefits.

  • If your business can't afford a traditional group health insurance plan, or cannot meet minimum participation requirements, work with your broker to design a defined contribution health benefit. With defined contribution health benefits, your business provides employees healthcare allowances (via a "pure" defined contribution approach) for their individual health insurance policies. This is an alternative to an employer-sponsored group health insurance plan. See: What is the Cost of a Defined Contribution Plan?

Tip #6: Provide Different Benefits for Different Employees

Turnover of certain employees may be more costly than others, thus it is common to provide different levels of benefits to different classes of employees. This is routinely done by major corporations. For example, with salary and compensation, employers routinely compensate groups of employees differently. Outside sales representatives are compensated differently than sales managers. Some employees get company cell phones or cars, while others earn bonuses.

Because health benefits are such an important part of compensation and retention, why not provide health benefits that vary by class of employee? Small businesses can do this with defined contribution health benefits. 

For example, consider a restaurant who struggled to hire and keep managers in a very tight labor market. Instead of offering the same health plan to all employees, the restaurant used defined contribution health benefits to create a separate classes for wait staff and managers, giving managers $350 more per month in their Health Reimbursement Arrangement (HRA). This large increase helps the company reduce attrition among managers. 

As there are no minimum or maximum contribution requirements with defined contribution health benefits, a business can design their health benefits to fulfill its exact recruiting and retention needs.

Providing class-specific health benefits is clearly allowed by ERISA and HIPAA. For specific rules and regulations on providing different amounts to different employees, see Using Employee Classes.

Tip #7: Conduct Exit Interviews

Exit interviews provide businesses valuable information on the reasons employees seek employment elsewhere.
  • Develop an exit interview survey that asks for feedback on the work environment, employee benefits, areas for improvement, training, supervision, and workload. 

  • Evaluate the exit interview surveys and incorporate the feedback into your small business's employee retention strategies.

Download our employee retention eBook to learn how to keep your most valued employees without breaking your budget.
Originally published on July 5, 2013. Last updated July 13, 2020.


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