The employee retention rate is an important business metric that illustrates the percentage of employees who stay with a company over a given period of time.
It is commonly calculated on an annual basis, but any time frame can be used based on the given needs.
Calculating your employee retention rate can help you gain helpful insights into your current retention strategies and overall framework for working with employee retention.
A high retention rate is indicative of having loyal employees who stay with the company. Conversely, a low retention rate is indicative of the company having a hard time retaining talent.
In this blogpost, we’ll take a look at how you can calculate the employee retention rate, what an ideal retention rate is, typical drivers for high and low retention rates, and finally some ideas and strategies for you to consider to increase employee retention.
How to calculate employee retention rate
Retention rates are commonly expressed as a percentage and can be determined by dividing the total number of employees at the end of a period by the total number of employees at the beginning of that period, then multiplying the result by one hundred.
This means that the formula for calculating the employee retention rate can be stated as follows:
Employee retention rate = (Number of employees at the end of a period) / (Number of employees at the start of the period) x 100
For example, if a company has 65 employees at the start of the year, and has 60 employees at the end of the year, the retention rate would be:
60 / 65 x 100 = 92%
In other words, the company retained 92% of its employees over the specified period.
What is an ‘ideal’ employee retention rate?
An ideal employee retention rate varies depending on the industry and the company. However, a good retention rate is generally considered to be around 90%, meaning that a company should aim for an average staff turnover rate of 10% or less.
Conversely, a retention rate below 80% is generally considered to be a warning sign that the company may have issues with employee satisfaction or engagement.
Keep in mind that the ‘ideal’ retention rate varies a great deal in relation to the given industry, company, and country.
Data on the subject is scarce, but attrition rates – that is, the proportion of employees who voluntarily and involuntarily leave the company – are more commonly investigated. As such, we have data on the average attrition rates across industries, which in turn can provide some insight into the average retention rates.
For example, the attrition rate in the BPO (business process outsourcing) industry in 2007 was 42% in the US, 29% in Australia, 24% in Europe, and 18% in India, with a global average of 24%, according to this study.
Looking at those numbers, it is clear that there are big differences across countries. With a global average attrition rate of 24%, you could deduce that an average retention rate lies around 76%.
However, some companies exclude voluntary turnover – i.e. retirements and terminations – when calculating the employee retention rate. As mentioned above, attrition rates account for both voluntary and involuntary turnover.
This creates a discrepancy between the two metrics, which should be considered when deciding on an ‘ideal’ employee retention rate in relation to the global, average attrition rate.
Typical drivers for low and high retention rates
As mentioned in the previous section, low and high retention rates are dependent on the given company, industry, and country. As such, you may set your ideal retention rate at 90% or 85% – whatever your ideal rate may be, there are some typical drivers for low and high rates respectively.
5 typical reasons for low retention rates
1. Lack of effective onboarding
When employees are not properly introduced to the company and their new roles, it can negatively impact their perception of the organization and their commitment to staying.
In a quasi-experimental study about the effects of onboarding in relation to retention, the authors found “that longer onboarding may be a solution for the human resource community regarding long-term engagement and retention”.
2. Poor company culture
A negative or toxic work environment can lead to low employee retention rates. Employees are more likely to leave if they do not feel valued, supported, or included in the company culture.
Under the title “The Retention Revolution: A New Approach to Address Employee Attrition”, a group of researchers argue that traditional ways of retaining employees – e.g. financial incentives and employee perks – are ineffective.
Instead, the authors argue that:
“By prioritizing employee engagement, development, and well-being, companies can reduce attrition and create a supportive and fulfilling work environment, leading to greater productivity and success in the long term”.
3. Lack of career growth opportunities
When employees feel stagnant in their roles and see no opportunities for advancement or professional development, they may seek opportunities elsewhere.
In a study on employee retention strategies, the authors found that organizations should focus on “improving job satisfaction, providing adequate supervisor and organizational support, and creating a culture of engagement to retain their employees”.
The authors further argued that “providing opportunities for career growth and development” can help in building a strong and committed workforce.
4. Uncompetitive pay and benefits
Compensation plays a significant role in employee retention. If employees feel that they are not being fairly compensated for their work or that their benefits package is inadequate, they may be more inclined to leave.
In the previously mentioned study, the authors also argue that “offering competitive salaries & benefits” can help build a strong and committed workforce too.
The same positive correlation between salary/benefits and employee engagement, and thus employee retention, is a point made in this study as well.
5. Work-life (im)balance
When employees feel overwhelmed with work demands and have little time for personal life or self-care, it can lead to burnout and a desire to seek a better work-life balance elsewhere.
The point being made here is further backed up by this study, which examines the correlation between work-life balance and employee retention.
The authors state that “there is an influence between work-life balance on job satisfaction as much as 8.3% and there is an influence between work life balance on employee retention as much as 4.4%”.
3 typical reasons for high retention rates
1. Effective leadership
Strong leadership that provides guidance, support, and clear communication can contribute to higher employee retention rates.
Different sources on the subject matter point at the same conclusion; that is, leadership is closely related to employee satisfaction and thereby retention.
For instance, this study investigates the association between leadership and its impact on employee retention. The study tries to show how “effective leadership can help balancing the work-life of employees and consecutively leads to help the Organization identify its quality employees and tap their efficiencies for a long-term through employee retention”.
2. Recognition and appreciation
Employees who feel valued and appreciated for their contributions are more likely to stay with an organization. Recognizing and rewarding employees for their hard work can foster a sense of loyalty and commitment.
In terms of reward strategies, it has been found that remuneration packages and defined career paths are the most influential in relation to employee retention.
3. Opportunities for advancement
Following one of the points made in the last section, providing employees with opportunities for growth, career development, and upward mobility within the organization can increase their motivation to stay.
Use these ideas to increase your company’s retention rate. We’ve compiled a list of implementable strategies that you can use to increase your company’s retention rate today.
See the list in our article “10 proven strategies to enhance employee retention that you can implement today”.
Employee retention rate measures the percentage of employees who remain with a company over a specific period of time.
Turnover rate, on the other hand, measures the rate at which employees leave a company over a specified period. It indicates the level of employee turnover within the organization.
- Compensation and benefits
- Career development and growth opportunities
- Work-life balance
- Culture and work environment
- Leadership and management
- Rewards and recognition
The list is not exhaustive, but a small range of typical factors that can have an impact on employee retention.