Losing productive employees, especially those with in-demand and specialized skills, is expensive. Each loss costs your business time and money in recruiting, training, and lost production.
You want to fix the issues that cause employees to leave before they walk out the door. An improved employee experience can create a more positive work environment for all involved. Tracking your employee retention rate can help you see where potential trouble spots lie so you can promptly take the right actions to remedy them.
The thing is, your retention rate only gives you half the story. Your turnover rate provides the second half. Read on to learn how to use both rates to keep top employees.
Image Credit: KucherAV/istockphoto.
Employee retention rate vs. employee turnover rate
Calculating employee retention goes hand in hand with calculating employee turnover. Although the two rates reflect inverse situations of keeping and losing employees, they provide a more holistic picture of your employee management when viewed together. This enables you to set measurable goals and take the right actions to achieve them.
Let’s start with a definition:
Employee retention rate is the percentage of people who stay during a specified time period. Retention rate measures the effectiveness of your employee engagement initiatives.
Employee turnover rate, also known as attrition or churn rate, is the percentage of people you must replace during a specified time period.
Click here to use our calculator tool.
Image Credit: Jacob Wackerhausen/istockphoto.
How to calculate employee turnover rate and retention rate
We show the retention rate and turnover rate formulas in action.
Retention rate formula
You need two numbers for the employee retention rate calculation:
- Number of employees who stayed during a given period of time
- Number of employees at the start of a given period of time
Retention equals the number of employees who stayed for the whole period divided by the number of employees you had at the start of the period. Multiply the result by 100 to get your retention rate.
For comparison, let’s calculate retention rates using the examples below.
Example 1. Calculating quarterly employee retention rate
A call center had 30 employees at the beginning of Q1. One person left for another job and was replaced. The company hired three additional people and fired two, ending the quarter with 31 employees.
Grab the numbers:
# of employees who stayed: (30-1) = 29
# of employees at the start: 30
Plug them in:
(29/30) x 100 = 96.7% quarterly retention rate
Example 2. Calculating annual employee retention rate
Over 12 months, a sales team of 36 employees had one manager promoted to another function who wasn’t replaced. Two other sales members left. Over the year, the company hired five salespeople to replace them and fired four of these people.
Grab the numbers:
# of employees who stayed: (36-3) = 33
# of employees at the start: 36
Plug them in:
(33/36) x 100 = 91.7% annual retention rate
You probably noticed that the retention rate doesn’t include employees who were hired and left within the specified period. In example two, the retention rate doesn’t account for the five people hired and four fired during the year, but it still costs the company money to recruit, hire, and offboard them.
Looking at both turnover and retention rates can provide a more accurate picture of a company’s trends.
Image Credit: istockphoto/shironosov.
Turnover rate formula
You need three numbers to calculate employee turnover:
- Number of separations
- Number of employees on start date
- Number of employees on end date
Turnover equals the number of separations during a specific period divided by the average number of employees during the same time frame. Multiply the result by 100 to get your turnover rate.
Example 1. Calculating quarterly employee turnover rate
Let’s say a call center had 30 employees at the beginning of Q1. One person left for another job and was replaced. The company hired three additional people and fired two, ending the quarter with 31 employees.
Grab the numbers:
# of separations: 3
Average # of employees: (30+31)/2 = 30.5 (add the total number of employees at the start of the period and the number of employees at the end of the period, divided by 2)
Plug them in:
(3/30.5) x 100 = 9.8% quarterly turnover rate
Example 2. Calculating annual employee turnover rate
Over 12 months, a sales team of 36 employees had one manager promoted to another function who wasn’t replaced. Two other sales members left. Over the year, the company hired five salespeople to replace them and fired four.
Grab the numbers:
# of separations: 7
Average # of employees: (36+34)/2 = 35
Plug them in:
(7/35) x 100 = 20% annual turnover rate
Image Credit: Tijana Simic/istockphoto.
Importance of knowing your retention rate
The employee retention rate tells you what percentage of employees remained with your company over a given period of time. You might use your retention rate to gauge your workforce’s stability over a period (a quarter, for instance).
The retention rate can also provide valuable insights into how engaged your employees are in their positions. If you uncover particular departments or positions with low retention rates, you can reevaluate how you structure the position and what might lead to employees leaving.
For example, you might find your benefits package hasn’t remained competitive or that you don’t offer as many career development or professional development opportunities.
However, the retention rate doesn’t distinguish between people who voluntarily and involuntarily leave positions. People may leave a position involuntarily through terminations or layoffs. The retention rate also doesn’t look at new hires after the start of the target period and how they work throughout the year.
You should expect some level of turnover. Understanding your company’s performance comes down to evaluating whether your retention is good for the company and your industry.
Image Credit: Ridofranz/istockphoto.
What is a good retention rate?
The U.S. Bureau of Labor Statistics (BLS) provides annual retention averages by industry. These aren’t goals to strive toward but benchmarks to gauge where your company stands. While you may have a lower turnover rate than the industry average, any loss of top talent can strain your bottom line.
Get granular with your data. Consider categorizing retention and turnover rates by specific departments, managers, and situations. For example, instead of lumping everyone into total turnover, consider calculating voluntary turnover and involuntary turnover so you’re only acting on the people you can control. You can also analyze metrics like retention rate by department or turnover rate by a particular manager or situation.
The reality is people leave. You might assume pay and benefits are to blame, but not always.
Image Credit: fizkes/Istockphoto.
Why employees leave jobs
Employees leave for many reasons, categorized as voluntary turnover or involuntary turnover.
- Involuntary turnover occurs when a person doesn’t instigate leaving, such as when they’re laid off or fired.
- Voluntary turnover occurs for a multitude of reasons. This includes leaving for a new job, returning to school, moving to follow a partner’s job change, retiring, or quitting because of a negative experience.
High turnover in either category indicates it’s time to dive deeper into identifying why people leave. Chances are, it’s something you can control and is unrelated to salary, benefits, or perks like free in-office lunches.A McKinsey study indicated that a lack of career development and advancement opportunities was the chief reason people resigned from their positions, with 41% noting this frustration. While inadequate compensation was noted by over a third of people who quit their positions, other leading reasons included uninspiring leaders and a lack of meaningful work.Getting the real reasons employees leave can help inform your employee retention strategies. What’s more, your changes may bubble up to create a business that attracts the best employees and helps strengthen your company culture.
Image Credit: Drazen Zigic/Istockphoto.
What are the true costs of employee turnover?
Many factors go into calculating the cost of employee turnover, including the impact on team members and the time and resources spent by the hiring manager, recruiter, and human resources. These factors include:
- Conducting exit interviews
- Onboarding
- Recruiting costs
- Training new employees
- Hiring temporary help while looking for a full-time replacement
- Paying other employees overtime while the role remains unfilled
- Lost productivity
- Decreases in morale, employee engagement, and employee satisfaction
The total cost of replacing an employee can vary depending on skill level and productivity. However, some estimate that the cost of turnover is about 1.5 to two times the existing employee’s salary. Costs can even reach many times an employee’s annual salary if they were a top performer, a senior-level manager, or someone with in-demand or niche skills.
Hidden turnover costs can come over time. Many employees leaving within a given time period can increase the demands on your remaining employees. Employee morale and productivity may decline as staff members spend time training new hires and shouldering more work. In time, the strain may lead to more employees quitting.
Image Credit: gorodenkoff/Istockphoto.
How to improve employee retention
By implementing these strategies, you can create a work environment that encourages employees to stay and grow with your organization. Improving employee retention is an ongoing process that requires consistent effort and adaptation to changing employee needs and market conditions.
- Enhance onboarding and training. A strong onboarding process sets the tone for an employee’s tenure. Implement a comprehensive onboarding program that goes beyond the first week, extending support through the first few months. Provide ongoing training opportunities to help employees grow their skills and adapt to changing job requirements.
- Offer competitive compensation and benefits. Regularly review your compensation packages to ensure they remain competitive within your industry. Consider offering performance-based bonuses, profit-sharing plans, or equity options to align employee interests with company success.
- Promote work-life balance. Implement flexible work arrangements where possible, such as remote work options or flexible hours. Encourage employees to take their vacation time and respect their off-hours to prevent burnout.
- Encourage innovation and creativity. Create an environment where employees feel safe to share new ideas and take calculated risks. This can lead to increased job satisfaction and a sense of ownership in the company’s success.
Image Credit: jacoblund/istockphoto.
Keep your top performers
Data will show you how to keep and attract talent that can help your business grow. In addition to employee turnover and retention rates, use employee surveys, workforce trends, and other internal metrics to gain a holistic picture of how you manage talent, where potential issues are, and how to correct them. Then, evolve current policies, practices, and programs accordingly.
For example, you can support your workers’ desire for work-life balance by letting them work remotely. Flexibility can increase employee engagement, productivity, and job satisfaction. You can also help support career advancement by offering targeted training programs, mentorship opportunities, and clear progression pathways.
You can foster self-development by dividing work into projects for hybrid teams. When PGA of America adopted hybrid teams, projects turned around three times faster, and employees increased their knowledge through exposure to external skill sets.
This article originally appeared on Upwork.com and was syndicated by MediaFeed.org
Image Credit: g-stockstudio/istockphoto.
More from MediaFeed
15 Ways Businesses Can Use AI to Get More Productive & Innovative
Image Credit: CHOLTICHA KRANJUMNONG / iStock.
