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How to calculate your employee retention rate

Written by: Elizabeth Walker
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Published on July 15, 2022.

As an employer, you likely already know it’s crucial to not just attract, but also retain talent for your company’s continued growth and success. Losing employees can mean losing valuable team knowledge, lowering workplace morale, and decreasing employee productivity.

In a competitive labor market, employee retention is a priority for many companies, especially for small businesses that rely on limited staff members to keep their business running. In contrast to larger organizations, smaller businesses may not have the annual salary budget to compete with larger organizations for top talent.

By tracking specific data like employee retention and turnover rates, you’ll have a benchmark for measuring the effectiveness of HR programs and business, driving positive business outcomes, and developing strategies to keep good employees from quitting.

This blog provides an overview of how to calculate your employee retention rate, why employee retention matters, and best practices to improve the retention rate at your organization.

Find out how you can boost your employee retention rate with fringe benefits

What does retention rate mean?

An employee retention rate measures the retention of your employees over a specific time period, giving insight into the employee experience. It complements your turnover rate metric, providing a more complete view of employee transition than calculating either metric alone.

Turnover rate and retention rate are often used interchangeably, but the two aren’t the same. Retention rates are the rates of employees staying, while turnover rate is the rate at which employees leave

In later sections, we’ll go over how you can easily calculate the employee retention rate at your organization. But remember that this data is much more than a simple calculation.

Your retention rate helps you understand whether your organization provides a positive employee experience that motivates and engages your staff. It ultimately shows your company’s ability to retain a stable workforce.

By comparing retention rates over a set time period, you can examine what your employees are missing and make the necessary adjustments to their experience.

Why is employee retention important for business owners?

Your talent is your organization’s most valuable asset. Without it, you won’t be able to achieve your business goals or drive initiatives to maintain a successful business. That’s why employee retention should be one of your top concerns.

Employee turnover disrupts the flow and success of a functioning business. For example, not counting layoffs or other types of involuntary termination, the U.S. Bureau of Labor Statistics1 found that almost 26,000 employees have quit their job since May 2021. When an employee leaves, they leave behind a knowledge gap, creating more work for the remaining team members to pick up the pieces.

Being familiar with your employee retention rate can help you identify any problems so you can implement retention strategies to mitigate high turnover.

A successful employee retention rate can also lead to:

  • Reduced company costs: Studies show that the average cost for replacing an employee is about 6 to 9 months’ salary, so understanding retention rates can reduce overall turnover costs.
  • Increased employee productivity: The longer employees stay at your company, the more productive they become. A high annual turnover rate can lead to reduced efficiency and lower productivity.
  • Improved employee engagement: Analyzing your average employee retention rate allows you to improve employee engagement, such as building a more positive company culture and increasing employee morale.

Looking at internal data and comparing retention rates allows you to make smarter strategic moves ahead of time to make your organization more successful. While some turnover is inevitable, the more engaged employees you have, the less likely they will be to leave your company.

How to calculate your employee retention rate

Employee retention rate calculations provide you with a point of reference when determining how your organization compares to others. That’s why calculating it should be a regular exercise to see where you stand during a period of time, whether that be on a monthly or quarterly basis.

Several different formulas can calculate employee retention rate, but the basic formula is below:

(# of employees at the end of a set time period / # of employees at the start of a set time period) x 100 = retention rate percentage.

The following table shows an example of the simple formula in practice:

# of employees at the end of a month

# of employees at the beginning of a month

# of employees at the end of a month/ # of employees at the beginning of a month

X 100

Retention rate percentage

18

39

.46

46

46%

When calculating your employee retention rate, it’s important to outline a timeframe that you would like to measure so you can easily compare it to future data of the same timeframe.

You may also want to separate your calculations by voluntary and involuntary turnover. This allows you to compare terminated employee data to the percentage of people who left your organization by choice and factor that into your retention strategy.

What is a good employee retention rate?

Generally, employee retention rates of 90% or higher are considered good, meaning a company should aim for an average employee turnover rate of 10% or less. In 2021, the average retention rate was around 52.8%2, but the individual rate varies by industry and sector.

Industries with the highest retention rates include government, finance, insurance, and education, while the lowest rates are in the food, retail, and hospitality industry.

However, a very high retention rate, like 99%, may not always be good either. Some turnover is helpful to carve out career paths for high-performing employees within the organization or to bring in external talent.

You may also want to terminate low-performing or average employees through voluntary turnover to make your company more productive and efficient.

Best practices to improve your employee retention rate

Now that we’ve covered why employee retention is important and how to calculate it, let's talk about what you can do to retain valuable talent at your organization. Below we’ve highlighted a few ways to improve your retention rate and create a more positive work environment.

Value your employees and trust their judgment

In the same way you promote the value of your products to potential customers, you should do the same with your employees. As an employer, expressing how valuable your employees are to you and your organization can instill feelings of exclusivity and pride that can help your employees feel like working at your company is a unique opportunity.

Outstanding employees will stay at their job if they trust leadership and leadership trusts them. Individuals tend to be passionate about the things they’ve helped create and grow. The more you engage your employees in your organization, the more emotionally invested they become, and the more likely they are to stay.

Give employees responsibility and challenge them to make a difference

Another effective employee retention strategy is to give your staff greater visibility and responsibility for the processes and initiatives necessary for success.

This starts with employee career development opportunities and continues with regular company updates on business metrics like profits, revenue, and product; and details on how their personal efforts have a direct impact on the business.

The employees you’re trying to hire and retain have unique talents, skills, and drive. It’s important to make it clear that what they are doing benefits the company in critical ways.

A transparent company culture that is empowering and supportive where honesty matters will likely raise your overall employee retention rate.

Provide competitive compensation and reward personal contributions

Even if you implement all the strategies above, a good employee who is underpaid will look at offers from other employers who will pay them more, especially if the position is similar to yours.

It’s essential to stay on top of what competitors in your industry are offering as compensation. Don’t forget to consider updating your benefits and perks package to stay competitive as well.

Additionally, successful companies reward employees who go above and beyond. Recognizing the efforts of your employees goes a long way toward improving their morale and increasing company loyalty.

There are many ways to show recognition, from office parties and recognition awards to bonuses and promotions. Whatever you choose, current employees need to feel that their employer appreciates their efforts.

Conclusion

In today’s tight labor market, hiring outstanding employees is becoming increasingly challenging. That’s why keeping them on board should be a priority. While losing some employees is unavoidable, staying mindful of the core issues that can improve retention can go a long way toward employee satisfaction.

Offering a competitive benefits package while monitoring your employee retention rate is a great way to help your business stay on the right track. If you’re looking to boost your organization’s benefits package, contact us to learn which personalized employee benefits you can leverage to improve your overall retention.

This article was originally published on July 28, 2020. It was last updated on July 15, 2022.

1https://www.bls.gov/news.release/jolts.t04.htm

2https://www.award.co/blog/employee-turnover-rates

Originally published on July 15, 2022. Last updated July 15, 2022.
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