If you’re searching for a simple and quick explanation of how to calculate your employee retention rate, you’ve come to the right spot.
For every HR pro who wants to make their organization a better place to work, here’s the answer you’ve been searching for:
Employee retention rate formula
The basic formula for calculating retention is the number of individual employees who remained employed – let’s say 36 – for the entirety of the specified period – let’s say 12 months – divided by the number of employees at the start of that same period – let’s say 40 – multiplied by 100.
So, in this example, you started the 12-month period with 40 employees and ended with 36. That’s (36/40=0.9) and then (0.9×100) = 90%. Your retention rate for the course of one year was 90%.
There! You’re done.
Not really. There’s a lot more to know about employee retention rates than just how to calculate it. So, if you’re like most HR people who’ve set out to master this retention discussion, please read on.
Retention vs. turnover
Many professionals use the terms “retention rate” and “turnover rate” interchangeably. The rates do complement each other, but they offer different views because they look at different things.
As you see from the example, the retention rate measures how many employees were retained over a specified period. Turnover, on the other hand, is the rate of separations in an organization, divided by the average number of employees during the same time.
Calculating both rates will give you a more complete view of worker movement.
Employee turnover rate formula
Here’s how the turnover rate works with the retention rate in the same period, using the same numbers from the retention example above.
The formula for calculating turnover is the number of separations – four – during a specified period – 12 months – divided by the average number of employees – 40 – multiplied by 100.
So in a department of 40 employees, four people left and were replaced. Retention is (36/40) x 100 or 90%. Turnover is (4/40) x 100, or 10%.
But what happens if four people leave and you replace them with four new people, who also leave? And then you replace those four people, all in the same 12 months? That’s a different number altogether.
Remember, the 36 people never changed, they stayed employed and never left the organization. They were retained. But eight new people came into your organization, and four of them left.
That calculation would look like this:
Retention is (36/40) x 100, or 90%.
Turnover is (8/40) x 100, or 20%.
So, the rates aren’t always directly inverse.
Other key details about retention
When calculating retention, be sure to only include those employees who were employed on both the first and last day of the time period. Anyone added during that time is simply not counted since the goal is to track how many employees stayed or were retained from the first day.
Also, there are internal transfers to be considered. For instance, if a customer service employee is promoted to the sales team. That person is retained organization-wide but represents a departure from a specific department.
In general, though, retention reflects the stability of a workplace. Its shortcoming is that it doesn’t track the departures of those who came and went during the time period.
That’s why tracking turnover helps complement the retention rate by tracking separations.
What to count
You can calculate a retention rate for your entire organization or just one area. It’s good to break things up sometimes, especially if you have a problematic department with a lot of turnover that would negatively impact the retention rate of the rest of your business.
For instance, call centers are notorious for turnover. A Quality Assurance & Training Connection study found the average call center agent turnover rate ranged between 30% and 45%. Some centers reported 100% turnover in one year.
In another example, let’s say your sales and marketing team has 17 seasoned employees. However, two of them, a married couple, retired together in mid-year and moved away to be closer to their grandchildren. Both were replaced. One of the two new people announced suddenly that the job just wasn’t for them, so that person left and was also replaced.
So, 17 people in the group, two retire, one quits and all three positions were filled with new hires.
Remember, retention is the number of individual people who remained employed during the time period. In this example, 15 of the original 17 people never left. So that’s 15 divided by 17 and then multiplied by 100.
The retention rate in this example is (15/17) x 100, or 88.2 %.
Turnover is the rate of separations, divided by the average number of employees during the same time period.
The turnover rate in this example is (3/17) x 100, or 17.6%.
Importance of a good employee retention rate
If you hire well, it’s essential to do what you reasonably can to stop people from leaving your organization. You can put a lot of time and effort into finding the right person, and you don’t want to squander that.
Turnover is also expensive. According to the Bureau of Labor Statistics (BLS), it costs 33% of a worker’s salary to replace them when they leave.
As a general rule, companies should aim for a retention rate of 90%, although in reality that may be hard to achieve, as you can see in the charts below from the BLS.
Top 5 best retention rates in 2019 by industry
|Industry / Year 2019||Total Separations as a percent of annual average employment|
|Finance and insurance||24.6%|
Top 5 worst retention rates in 2019 by industry
|Industry / Year 2019||Total separations as a percent of annual average employment|
|Arts, entertainment and recreation||79.5%|
|Leisure and hospitality||79.0%|
|Accommodation and food services||78.9%|
|Professional and business services||63.5%|
Tactics for improving your employee retention rate
Your ability to retain good people can be affected by:
- Lack of training and development opportunities for new hires
- Poor communication between management and staff members
- Unclear job descriptions that don’t clearly define responsibilities
- Inadequate staffing levels to cover the workload
- A lack of recognition by managers when their work is done well
- An inability to provide feedback on performance issues, and
- The need for more flexible working hours.
The best way to address employee retention is to ask employees what they want. An employee survey is a great tool to do just that.
Here are 10 ways to get started.
- Invest in employees. According to LinkedIn, 94% of employees say they would stay with their company longer if it invested in their career development. Employees understand they need to keep their skills sharp to remain competitive and move up the ladder.
- Focus on managers. You know the old line “People don’t quit jobs, they quit bosses”? Well, it’s true.
- Recognize employees’ contributions. Everyone likes to feel valued, and that’s especially true in the workplace. A 2022 Gallup survey found that when employees feel recognized for their work, they are 56% less likely to look for new opportunities.
- Reassess compensation. Pay is an essential piece of any retention strategy. No matter how valued an employee may feel, they are likely to look outside their current company if they feel inadequately compensated for their work.
- Look at the benefits. Similarly, benefits are a major factor, with Forbes reporting that for nearly 6 in 10 employees, a company’s benefits package is the most important non-salary factor they consider when assessing a job. Benefits like lower employee healthcare premiums or increased parental leave can mean the difference between staying in a role or looking for a new one.
- Better work-life balance. While remote work and flexible scheduling policies are important factors in creating work-life balance, they’re of little use if employees simply have more work to do than they can reasonably achieve, or if the company culture expects them to check their email well after business hours.
- Pathways for growth. Employees know they need to keep moving or risk falling behind. Yet many worry that they lack opportunities for promotion and upward mobility As a result, they look outside the organization for their next step.
- Better culture. While organizational culture may seem subjective, its impact on retention can’t be denied. In fact, company culture is one of the key drivers of workplace satisfaction.
- Hybrid options. A 2022 ADP survey found that 64% of Americans would consider looking for a new job if required to return to the office full-time.
- Flexibility. In addition to remote options, employees increasingly prioritize flexibility in their schedules as one of their employee retention strategies. Employees who can flex their hours to accommodate family caregiving, medical needs or even a simple run to the bank in the middle of the day are likely to feel more in control of their workday and more able to attend to their needs. This is true even if the total number of hours worked remains the same.