What is employee retention rate?

Employee retention rate is a metric that measures the percentage of employees who remain employed over a specific period. 

This vital measurement allows organizations to gauge the success of their human resource practices. This includes things such as talent employee development and engagement initiatives. 

A high employee retention rate indicates that your organization is effectively managing the needs of its workforce—leading to greater loyalty and productivity, and a better overall working performance. 

A low employee retention rate could well signal potential issues within your team. This could include a lack of effective communication, inadequate compensation, or a work environment that doesn’t nurture team members’ development.

How to calculate employee retention rate

The formula to calculate your employee retention rate is as follows:

Retention rate = (number of people employed during the entire period)/(number of people employed at the start of the period) x 100

This formula should only include employees who worked during the entire period, from the beginning date to the end date. It does not include those who were hired in the middle of the period of time. 

Your retention rate serves as a compass for HR leaders, pointing them in the right direction to assess the effectiveness of their employee retention strategy.

Here are some examples of how to calculate your employee retention rate:

Example 1

A research and development company previously had 100 employees. In the last year, five people have left. 

Employee retention rate = ((100 – 5)/100) x 100 = 95%

Example 2 

A large manufacturing company has 10,000 employees at the start of the fiscal year and 8,500 of them are still employed at the end of the year.

Employee retention rate = ((10,000 – 1,500)/100) x 100 = 85%

Example 3

A multi-national chain has 500 stores in one country, each having 30 employees. They decide to close down all 500 stores. In this situation, 15,000 employees (500 stores x 30 employees) would be affected.

Before the closures, let’s assume the chain had 50,000 employees. After closing down the 500 stores, the company would have 35,000 employees remaining (50,000 – 15,000).

Employee retention rate = ((50,000 – 15,000)/100) x 100 = 70%

What is considered a good employee retention rate?

A good employee retention rate will vary depending on what industry you’re in and the size of your company. For example, industries such as retail or entertainment commonly would see high levels of employee turnover. 

As a rule of thumb, a retention rate of around 85-90 percent or higher is considered good for most industries. 

Why should HR leaders care about employee retention rates?

A high employee retention rate reveals a noteworthy level of employee engagement. If a company ensures it has a high employee retention rate, this can help HR leaders:

• Reduce company costs
• Increase employee productivity
• Improve employee engagement
• Strategize workforce tactics
• Address recruiting issues

Calculating the number of employees who stay at a company provides HR and other department leaders with concrete, reliable data that can in turn help them navigate through rough waters and toward better employee engagement.

How can HR leaders use employee retention rates beneficially?

Retention rate data is the key to unlocking strategic retention methods. HR leaders can apply the following practices to use employee retention rates effectively:

• Choose specific areas of measurement. HR leaders should determine the specific time span and jobs they plan to analyze. Additionally, calculating the retention rate for each department, as well as for the company as a whole, enables HR leaders to discover certain weak areas in need of adjustment. 
• Analyze turnover rates. Calculating the turnover rates, and analyzing this data in combination with retention rate data, can provide a comprehensive picture of the overall employee retention status. Examining when and why employees choose to leave their jobs helps HR leaders understand what changes they should make to enhance motivation, engagement, and retention. 
• Interpret the data. Retention data can provide valuable insight for HR leaders. Analyzing retention and turnover rate figures can shed light on important trends, inefficient practices, strategies that need adjustment, or successful methods that they can further develop.  
• Implement the changes. HR leaders can collaborate with supervisors to craft and implement an improvement plan that addresses the root causes of low retention rates. Perhaps, for instance, the plan will revamp company onboarding methods or the interview process, or improve upon a sparse employee development program.

How to increase employee retention rate

One of the most effective ways to achieve a high retention rate is by creating a positive work environment for your team. 

This includes fostering employee satisfaction, growth, and loyalty by offering things such as competitive compensation packages, providing plenty of opportunities for career advancement, and implementing robust employee development programs.

HR leaders can also boost their retention rates by ensuring there are clear and open communication channels, promoting a healthy work-life balance, and recognizing and rewarding people for their achievements. 

What is employee retention vs turnover rate?

The employee retention rate and the turnover rate are two sides of the same coin, as they each represent different aspects of the ability to nurture and maintain a workforce. 

Retention rate measures the percentage of employees who remain employed over a specific period. This indicates the success of the organization’s HR practices and the work culture and environment. 

Turnover rate measures the percentage of employees who leave your organization within a specific period, whether that’s voluntarily or involuntarily. 

How to measure employee retention rate with HR tech

Modern software solutions and analytics tools can be used to track and analyze a wide range of employee data. 

By leveraging HR tech such as Human Resource Information Systems (HRIS), HR leaders can store and manage employee data, monitor employee performance, and generate reports on various HR metrics—including retention and turnover rates. 

By collecting and analyzing this data, you can identify trends and patterns that could have an effect on the satisfaction of your team. 

Therefore, integrating this HR tech into your decision-making process allows you to make educated, data-driven decisions that can enhance your workforce management and improve your employee retention rates. 

How can calculating employee retention rate improve company culture?

Calculating and analyzing your retention rate helps HR professionals pinpoint, address, and reinforce weak areas. 

Applying this metric can help improve the employee experience and build a workforce of engaged and motivated employees. So you will have a team that not only has greater job satisfaction, but will also positively contribute to a healthy company culture.