How to calculate and improve your employee retention rate?

Let’s roll back 4 years and transport ourselves to 2020. The pandemic had just hit and there is a huge turmoil in the job markets around the world.

Everyone around is trying to protect themselves from covid and financial instability. This resulted in mass resignations and the employee retention rates hit a record low.

Now that you have recollected the flashbacks of the employee situation, let’s embark on a journey where numbers meet human resources, where calculations dance with job satisfaction, and where statistics become the backbone of a successful organization.

Welcome to the captivating realm of calculating and improving your company's employee retention rate!

In this blog, we'll uncover the secrets behind measuring the elusive yet oh-so-vital retention rate.

Table of contents:-

• What is the employee retention rate?
• Why is knowing your employee retention rate important?
• Why is employee retention important for business owners?
• How do you calculate employee retention rate, what’s the formula?
• What is a good employee retention rate?
• What are some employee retention rate examples?
• How to measure employee retention?
• What role does HR play in analyzing and addressing factors affecting the retention rate?
• 10 Tips to improve employee retention rate
• FAQs

What is the employee retention rate?

Let’s address the elephant in the room - the elusive employee retention rate! It's like trying to catch a unicorn in a field of dreams.

But in simpler terms, it is a magical metric that measures an organization's ability to keep its talented and engaged employees from fleeing the nest.

Think of it as a grand performance, where the stage is set with a company's enticing culture, meaningful work, and rewarding benefits.

The employees are the show's stars, dazzling the audience with their skills and dedication. And the retention rate? It's the applause that echoes through the corridors, indicating how many performers decided to stick around for an encore.

The employee retention rate is not just a number. Employee retention refers to the lifeblood of a thriving organization, a testament to its ability to create a workplace culture that employees simply can't bear to leave. Keep those unicorns prancing, and your retention rate of retaining employees will soar!

Why is knowing your employee retention rate important?

Knowing your employee retention rate is like having a secret weapon in the fierce battlefield of talent acquisition and retention.

It's a vital piece of information that contributes to your organization's success.

Here are four reasons that you should make a note of -

1. The employee retention rate helps you explore employee satisfaction. It's like a map that highlights potential problem areas, showing you where your organization may be falling short in creating a fulfilling work environment. By identifying areas of improvement, you can take proactive steps to boost employee engagement, morale, and overall happiness.
2. Your retention rate is a window into the health of your organization. It's a reflection of how well you're able to attract and retain top talent. High retention rates represent a strong company culture, effective leadership, and opportunities for growth. Whereas, low retention rates can be a red flag, indicating issues such as poor management, lack of development opportunities, or a toxic work environment.
3. Knowing your retention rate is crucial for your bottom line. Employee turnover comes with a hefty price tag—recruiting, training, and onboarding new employees can drain your resources and impact productivity. By keeping tabs on your retention rate, you can identify potential cost-saving opportunities and invest in initiatives that will help retain your valuable talent.
4. Lastly, your retention rate plays a significant role in your employer brand. A high retention rate can be a powerful marketing tool, attracting top-notch candidates who are drawn to organizations with a reputation for employee satisfaction. It showcases your commitment to your employees and can differentiate you from your competitors in the talent market.

Why is employee retention important for business owners?

Employee retention is vital for business owners as it positively impacts the bottom line, productivity, customer satisfaction, company culture, talent attraction, and leadership development.

High employee turnover can be a significant financial burden for businesses. Recruiting, onboarding, and training new employees incur costs that can add up quickly.

By focusing on employee retention, business owners can reduce the hiring costs and allocate resources more efficiently to upskill the existing talent to make the employees more productive and happier.

When employees stay with a company for an extended time period, they develop institutional knowledge, understand processes, and become more proficient in their roles.

This continuity leads to increased productivity as you retain employees who become more experienced and efficient over time. Retaining talented employees ensures stability and minimizes disruptions that come with frequent turnover.

Satisfied and engaged employees contribute to better customer experiences. They build rapport, provide consistent service, and exhibit in-depth knowledge of products or services.

By retaining skilled employees who understand and connect with customers, business owners can foster loyalty, trust, and satisfaction, which in turn strengthens the company's reputation and bottom line.

By prioritizing retention efforts to encourage employees, business owners can build a stable, dynamic, and high-performing workforce that contributes to the overall success and growth of the organization.

How do you calculate employee retention rate, what’s the formula?

To effectively use an employee retention rate formula calculator, you'll need two essential pieces of information: the number of employees at the beginning of a specific period (let's call it "A") and the number of employees at the end of that period (let's call it "B"). Here's the formula:

Retention Rate = ((B - X) / A) * 100

To break it down further:

1. Subtract any new employees hired during the period ("X") from the total number of employees at the end of the period ("B").
2. Divide the result by the number of employees at the beginning of the period ("A").
3. Multiply the quotient by 100 to get the retention rate as a percentage.

For example, let's say you had 100 employees at the start of the year (A) and 90 employees at the end of the year (B), with 10 new hires during the year (X). Applying the formula, the calculation would look like this:

Retention Rate = ((90 - 10) / 100) * 100

Retention Rate = (80 / 100) * 100

Retention Rate = 80%

Voilà! The retention rate for that specific period is 80%.

You may also want to separate your calculations by both 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?

According to a Business Leadership Today article, an employee retention rate of 90% or higher is commonly regarded as indicative of a favorable retention rate.

A good employee retention rate should reflect a healthy, engaged workforce and demonstrate that employees find value and satisfaction in their roles.

It's a dynamic metric that should be assessed in conjunction with other indicators of employee well-being and organizational success.

What are some employee retention rate examples?

Employee retention rate examples vary across industries and organizations. Here are three hypothetical scenarios to illustrate different employee retention rates:

1. Company A

In a tech startup known for its strong company culture and comprehensive employee benefits, the employee retention rate is 85%. This indicates that 85% of employees choose to stay with the company over a specific period, showcasing the organization's ability to create an engaging work environment.

2. Company B

Within a healthcare organization that values professional growth and career development, the employee retention rate stands at an impressive 95%. The high retention rate reflects the company's commitment to providing opportunities for employees to advance their careers within the organization.

3. Company C

A manufacturing company operating in a rural area faces workforce challenges, resulting in a retention rate of 60%. Despite the lower rate, the company actively addresses retention issues through targeted recruitment efforts, skill development programs, and community engagement initiatives.

4. Company D

In a retail chain with numerous locations nationwide, the employee retention rate is 75%. This moderate rate is attributed to competitive wages, employee discounts, and a supportive work environment that encourages work-life balance. The company continuously works on enhancing its retention strategies by implementing regular employee feedback sessions.

5. Company E

A financial services firm in a major city boasts a retention rate of 90%. This high rate is largely due to the firm's focus on work flexibility, offering remote work options and comprehensive wellness programs. Additionally, the firm invests heavily in leadership training and mentorship programs to foster career growth.

How to measure employee retention?

Measuring employee retention involves assessing various factors to calculate your employee retention and utilizing specific metrics to gauge the effectiveness of your efforts. Below are some commonly used methods for measuring employee retention:

Employee retention rate

This metric calculates the percentage of employees who leave the organization over a given period.

It involves comparing retention rates between the number of employees at the beginning and end of a specific timeframe, factoring in any additions or departures. The formula is as follows: Retention Rate = ((End Count - New Hires) / Start Count) * 100.

Turnover rate

This measures the percentage of employees who leave the organization within a defined period.

It helps identify the frequency of employee departures and can be calculated using the formula: Turnover Rate = (Number of Employees Left / Average Number of Employees) * 100.

Exit interviews

Conducting exit interviews with departing employees provides valuable insights into their reasons for leaving. This qualitative data can uncover patterns, identify areas for improvement, and inform retention strategies.

Employee surveys

Regularly surveying employees can help assess their satisfaction levels, engagement, and intent to stay. Survey responses provide valuable feedback and allow for targeted action to address any concerns.

Performance and productivity metrics

Monitoring employee performance and employee productivity can indirectly reflect retention. Engaged and satisfied employees tend to exhibit higher levels of productivity and performance. You can keep a tab on the employee engagement metrics to gauge the results as well.

Length of service

Tracking the length of service of employees provides a general indication of retention. It helps identify long-tenured employees and highlights areas where retention efforts may be falling short.

Internal mobility rates

This metric tracks the movement of employees within the organization, such as promotions, lateral moves, or transfers. High internal mobility rates can indicate a healthy career development environment, contributing to higher retention rates. It can be measured using the formula: Internal Mobility Rate = (Number of Internal Moves / Average Number of Employees) * 100.

Stay interviews

Conducting stay interviews with current employees can provide insights into what motivates them to remain with the organization. This proactive approach helps identify factors that contribute to employee satisfaction and areas that may need improvement to enhance retention efforts.

Retention by department or role

Analyzing retention rates by specific departments or roles can highlight areas with particularly high or low retention. This detailed analysis helps target retention strategies more effectively by addressing the unique challenges and needs of different groups within the organization.

Cost of turnover

Calculating the financial impact of employee turnover helps emphasize the importance of retention strategies. This involves assessing costs related to recruiting, hiring, training, and lost productivity. By understanding the cost of turnover, organizations can better allocate resources to retention initiatives.

Likewise, you can also use a good employee retention software to carry out the task for you.

What role does HR play in analyzing and addressing factors affecting the retention rate?

The role of Human Resources (HR) in analyzing and addressing factors affecting the retention rate is multifaceted and critical to the overall health of an organization.

HR departments employ a range of strategies and analytical tools to understand and mitigate issues that lead to employee turnover. Below are the key roles HR plays in this context:

• Data collection and analysis: HR systematically collects data on employee turnover, exit interviews, and employee satisfaction surveys. By analyzing this data, HR identifies patterns and trends that indicate the underlying causes of employee departures.
• Identifying key factors: Through detailed analysis, HR pinpoints specific factors that contribute to employee turnover. These factors may include lack of career development opportunities, inadequate compensation, poor work-life balance, and workplace culture issues.
• Developing retention strategies: Based on their findings, HR devises targeted retention strategies. These may involve enhancing professional development programs, revising compensation packages, and improving workplace policies to foster a more inclusive and supportive environment.
• Implementation of initiatives: HR is responsible for the rollout of retention initiatives. This includes training managers to better support their teams, and ensuring clear communication of career progression pathways within the organization.
• Monitoring and evaluation: HR continuously monitors the effectiveness of retention initiatives through ongoing data collection and feedback mechanisms. They evaluate the impact of these initiatives on the retention rate and make necessary adjustments to improve outcomes.
• Employee engagement and support: HR plays a crucial role in maintaining high levels of employee engagement by promoting a positive workplace culture. They organize regular engagement activities, recognize and reward employee contributions, and provide support systems such as counseling services.
• Benchmarking and best practices: HR benchmarks the organization’s retention rates against industry standards and incorporates best practices from other companies. This ensures the organization remains competitive in retaining top talent.

10 Tips to improve employee retention rate

Here are ten tips to help you enhance your employee retention efforts:

1. Prioritize effective onboarding: Create a program that helps new employees feel welcomed, informed, and equipped for success.
2. Foster a positive work culture: Cultivate a supportive and inclusive work environment. Encourage open communication, and collaboration, and provide opportunities for growth.
3. Offer competitive compensation and benefits: Ensure that your employees are fairly compensated based on industry standards and provide benefits packages that meet their needs. Roll out regular employee surveys to keep a check on your employee’s financial condition.
4. Provide opportunities for growth and development: Support your employees' professional growth by offering training, development programs, and opportunities to acquire new skills.
5. Recognize and reward performance: Implement a system to acknowledge and reward exceptional employee performance.
6. Promote work-life balance: Offer flexible work arrangements, and ensure reasonable workloads. Ensure that your employees are happy and healthy.
7. Improve communication channels: Establish effective communication channels that allow employees to voice their concerns, provide feedback, and share ideas.
8. Build strong leadership: Invest in leadership development programs to ensure that managers possess the necessary skills to support and engage their teams.
9. Conduct stay interviews: This will identify any potential issues or concerns that may impact retention. Act on the feedback received to address areas for improvement and enhance the overall positive employee experience.
10. Look after employee health:  Provide resources for personal well-being, hold meditation sessions and extracurricular events to boost the happiness quotient.

Remember, every organization is unique, so tailor these tips to align with your company's culture, values, and employee demographics. The end goal should always be to create an environment where employees are motivated feel valued, empowered, and inspired to stay and contribute to the growth and prosperity of your organization.

FAQs

1. What factors should I consider when calculating the employee retention rate?

When calculating the retention rate, consider the number of employees at the beginning and end of a specific period, along with any new hires during that period. Subtract the new hires from the end count, divide it by the start count, and multiply by 100. This formula takes into account both the initial and final employee numbers, as well as the impact of new hires.

2. How can I interpret the employee retention rate for my organization?

The employee retention rate provides valuable insights into your organization's ability to retain employees. A high retention rate indicates a healthy work environment, strong company culture, and satisfied employees. On the other hand, a low retention rate may signal issues such as poor management, lack of growth opportunities, or a negative work environment. Use the retention rate as a benchmark to gauge the effectiveness of your retention strategies.

3. What are some effective strategies to improve employee retention?

Improving employee retention requires a multifaceted approach. Some strategies to consider include effective onboarding programs, fostering a positive work culture, offering competitive compensation and benefits, providing growth and development opportunities, recognizing and rewarding performance, promoting work-life balance, improving communication channels, investing in leadership development, conducting stay interviews, and prioritizing employee health and well-being.

4. How often should I measure and track the employee retention rate?

It's beneficial to measure and track the employee retention rate regularly to monitor trends and assess the impact of your retention strategies. The frequency may vary depending on your organization's size and resources. Generally, tracking the retention rate on a quarterly or annual basis can provide meaningful insights. However, consider more frequent measurements during times of significant change or after implementing new retention initiatives.

5. What are some other metrics I should consider alongside the employee retention rate?

While the employee retention rate is a vital metric, it's valuable to consider other related metrics to gain a comprehensive understanding of your organization's employee retention efforts. Some additional metrics to consider include turnover rate (measuring the percentage of employees leaving within a defined period), average tenure (tracking the length of service of employees), employee satisfaction scores (gathered through surveys), and performance and productivity metrics.

6. How to calculate employee growth rate?

To calculate the employee growth rate, first determine the number of employees at the start and end of a specific period. Use the formula:

Employee Growth Rate = ((Number of Employees at End - Number of Employees at Start) / Number of Employees at Start) * 100.

This metric provides insight into workforce expansion over time, aiding strategic planning.

7. What is an 80% employee retention rate?

An 80% employee retention rate calculation means that 80% of employees remain with the organization over a specified period. While this indicates a relatively stable workforce, there is room for improvement. This rate suggests that the organization may need to address specific retention challenges to enhance employee satisfaction and reduce turnover further, contributing to overall organizational stability and growth.

8. What are the key factors HR considers when setting retention rate targets?

When setting retention rate targets, HR considers factors such as industry benchmarks, employee engagement levels, turnover rates, and feedback from exit interviews. They also evaluate the impact of organizational culture, career development opportunities, and compensation packages. These factors help HR establish realistic and strategic targets to enhance employee morale and reduce turnover.

9. Is a 70% retention rate good?

A 70% retention rate is generally considered moderate. While it indicates a majority of employees remain with the organization, it also suggests potential areas for improvement in employee satisfaction and engagement. HR should analyze underlying factors contributing to turnover and implement strategies to enhance retention, aiming for a higher rate to ensure organizational stability and productivity.