EMPLOYEE RETENTION RATE: How to Calculate It and Things You Must Know

Employee retention rate
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Keeping your employees devoted to their roles and to your company is the key to maintaining your company’s success. And to keep your staff, you must maintain a high level of retention. To accomplish this, you must be able to calculate and understand your employee retention rate. In this guide, we’ll go through the importance of maintaining a high employee retention rate while comparing the retention vs turnover rate. 

What Is Employee Retention Rate?

An employee retention rate analyzes your employees’ retention over a given time period, providing information about the employee experience. It supplements your turnover rate metric, providing a more comprehensive picture of employee transfer than either metric alone. 

When you can increase – and maintain — your retention rate, you can focus on the most important aspects of your business rather than continually having to discover, hire, and educate new staff.

Turnover and retention rates are frequently used interchangeably. However, they are not the same thing. Employee retention rates are the percentages of employees who stay, whereas turnover rates are the percentages of employees who depart.

Knowing how to calculate the employee retention rate is critical for growing a successful business. Here’s how to go about it.

How to Calculate Employee Retention Rate

The first step in determining an employee retention rate is determining what time period you want to use to calculate retention. Some businesses calculate their retention rate on a yearly basis. However, merely reviewing your retention stats once a year is a huge waste of time.

Divide the number of employees who stayed with your company for the full-time period by the number of employees you started with on day one to calculate the retention rate. Then multiply that figure by 100 to calculate your employee retention rate.

The employee retention rate calculation for a specific time period would look like this in formula form:

The formula for Retention Rate

((Remaining Headcount During Set Period /Starting Headcount During Set Period) x 100)

Assume you wanted to know your employee retention rate over the last month. You had 30 employees on the first of the month and 28 employees on the last day of the month, as two team members left your firm to explore other possibilities. In such a case, your staff retention rate would be (28/30) multiplied by 100, or 93.33%.

What is a Good Employee Retention Rate?

Employee retention rates of 90% or greater are generally regarded as good. This implies that a corporation should strive for an average employee turnover rate of 10% or less. The average retention rate in 2021 is expected to be around 52.8%2, while the individual rate varies by industry and sector.

Government, banking, insurance, and education have the highest retention rates, whereas food, retail, and hospitality have the lowest rates.

However, a very high retention rate, such as 99%, is not necessarily desirable. Some turnover is beneficial in establishing career paths for high-performing individuals within the firm or in attracting external talent.

To make your organization more productive and effective, you may also choose to discharge low-performing or average staff through voluntary turnover.

Why is The Employee Retention Rate Important?

Your talent is the most significant asset in your firm. You won’t be able to reach your business goals or drive initiatives to keep your company running smoothly if you don’t have it. That is why one of your primary priorities should be employee retention.

How to Increase Employee Retention Rate

Calculating the employee retention rate will provide you with a better idea of how many employees are still with your organization. However, if you truly want to enhance staff retention, you must go beyond this equation.

Here are some suggestions to assist you to increase employee retention while also improving the health of your organization.

#1. Employ the right people

Employee retention begins with the people you hire.

Before you begin interviewing for a position, make sure you understand the role, its duties, and the type of person you want. When you begin interviewing candidates, take the time to get to know them. Then, determine whether they are a good fit for the role, your business, and the team they will be working with.

Being deliberate during the hiring process can guarantee that the correct people are hired for your firm. And when it’s the proper fit for both of you, it increases the likelihood that they’ll stay with your company for years to come.

#2. Invest in future leaders.

Management bears a large portion of the responsibility for increasing employee retention.

Employees are considerably more likely to stay with a company if their boss trusts and respects them and encourages their professional growth than if their management micromanages them, treats them unfairly, or stops them from realizing their full potential.

#3. Create a values-driven culture.

Employees want to believe that their work is important and that they are a part of something larger than themselves. If your employees don’t believe your organization has a mission they can support, they may search elsewhere. Hence, causing your retention rate to plunge. According to recent Gartner data, 68% of employees would consider leaving their business for a company that takes a stronger stand on cultural and societal concerns.

As a result, if you want to boost employee retention, concentrate on creating a values-based culture and getting your staff on board with your company’s values and mission.

#4. Pay your staff fairly

It makes no difference how effectively you accomplish everything else if you aren’t compensating your staff fairly and competitively. In contrast, if you pay your staff well, they are more likely to stay with your company. Companies that were ranked highly on compensation and benefits had 56% reduced attrition or the rate at which employees left the organization, according to LinkedIn’s 2020 Global Talent Trends Report.

#5. Recognize that money isn’t the solution to all of your retention issues.

It is critical to pay your employees fairly. However, if you’re having difficulty retaining talent, pouring money into the problem isn’t always the solution.

According to O.C. Tanner Learning Group research, 79% of employees who departed their positions mentioned “lack of appreciation” as the reason for their departure. Furthermore, according to LinkedIn’s 2018 Workplace Learning Report, 94% of employees would stay with a company longer if it invested in their careers.

If your employee retention rate is lower than you’d like, chat with your employees and get their input on what’s working for them, what isn’t, and what they need from your firm to be happier in their jobs.

How Can Calculating Employee Retention Rate Help to Improve Company Culture?

The retention rate is a useful metric that assists HR managers in identifying, addressing, and reinforcing weak areas. Using this statistic can assist improve the employee experience and create a workforce of engaged and motivated employees who are more satisfied with their jobs and contribute to healthy business culture.

What Is Retention KPI?

The Customer Retention KPI assesses your organization’s ability to retain customers over time and create recurring revenue from existing customers.

Employee Retention Rate vs Turnover

Retention is more than just the reversal of turnover. There are significant distinctions between the two in terms of how they are computed and what they reflect. However, when viewed together, they provide a comprehensive picture of staffing stability and migration within the organization.

Employee retention refers to the rate at which people stay with a company over time as well as the techniques used to keep them there. On the other hand, employee turnover is a metric that measures the number of workers who leave an organization, either voluntarily or involuntarily (voluntary turnover) (involuntary turnover).

Employee Retention Rate vs Turnover: Key Differences

The following are the primary distinctions between retention and turnover:

The retention rate excludes new hires. It only takes into account persons who were already working throughout the time period for which the rate is being evaluated. In contrast, turnover rate calculations include people hired during the time period for which the rate is being calculated.

Some companies omit involuntary turnover from the calculation of retention rates, although this is not a hard and fast rule. Involuntary turnovers are departures caused by an employer’s decision when the employee is still capable and willing to complete his or her work obligations, and they include terminations due to performance, behavioral concerns, seasonal layoffs, and force reductions (RIFs).

Retention rates are often measured over a longer period of time, typically annually, because they represent a gauge of the company’s stability. Turnover rates are calculated and evaluated by month or quarter because they provide essential snapshots of employee migration. This provides a more precise and actionable perspective of departures caused by, for example, seasonal layoffs, as well as more accurate long-term insights into that rate. Annual turnover rates are calculated and compared by adding monthly turnover rates.

Employee Retention Rate vs Turnover Rate: Why Is It Important To Calculate Them?

A company cannot supply its products and services if it does not have the proper personnel with the correct capabilities. And if it can’t recruit additional employees with new and specialized talents, it won’t be able to develop or implement growth strategies.

Employee turnover and retention rates are key measures of how well a company cares for its employees. This covers whether it pays competitive salaries, provides training and possibilities for promotion, and provides employees with a decent work/life balance, as well as how effective management is. High turnover and poor retention rates indicate that there are issues with the organization’s culture and employee experience.

Employee engagement is intimately related to turnover and retention. According to a Gallup research of more than 112,000 business units, organizations with greater levels of employee engagement have lower turnover rates – as much as 43% lower for companies with less than 40% yearly turnover. And employee engagement is linked to organizational outcomes, with one of the most significant effects being that organizations with lower turnover are more profitable and have more loyal consumers. Gallup discovered a 23% difference in profitability and a 10% difference in customer loyalty when comparing top quartile and bottom quartile engagement business units and teams.

How to Determine Employee Retention and Turnover Rates

A company can compute a variety of turnover and retention indicators, each of which provides valuable information on distinct aspects of the employee experience.

How are retention and turnover rates calculated?

Employee retention rate

The retention rate is calculated by dividing the percentage of people who started at the beginning of the time period by the percentage of people who left voluntarily.

New hires during that time period are not included in retention. The Society for Human Resource Management (SHRM) suggests including only employees who worked throughout the entire assessment period, rather than those hired during it.

Formula for Retention

The retention formula is as follows:

Retention rate = the number of individual employees who stayed on for the full measurement period/number of employees at the start of the measurement period multiplied by 100.

Employee Turnover Rate

Employee turnover can be either voluntary or involuntary.

Voluntary turnover includes employees who left for a new job, to seek educational opportunities, for personal reasons, retired, or died.

Involuntary turnover is the termination of an employee’s job when the individual was willing and able to continue performing services. This involves dismissal for poor performance or bad behavior, seasonal layoffs, or force cutbacks.

Formula for turnover

SHRM recommends dividing the number of separations during a month by the average number of employees on the payroll, multiplied by 100, to compute the employee turnover rate.

The turnover formula is as follows:

Turnover Rate = No of Separations / Avg. No of Employees x 100

To obtain those figures, run reports from your HR management system on:

  • Total employee headcount comprises all payroll and direct-hire temp employees, as well as those on a temporary layoff, leave of absence, or furlough. It should not include temporary workers or independent contractors on the payroll of a separate agency.
  • The average number of employees: Next, compute the average number of employees per month by adding each month’s total and dividing it by the number of months or the total headcount from each report if run more than once per month/number of reports used.
  • Total separations: The number of separations within a month includes both voluntary and involuntary terminations; employees who are temporarily laid off, on furlough, or on leave are not included.

Who Is in Charge of Retention and Turnover?

Human resources personnel and, in some cases, recruiting teams are the keepers of employee retention and turnover data. They are in charge of monitoring the KPIs that measure the total employee experience and ensuring that the company has enough workers to accomplish its immediate goals and expansion plans.

While the entire organization is responsible for ensuring strong retention and turnover rates—from senior leadership to HR and rank-and-file colleagues—the individual with the largest single impact on employee retention is the employee’s boss.

Poor managers are routinely listed as a top reason why employees leave in retention and turnover studies, while good ones are a primary reason why people stay. According to the Gallup poll, 52% of employees who voluntarily left a company believed their supervisors could have taken steps to keep them there. More than half indicate that no one—no manager or other leader in the organization—spoke with them about their job satisfaction or future career ambitions in the three months before they left.

In Conclusion

Hiring great personnel is getting increasingly difficult in today’s tight labor market. That is why retaining them should be a top concern. While some employees are unavoidably lost, staying aware of the key areas that can increase the retention rate can go a long way toward increasing employee satisfaction.

Frequently Asked Questions

What does an 80% retention mean?

An 80% retention means that you started the year with 10 employees, and lost 2 of them at the end of the year.

What is the difference between attrition and retention?

Attrition is a measure of who your company has lost. And retention measures the people your company has kept.

What is the retention ratio formula?

Retention Ratio = (Net Income – Distributed Dividends) / Net Income

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