How to Calculate Employee Retention Rate

Matt Tenney, Author of Inspire Greatness: How to Motivate Employees with a Simple, Repeatable, Scalable Process

You may have seen a lot written over the past year and a half about “The Great Resignation.” This trend gained traction around April 2021, when four million people quit their jobs. 

Though The Great Resignation appears to be slowing down, it has been a wake-up call for many industries that they need to improve their retention game. 

Since the cost of turnover can have a devastating effect on an organization’s profitability, the high rates of turnover that we’ve seen over the course of the COVID-19 pandemic prompted many leaders and human resources departments to revisit and reassess their employee retention strategies.

In an effort to address what could be going wrong and identify sustainable methods for avoiding the kind of mass turnover that has characterized The Great Resignation, organizations can gain insight into what’s going right by examining their employee retention rate.

Employee retention rate is defined as the percentage of employees that remain at an organization during a specific time period. A high retention rate indicates a low turnover rate, which measures how many employees leave during a certain time period, and a high degree of employee engagement.

To calculate employee retention rate, an organization should divide the number of employees who have remained with the organization for a specific period of time by the initial number of employees for the same period of time, and multiply that number by 100. It is typically measured on an annual basis.

In this article, we’ll define employee retention rate, explain how to calculate it, and discuss ways to utilize retention and turnover rate calculations to improve retention strategies. 

Defining Employee Retention

Employee retention refers to an organization’s ability to retain its employees and prevent turnover. 

Employee engagement and employee experience greatly impact employee retention. 

This is because an employee’s feelings about their job, their feelings of belonging, their feelings toward leadership, and the sense that their voice is heard and valued all play a major role in an employee’s decision to stay put or look for greener pastures. 

There are many factors affecting retention, including compensation, job clarity, recognition, development opportunities, flexibility, autonomy, work-life balance, and meaningful work. 

Benefits of Employee Retention

High retention rates can indicate a high level of engagement, superior performance, and better customer service. 

Perhaps the most important aspect of retention for an organization’s financial success is that high rates of retention mean lower rates of turnover. Because of the negative financial impact turnover can have on a company’s bottom line, companies typically want to avoid it as much as possible. 

On top of the high cost of turnover, the time and effort managers have to spend on dealing with attrition can take a significant amount of time away from the aspects of their roles they should be focused on. When retention is high, this allows managers to spend less time and effort on the recruitment process. 

In addition to the financial impact of high turnover, it can also hurt employee morale. 

Employees can become overworked due to increased workloads and responsibilities until those vacated roles are filled. Even newly hired employees may experience low morale as they struggle to quickly learn their new job duties while they navigate a new work environment with new co-workers who may already be experiencing burnout.

Because it is so much more efficient and cost-effective to retain skilled employees than to recruit, train, and onboard new employees, having a high retention rate is good for an organization’s overall performance. It indicates that a team is highly engaged and performing well. 

Employee retention programs play a vital role in not just retaining employees, but they also help companies attract talented and skilled employees. High retention can help an organization build a positive reputation with customers and potential job candidates.

Recruiting and retaining talented employees is essential for an organization’s financial sustainability and for maintaining high levels of productivity, engagement, job expertise, and customer satisfaction. 

Retention vs. Turnover

Organizations track turnover closely because it can be such a costly process to refill positions when employees leave. This makes retention very important for the long-term financial success of an organization.

When we talk about employee turnover, we are referring to the number of employees who leave an organization, voluntarily or involuntarily, over a specified timeframe. Employee retention, on the other hand, is the number of employees who stay with an organization over a specified timeframe.

Retention and turnover are closely linked because they are both tied to employee experience, engagement, and satisfaction. Maintaining the right balance can be a real challenge. 

In the SHRM/Globoforce survey Using Recognition and Other Workplace Efforts to Engage Employees, retention/turnover was found to be the top workforce management challenge cited by 47% of human resource professionals

According to Gallup, voluntary turnover costs organizations over a trillion dollars each year.

Studies have indicated that every time an organization has to replace a salaried employee, it can cost them the equivalent of 6-9 months of salary. For a real-world scenario, imagine replacing a manager making $60,000 a year. This can cost $30,000 – $45,000 in recruiting, onboarding, and training costs.

Retention and turnover metrics, when used together, can provide powerful insight into employee experience, engagement, and satisfaction, as well as an organization’s level of cultural buy-in from employees.

Calculating Employee Retention Rate

Employee retention rate, also referred to as the “stability index,” measures the rate at which staff members stay with an organization. 

To calculate employee retention rate, divide the number of employees who have remained with the organization for a specific period of time by the initial number of employees for the same period of time, and multiply that number by 100.

(Remaining employees during a set timeframe / Initial number of employees during the same time frame) x 100 = Retention rate

If, for example, you wanted to calculate your organization’s retention rate for the year 2021. If the organization had 500 employees on January 1st of that year and 475 employees on the last day of that year, December 31st, this is how you’d calculate the employee retention rate:

(475 divided by 500) x 100 = 95% yearly retention rate

To calculate how many staff members remained employed for the whole time period being measured, only include staff who were employed on the first and the last day of the time period. 

Since the goal is to track the retention of employees who worked on the first day of the time period being measured, do not count employees hired within that measurement period. New positions added during the year should also not be counted.

When determining your organization’s employee retention rate, you can measure it on an annual, quarterly, or even monthly basis, but it is usually calculated on an annual basis.

Shorter or longer time periods can be measured, depending on what is being measured, such as the short-term result of retention strategies or when calculating the retention of employees who remained with an organization after a past reduction.

While employee retention rate can provide a good snapshot of the stability of the workforce, it is limited by the fact that it does not track the departures of employees who both joined and left during the time period being measured. 

Employee Turnover Rate

Because employee retention rate is limited in what it tracks, calculating both the employee retention rate and employee turnover rate can be more useful.

According to SHRM, “retention rate… measures the retention of particular employees over a specified period of time and complements the turnover rate metric, giving a more complete view of worker movement than calculating either metric alone.”

Employee turnover rate is defined as the number of employee departures divided by the average number of employees during the same time period. This is done by dividing the ending number of employees by the initial number of employees, then multiplying that number by 100: 

(number of separations during the specific time period / average number of employees during that same time period) x 100 = Employee turnover rate

The resulting number can then be divided into voluntary and involuntary separations to measure the percentage of employees who left by choice, were fired, or were laid off.

Retention and turnover metrics can provide insight into how well an organization is delivering on culture in terms of employee experience, employee engagement, and job satisfaction and help gauge the effectiveness of management, revealing areas for improvement. 

Boosting Your Organization’s Employee Retention Rate

A recent survey by Willis Towers Watson revealed that 53% of employees said they were “open to leaving their employer” and 44%, said they were actively looking for a new job or were planning to begin looking for a new one.

The COVID-19 pandemic has shifted employees’ expectations and needs, and they are seeking jobs that offer different and better benefits, whether monetary or less tangible, than previously. 

Compensation and culture, as usual, are still impacting engagement and retention, but so many of these Great Resignation job seekers are looking for work situations where they can improve their mental and physical well-being and experience greater overall job satisfaction. 

Since turnover can be so costly, retention efforts should always be a part of an organization’s strategy to recruit and engage the best talent and remain profitable. These efforts should focus on building a strong organizational culture and developing strong leaders.

Organizational culture, along with leadership, has a huge impact on retention and turnover rates. Organizational culture sets the tone for an employee’s experience, which, in turn, affects employee engagement and retention. Good leaders reinforce culture in a positive way.

In a recent article by Business Leadership Today contributors Karin Hurt and David Dye, they suggest the key to retaining employees is investing in the development of human-centered leadership at all levels of the organization.

To recruit, engage, and retain talented employees, organizations should focus on leadership development that leads to a real culture change that then leads to employee buy-in and engagement.

Hurt and Dye recommend a three-step approach for developing this type of leadership in your organization:

• Identify and teach a consistent set of behaviors at every level.
• Accelerate performance and connection by helping leaders serve as coaches for their teams.
• Give your leaders practical ways to encourage the contribution of new ideas and processes.

Since leadership plays such a vital role in employee engagement, it’s important to have leadership in place who let employees know they’re valued, who model core values and desired behaviors, who provide coaching and mentoring opportunities to their teams, and who foster healthy communication at every level of the organization.

Many job seekers are placing more emphasis on purpose and want to work for organizations that have a mission they feel passionate about. To retain workers with this mindset and these job-seeking behaviors, leaders and recruiters should pay close attention to what workers are asking for.

Having a caring organizational culture in place that puts people over profits is key to maintaining high retention rates and sustainable employment, even as the needs of workers shift, as we’ve witnessed during the pandemic. Meeting those shifting needs helps retention.

The key to successful recruiting efforts and retention is planning for, recognizing, and responding to these shifts in employee needs and expectations and determining where strategies can be improved. 

Employee experience starts at recruitment and has a major impact on retention, so helping to ensure a positive employee experience for current employees and a positive recruitment process for potential hires should be part of any retention strategy.

Hiring for cultural fit is another good way to start your retention efforts early on in an employee’s experience with your organization. When you hire for cultural fit, it’s more likely that culturally aligned employees will stay. 

Other ways to drive retention include offering development and growth opportunities, providing employees with the tools they need to work with autonomy (and letting them work with autonomy), being flexible where possible, utilizing a well-designed onboarding process, offering regular feedback and recognition of employee accomplishments and contributions, and offering programs that improve employee well-being.

---