A company’s greatest assets are its employees. They are responsible for sales, marketing, strategy, and the overall success of a business. Naturally, it makes good business sense to hold on to the best employees and encourage the rest to work as productively as possible. This is where employee retention comes in.

Employee retention is one of the biggest issues facing HR professionals. This article defines what employee retention is, how to calculate it for your business, why it’s important, and how it differs from turnover or attrition. Finally, we look at how you can measure and improve employee retention rates at your company.

What is employee retention and why is it important to understand?

Employee retention is the practices put in place to encourage your employees to stay. It is affected by every part of a company, from salary and benefits to office culture, and employee satisfaction. When we record and react to the data, it is called an employee retention strategy. 

Understanding employee retention primarily comes down to cost. When too many employees leave a company, it can be expensive and timely to replace them. The loss of talent and experience can also negatively impact business and company culture. However, some turnover can be healthy. When employees naturally choose to leave a company, it can offer the opportunity to inject new skills into the business. Knowing what healthy levels look like and monitoring them is key.

How to calculate your employee retention rate

The employee retention rate usually appears as a percentage. The higher the percentage, the better the rate of retention. To calculate the employee retention rate, follow the formula below:

Part 1

(Total number of employees at the start of a chosen period) 

– (the number of employees who left during the period) 

= (the number of employees who remain at the end of the period)

Part 2 

(Number of employees remaining at the end of the period) 

÷ (total number of employees) 

= (percentage of retention)

Your retention rate will appear as a decimal. Convert it to a percentage by multiplying by 100.

Employee retention, turnover, or attrition?

There are several terms relating to the fluctuation of employees in a company. Sometimes it’s difficult to know the difference. Employee turnover, for example, works similarly to the employee retention rate. Turnover is the number of employees who leave a company, divided by the total number of employees who work there. The turnover rate is expressed as a percentage. Employee attrition, on the other hand, refers to the gradual reduction in the number of staff naturally, through retirement for example. These members of staff are not replaced. 

The difference between employee turnover and the employee attrition rate is that the turnover rate measures the percentage rate at which a company replaces employees. Whereas the attrition rate records employees who are not replaced. For example, a member of staff might choose to leave because business slows and the company leaves the role empty. You can think of the employee turnover rate as a stable or growing workforce. The employee attrition is a declining workforce.

Both the employee turnover and attrition rate measure the number of employees leaving a company. The retention rate, however, measures the a company’s efforts to change this pattern. The change over time. An increasing employee retention rate shows new policies and procedures are working.

Effects of extreme employee retention rates

Both extremely low and extremely high employee retention rates can be problematic. Rates will differ between industries and countries, so it is difficult to put an exact number on an ‘ideal’ figure. However, by organizing the data and measuring it frequently, you can define your company’s own success rate. Regardless of the number, both extremes can be costly in time, money, and resources. This reduces your company’s competitive edge. Below we list some of the negative effects of too high and too low employee retention rates.

Low retention rates i.e. Many employees choose to leave

  • This reduces the ability to complete everyday tasks due to a loss of continuity and expertise.
  • It is estimated to cost up to twice the salary of an employee who needs to be replaced because of the time and resources it takes to recruit, onboard, and train new staff.
  • Too many employee departures can encourage other talented staff to leave.
  • A fast turnover of staff does not give the team time to build effective relationships.
  • Customers might notice the change in staff, therefore impacting service and brand image.

High retention rates i.e. Many employees stay for a long time

  • Bringing new employees onboard can be rejuvenating for a company, leading to more innovation and more acceptance of change.Some long-term employees can become complacent, which can lead to lower productivity.
  • Low productivity can affect output, costs, and ultimately profit.
  • Employees who have been at the same company for many years may not be developing new skills that can propel the company forward.

What can you do to improve employee retention?

There are many policies and practices that your company can implement to improve the employee retention rate. The three most important concepts can be summarized as recruitment, recognition, and engagement.

Recruitment 

Employee retention starts with correctly identifying job roles and recruiting staff with the skills your company needs. We recommend being honest about your company and the everyday tasks of the role when advertising the position. This will avoid unrealistic expectations and dissatisfied staff. We also recommend recruiting employees who have experience with commitment. This might be many years spent in the same company for example, or a history of team sports, or a commitment to activities outside of work. All these things suggest that the candidate has the right mindset to stay loyal to a new employer.

Recruit for long-term growth rather than short term needs. Build a diverse team that can work effectively together because this will retain top talent. Many recruitment agencies can assist with this process and it is usually worth the investment. 

As part of the recruitment process, design a benefits package that both parties are satisfied with. This includes more than just a competitive salary. Your staff want to feel that your company cares for their social, mental, and physical well-being. This includes everything from flexible working, vacation allowances, discounts, extra health benefits, and so on. More than this, a fair and transparent salary structure can give staff the feeling of fairness and of being part of a team.

Onboarding is also a crucial part of the recruitment process. The onboarding process should reiterate your companies values and remind staff why they chose you in the first place. We recommend regular management meetings to collect feedback and monitor this. You should also consider getting feedback from new employees who have recently completed the onboarding process. If you want to learn more about the onboarding process, read our article, ‘How a better onboarding program can reduce employee turnover’.

Recognition

Even adults need to be told they are doing a good job sometimes. A 2016 Gallup study suggested that employees are twice as likely to say they will quit their jobs within the next year due to a lack of recognition.

How your employees feel about the recognition they receive can be measured and managed by employee engagement software. This software gives employees a voice within the company by conducting surveys. Most employee engagement software offers template packages or the option to build personalized packages yourself. Some software providers also analyze the results and provide reports directly. This allows your company to address individual employees or whole departments with low job satisfaction. It also offers the tools to work proactively to keep employees motivated.

To end an employee’s journey use exit surveys and exit interviews to provide a clear insight into internal problems. For more on exit interviews and surveys, we recommend the article, ‘What to ask in an employee exit interview?’.

Employee engagement

Engaged employees work more productively and achieve more than their disengaged counterparts. So, how can your company engage its employees? We list some ideas below that can be easily implemented.

  • Regularly gather feedback from your employees to gage how happy they are at work. This could take the form of yearly satisfaction and engagement surveys, or more regular pulse surveys.
  • Communicate the company’s core mission and vision and refer to it regularly. This is the ultimate goal that unites all staff.
  • Negotiate and update performance development plans with all employees. This offers purpose and direction to employees, encouraging them to remain loyal.
  • Provide training for management in core areas such as giving and receiving feedback, coaching, handling complaints, building career development plans, and so on. Poor middle management is often cited as a reason why your best employees leave.
  • Offer learning events to all staff such as product training and ‘job swaps’. Or non-work-related topics like book clubs and exercise classes. Creating a community and investing in employees makes them feel valued. For more on employee morale, read our 4 steps to success here.
  • Design a circular feedback loop from management down to employees and back up the chain of command. This is called 360 feedback. It allows you to target your training and feedback for all employees, from those just starting out to senior leadership.

To take away…

The employee retention rate gives valuable insights into the inner workings of your company and the impact it has on its employees. The key point to take away is to measure and track the data through simple calculations and employee satisfaction surveys. When you have a clear picture, there is a whole range of implementations you can use to help your company improve employee retention rates. Through recruitment, recognition, and engagement. Invest resources into improving these processes and give your company the competitive edge it deserves.