Decreasing Staff Turnover is the goal of every employer. You want the employees you train up to be happy and productive workers and remain at your company for many years to come. If your turnover rates are high then you will find yourself continually sourcing, recruiting, onboarding and training replacements. This involves a great deal of time and money, so it will inevitably have a big impact on your business. The first step to increasing retention and reducing your turnover rate is to establish an effective retention rate formula.
A retention rate formula will help you identify any potential issues in your company so that, once addressed, your company can continue to grow, develop and attract top talent. You can then focus on other strategies to increase your retention rate, such as improving the employee experience and creating regular feedback cycles.
- Employee Retention Rate Definition
- How to Calculate Retention Rate: the Retention Rate Formula
- Example Calculation for Employee Retention Rate
- Why Retention Is the Foundation of Growth
- Why Employee Retention Matters for a Small Business
- Employee Retention – Best Practices Checklist
An employee retention rate is a metric that represents a company’s ability to retain employees over a given period of time. Although they are similar concepts, be careful not to confuse retention with turnover. Turnover focuses on employee departures and divides the number of leavers by the average headcount at the start and end of a given period. Retention, in contrast, is only interested in the proportion of employees who have remained at your company over a given period. It doesn’t take into account new hires.
Your employee retention rate can give you valuable insight into your company. If your rate is too high, you will likely have high recruitment and training costs. You will also probably encounter issues with morale and productivity if your employees are constantly seeing their colleagues walk out of the door. If your rate is low, then this low rate will probably be reflected in a work environment based on trust, commitment, loyalty and productivity.
Let’s start by reviewing turnover.
Employee Turnover Definition: a percentage that represents the number of employees that leave your company in a given period of time.
(# of leavers/average # of employees) x 100 = turnover rate
So a company with an average of 200 employees and 10 leavers over a given period, would have an employee turnover rate of: (10/200) x 100 = 5.
Now let’s take a look at retention. The following retention rate formula will help you calculate your company’s staff retention rate:
Retention Rate Formula:
(# of employees who stayed for the period / # of employees at start of period) x 100 = retention rate
Most companies calculate retention rates on an annual basis, so the defined period would be Jan 1st to December 31st. However, you can define any period you like.
Formulas can be a little hard to digest, so let’s look at a couple of examples to help us understand the employee retention rate formula.
A Leeds-based company – Top Paper – had an average of 100 employees during the calendar year 2020. Throughout the course of that year, 10 people left the company (voluntary and involuntary) and had to be replaced. Consequently, Top Paper retained 90 employees.
Top Paper’s retention rate formula would be as follows: (90/100) x 100 = retention rate of 90% (high). Nothing to worry about here.
Bouncy Castles Ltd. had an average of 25 employees during the calendar year 2020. Throughout the course of that year, 17 people left the company (voluntary and involuntary) and had to be replaced. Consequently, Bouncy Castles Ltd. retained 8 employees.
Bouncy Castles Ltd. retention rate formula would be as follows: (8/25) x 100 = retention rate of 32% (very low). This suggests there is a serious issue preventing the company from retaining talent which needs to be addressed.
Retention is the foundation of growth because your retention rate affects every area of your business. When you track your retention rate regularly and create benchmarks to help you continuously improve, there are a whole host of benefits that can help your business grow.
Firstly, a company with a high retention rate is usually one that values its employees. And when people feel appreciated, they are more likely to be productive and go the extra mile. Remember: your employees are your most important asset. If you are able to retain top talent then you will be in a much better position to grow and expand as a business.
Secondly, the retention rate metric can help you measure the success of new initiatives, as well as employee engagement. It is also a great tool for analysing your recruitment and onboarding processes. If new hires regularly leave your company then it could suggest an issue in the hiring process. Perhaps more time needs to be spent sourcing the right candidate, rather than rushing to fill a position with the first available candidate? A little more investment at the recruitment stage can save you a whole heap of time and money further down the line.
Regularly using the retention rate formula to calculate your rate is especially important if you are a small business. This is mainly down to the fact that, as a smaller entity, you are more likely to have a limited supply of resources. If you are going to invest the time and money in recruiting, onboarding and training a new employee, you need to know they are not going to up and leave in a matter of weeks. At the very least, you want them to stay for however long it takes for you to recover your investment. Every time you fail to retain a member of staff, your hiring costs for the year go up. Not to mention the time you have to spend getting a new employee up to speed before they become a productive member of staff.
Another important reason is that the smaller a company is, the more your employees will notice someone leaving. If they regularly see their colleagues being dismissed or handing in their notice, then it will have a big impact on morale and the employee experience, further reducing your retention rate.
The following best practices should help you increase your retention rate and, as a consequence, reduce your employee turnover rate:
- Benchmark and track your employee retention rate, employee turnover rate and attrition rate
- Invest more time in finding the right person for the job from the onset
- Monitor and research the market on a regular basis so that you are offering fair salaries and compensation plans in line with industry averages
- Offer a solid onboarding process to ensure a positive employee experience from the start
- Gather employee insights through regular appraisal meetings and feedback surveys. The more valued and heard your employees feel, the more likely they will stay at your company
- Establish clear goals and expectations in terms of employee performance
- Create a positive work environment based on trust and transparency
- Provide your employees with training and support so that they understand and are able to perform their duties
- Offer clear career development paths to your employees
- Recognise and reward employee contributions