how to calculate employee retention rate

Ultimate Guide on How to Calculate Employee Retention Rate

Every year, a certain number of employees will leave your organization, which is normal and may have nothing to do with your company policies. 

But too many leaving or your top performers leaving will slow you down as a business. You’ll have fewer experienced employees and unhappier clients and be stuck in a never-ending cycle of job posting, interviewing, and onboarding. 

That’s why you must focus on your employee retention rate. This metric will tell you whether you have something to worry about regarding workplace trends. 

In this article, we’ll explain how to calculate employee retention rate, why it’s important, and quick strategies you can implement to boost this metric over time.

Let’s get started.

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What is Employee Retention Rate?

Employee retention rate is a metric that measures how many employees stay with your firm through a time period, usually a year. It is the opposite of the employee turnover metric, which measures how many people have left during a period.

The basic formula calculates the percentage by dividing the number of employees (who remained in employment for the whole period) by the total population at the start of that period.

How to calculate employee retention rate

For example, if your organization initially had 100 workers but ended up with only 90, its retention rate would be 90%. Conversely, ten people left during this time, which means that its attrition rate would be 10%.

Why is Calculating Employee Retention Rate Important?

Why is Calculating Employee Retention Rate Important?

Workforce stability

A high retention rate means that the company has a stable workforce, which is crucial for its long-term success and growth.

Think of a software development company with high staff retention. The employees who stay in such cases have worked for many years on long-term projects, making them very proficient with company policies, work ethics, and standards. This makes it easier for you to plan for the future and take on more ambitious projects since you know you have a reliable team to execute them.

Cost savings

It can be costly to recruit, hire, and train new employees. This can be avoided altogether if you hold on to experienced employees.

You can also focus your resources on other areas, such as employee career development, which will lead to a more skilled workforce.

Productivity 

Compared to new hires who know little about your company’s processes, workplace culture, or goals, experienced workers are generally more productive because they have a deep understanding of these attributes.

Consider a manufacturing company where some employees have been working for several years. These experienced professionals understand the production steps well, as well as the equipment used and required quality standards. 

They help identify bottlenecks quickly, optimize workflows, and assist new hires at the workplace through mentorship programs. They maintain higher productivity levels and better product quality, which would not be the case if inexperienced recruits constantly replaced them.

Knowledge retention

Your organization will benefit from accumulated institutional knowledge when employees enjoy longer tenures with you. 

Imagine a consulting firm that specializes in a niche industry. The consultants who have stayed with this particular firm for years have acquired extensive experience in client best practices, such as which communication styles they like or ideal presentation styles. They carry this expertise and build on it with every new assignment they complete. In the long run, this knowledge retention will give your company a competitive advantage.

Morale and engagement

High turnover rates are usually associated with poor morale and lack of job satisfaction among workers.

On the other hand, when retention is high, work is meaningful. Employees have a better chance of working with supportive supervisors and colleagues they can depend on because that is imbibed in the company culture. There is a better sense of security and positivity present in all the staff members. High employee morale leads to effective engagement, guaranteeing quality service delivery and sales.

Competitive advantage

Companies with high retention rates can gain a competitive edge by attracting top talent and enjoying skilled workforce continuity.

Consider two tech start-ups competing against each other for the same pool of highly skilled engineers. Company A is known for its low employee turnover rate, pleasant work environment, competitive salaries, and professional growth opportunities. Company B, on the other hand, has a history of high turnover.

When talented engineers are weighing up job offers, they are more likely to join companies that appreciate them like company A. This will eventually result in a stronger and more skilled workforce at Company A.

Customer satisfaction

Frequent personnel changes can lower customer satisfaction. Consumers prefer interacting with familiar employees.

Let’s picture an investment firm where clients have worked with the same account manager for many years: 

  • During this period, the account manager becomes familiar with the client’s financial situation, goals, and preferences. 
  • Clients feel comfortable discussing their concerns and trust their personal advisors’ judgments. 

This long-term relationship leads to higher customer satisfaction and loyalty, as clients know they can rely on a familiar and knowledgeable point of contact.

How to Calculate Employee Retention Rate?

Follow these five steps to find the employee retention rate for your organization.

Step 1: Determine the Time Frame

Many organizations prefer calculating their retention rates annually. This provides a more complete view of worker movement as well as comprehensive information about how well they have retained employees on an annual basis. 

However, a quarterly or even monthly period could be measured too.

If you measure your retention rate monthly, you can detect sudden fluctuations in the number of separations and intervene with policy adjustments. This frequency can reveal more about retention trends at a more granular level and may be especially important if a company is undergoing significant changes or facing difficulties.

At the same time, certain perks apply to calculating an annual employee retention rate. This aligns with typical HR reporting cycles and enables a wider and longer-term outlook on retention. Also, benchmarking against industry standards is easier with this method because most published data on retention are computed per annum.

Step 2: Find Out How Many Employees You Had at The Start of The Period

Once you have chosen your time frame, you must determine the total number of employees present at the beginning of that period.

This information can be found in payroll records or human resource data files. Be sure to include all active employees on the first day of the period, regardless of their employment status (full-time, part-time, or temporary). This figure will serve as the baseline for calculating your retention rate.

Step 3: Determine How Many Retained Employees There Were

It’s time to calculate the number of employees who have remained with you, i.e., those who remain at the end of the year or calculation period. 

This figure should only include employees who were with the company at the start of the period and are still employed at the end. It’s crucial to exclude the number of new hires made during the period, as the focus is on measuring the retention of your original workforce.

Step 4: Use the Employee Retention Rate Formula

You have the numbers you need now: the starting headcount and the number of people who have remained with you. All you have to do is compute it into the employee retention rate formula:

Employee Retention Rate = (Number of Employees at the End of Period / Number of Employees at the Beginning of Period) x 100

Let’s assume that your company employed 200 people at the beginning of this year. Your retained employees come to 150, i.e., the number of employees who stuck around until the end of the period.  

The retention rate would be determined as follows:

(150 ÷ 200) x 100 = 75%

This implies that three-quarters (75%) of your workforce have been with you for twelve months.

Step 5: Compare Your Retention Rate to Industry Standards

After calculating your employee retention rate, you must compare it to industry benchmarks. Are you retaining fewer employees than your competitors? Though the average retention rate stood at 47.2 % in 2021, the normalcy of this rate depends on your industry. For example, if you work in the hospitality industry, 47.2% is unrealistic, as the average turnover rate is 73.8% for this sector. That means the retention rate is much lower. 

If you compare the number of employees you’ve retained to how your companies have fared, you’ll have a good idea of whether you are performing above or below average. 

Strategies to Improve Employee Retention Rates

Here are some actionable retention strategies that firms could use to improve their employee retention rates:

StrategyActions
Offer competitive salaries– Conduct regular wage surveys to ensure pay matches market standards.
– Provide benefits packages such as medical covers, pension plans, and paid-offs.
Invest in employee development– Offer continuous training programs to impart new skills.
– Provide educational reimbursements or create professional development grants.
– Create clear career paths and promotion opportunities within the organization.
Create a healthy working environment– Ensure the office is safe and comfortable.
– Implement open communication systems to build trust among employees.
– Offer flexible schedules such as remote work and compressed workweeks to encourage work-life balance.
– Gather constructive feedback through questionnaires and interviews to assess employee engagement.
Invest in employee recognition– Establish a formal recognition system for outstanding performers.
– Give regular feedback and praise for well-done work and efforts.
– Celebrate milestones and project completions.
Take care of employee wellbeing– Provide wellness services such as gym memberships, stress management counseling, and mental health support groups.
– Foster an atmosphere of inclusion, diversity, and respect.

How Peoplebox Simplifies Employee Retention Rate Tracking

The best way to retain your employees is to ensure they are paid well, cared for, protected, and encouraged to grow and learn. But can you step in and enhance every individual employee experience? In larger companies with thousands of employees, this is impractical. In smaller companies, it may be easier to execute but still tricky, as you’ll generally have smaller teams and more duties to get to.

You need an efficient talent management tool that fits your existing workflows and simplifies people management — giving your employees the same benefits but with half the effort from your end. 

Peoplebox provides real-time updates and progress tracking to help managers and employees stay on track and make informed decisions about performance and engagement. 

You get the following features when you include Peoplebox in your workflows:

  • OKR (Goals) alignment and tracking
  • Performance reviews and 360-degree feedback
  • 1:1 meeting management and check-ins
  • Engagement surveys and analytics
  • People analytics and workforce insights
  • Org chart and team visualization
  • Anonymous messaging for candid feedback
  • Seamless integrations with existing tools and workflows
  • Customizable templates and a user-friendly interface
  • Real-time progress tracking and reporting

By leveraging the power of technology and data-driven insights, you can create a work environment that values, supports, and retains your most valuable asset — your people.

Ready to create a thriving workforce? Get in touch with us today!

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