Employee retention strategies

Most businesses, even the smallest ones, have a strategy for hiring employees. Processes for outlining job requirements, interviewing, and the first 90 days are typically set. But once a key employee is on board, how does an employer keep him from jumping ship? 

Employee turnover costs businesses time and money, and disrupts the flow of a functioning workforce. There can be a significant knowledge gap left when an employee says goodbye, creating more work as the remaining team members pick up the pieces. Then, there's the timely and costly process of recruiting and training a new employee.

  • It costs an employer 6 to 9 months in salary each time they have to replace a salaried employee. For a manager making $40,000 a year, that's a cost of $20,000 to $30,000 in recruiting and training expenses, along with other intangibles. 

For these reasons, turnover is something which businesses would very much like to avoid, but they don't always know how. While some turnover is inevitable, putting employee retention strategies into place can help ease an employer's pain. 

According to the U.S. Census Bureau, nearly 70% of businesses have fewer than 20 employees. It is likely that many of those firms do not have a formal Human Resources division, and too often end up throwing the proverbial "mud at the wall" when it comes to retention. There's always the option of hiring an HR outsourcing firm to assist with a businesses' employee retention strategies, but that's not always in the budget. So, where does a business owner start with their retention strategy?

Calculate Employee Retention Rate

Employee retention rate is a good statistic for an employer to calculate periodically, perhaps on a quarterly or bi-annual basis. Keep track of this rate via a shared company spreadsheet to spot trends and troubleshoot employee issues. The formula 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: 4

24 – 4 = 20 
20 / 24 = .83
.83 x 100 = 83%

Theories on Employee Retention Strategies

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".

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.

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.

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.

Don't Make Assumptions

One of the worst mistakes an employer can make is to assume that, because an employee is still there, he or she is happy. It is important that employers schedule regular, one-on-one reviews with employees. This is a forum where the employee can receive constructive feedback. Even the most productive employees should be given feedback as a part of the retention strategy. Believe it or not, employees not only want acknowledgement for work done well, most also appreciate constructive criticism and routine review of goals and expectations. This makes an employee feel valued and can keep an morale up. 

Employee reviews 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 organization. 

Health Benefits: A Key Part of Any Retention Strategy

The health benefit plan is a vital part of an employee's compensation package. A defined contribution health plan can provide many advantages over traditional employer health insurance. Rather than paying the costs to provide a specific group health plan (a "defined benefit"), employers can fix their costs on a monthly basis by establishing a defined contribution health plan that gives employers and employees full control over healthcare costs. Defined contribution is a win-win for employers and employees. The employer’s costs are predictable and controllable, while employees are given full control over their health care dollars and choose a portable plan that meets their exact personal needs.

How does a defined contribution health plan work? An employer gives each employee a fixed dollar amount (a "defined contribution") that the employee chooses how to spend. Typically, employees are allowed to use the defined contribution to reimburse themselves for personal health insurance costs or other medical expenses such as doctor visits and prescription drugs. 

Under the traditional approach to health benefits, the company selects and funds the same insurance plan for all employees in a one-size-fits-all approach. In contrast, the defined contribution model allows employees to choose the individual plan that works best for their family's needs, via an insurance company or a public or private health exchange.

How Much to Allocate to 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. With salary and other types of compensation, employers routinely compensate groups of employees differently. Field sales people 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, why not provide benefits that vary by class of employee? With defined contribution health benefits, businesses can create employee classes that offer benefits tailored to the company’s objectives, transforming a health benefit plan into a tool to find and keep great people.

For example, consider an 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 company created separate classes for wait staff and managers, giving managers $350 more per month in their defined contribution allowance. This large increase helps the company reduce attrition among managers. 

As there are no minimum or maximum contribution requirements, a business can design their defined contribution health plan 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 Defined Contribution Classes.


Retaining key employees is essential to every business, and a company's health benefit program is a key part of the compensation they offer to their employees. Due to the rising costs of traditional employer-sponsored health insurance, U.S. employers are steadily dropping those plans in favor of defined contribution health benefits. Rather than paying the costs to provide a specific group health plan (a "defined benefit"); employers might want to consider fixing their costs on a monthly basis by establishing a defined contribution health plan.

You need a strategy to retain your employees.
See how you can hire and keep your people with benefits.