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Why you need to calculate employee retention rates

Written by: Josh Miner
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Originally published on October 17, 2021. Last updated October 18, 2021.

When it comes to employee retention, business owners and HR departments need to track specific metrics to make sure the organization isn’t losing employees to other opportunities at too high a rate. By tracking specific statistics like employee retention rates and turnover costs, you have a clear way to measure the effectiveness of new HR initiatives, such as a formal onboarding program or starting to offer health benefits.

This is especially true for small businesses that rely on a small number of employees to keep their business running, and may not have the budget to offer salaries that can compete with larger organizations.

This article provides an overview of how to calculate your employee retention rate, why employee retention strategies matter, and a best practices checklist for employee retention.

Short on time? Download our full employee retention guide to read later

How to calculate employee retention rate

Your employee retention rate is a helpful statistic to calculate to see how well you’re retaining top talent. Employee retention rates can serve as a benchmark to measure success as you make organizational changes. That’s why calculating it should be periodic exercise to see where you stand (typically quarterly or biannually). 

To calculate your employee retention rate, you’ll divide the number of employees at the beginning of a period (like a month or quarter) by the total number of employees at the end of that period to get the percentage.

Example

Employees at the beginning of January: 39

Employees terminated during January: 5

Calculation

Number of employees at the end of the period: 39 - 5 = 34

Beginning of the period headcount/End of period headcount = 34/39 = .87 = 87%

Standard employee retention rates are anywhere from 70%–90%, but vary greatly by industry and calculation method. For example, you can measure your retention rate based solely on voluntary turnover to assess company culture, or you could choose to include all of your terminated employees for a high-level view of overall performance.

Why employee retention matters for a small business

Employee turnover costs small businesses time and money.

  • Turnover disrupts the flow of a functioning workforce. When an employee leaves, they can leave behind a significant knowledge gap, 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 between one-half to two times their salary.

While some turnover is inevitable, having a defined employee retention strategy in place mitigates turnover and associated costs.

Best practices checklist for employee retention

We outlined key strategies for employee retention in our eBook. If you don’t have time to read the whole thing, here's a summary of those tips:

  • Hire right the first time
  • Benchmark and track your employee retention rate
  • Benchmark the cost of employee turnover
  • Identify the perks your employees want
  • Evaluate health benefits - consider both traditional health plans and health reimbursement arrangements (HRAs)
  • Provide different benefits for different employees
  • Set clear employee goals and expectations
  • Offer a clear career path
  • Invest in your managers
  • Create a positive company culture
  • Recognize employee contributions

Download the full guide for all of the insider tips

Conclusion

While losing employees is an unavoidable part of being a business owner, there are several things you can do to keep your turnover numbers low and your employees satisfied. By offering a competitive salary and benefits package, checking in frequently with your employees, and being open to feedback, and keeping a close eye on your employee retention rate are all great ways to ensure your business is on the right track.

This article was originally published on July 28, 2020. It was last updated October 17, 2021.

Originally published on October 17, 2021. Last updated October 18, 2021.
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