How To Calculate & Measure Employee Retention Rate (A Guide)

When it comes to building an effective workforce, strategic recruitment is only the beginning. Having spent time, effort, and money on a carefully considered selection process, what follows thereafter is the challenge of keeping top talent on board and committed to the business.

What we're referring to here is employee retention – something every business needs to get a handle on if they're intent on continued growth.

In this article, we'll look at what the term employee retention means, how to measure it, and how to implement the right tactics to prevent your best staff from jumping ship.

What Is Employee Retention Rate?

Employee retention rate measures the percentage of employees a business retains over a given period, calculated as a percentage of the workforce as a whole. Companies should strive for a high employee retention rate to reduce costs and increase productivity.

In strategic terms, it also relates to the techniques and initiatives a business adopts to promote high retention rates. Company culture, compensation packages, and professional development all fall under the banner of an employee retention strategy.

Though the two are inextricably linked, employee retention should not be confused with employee turnover. Turnover is the number of employees that leave a business over a given period, and whilst that might seem like retention in reverse, the turnover rate calculation is not always a straightforward inversion; we'll see why later on.

How Do You Calculate Employee Retention Rate?

To calculate an employee retention rate, divide the number of employees who have stayed throughout a given period by the employee count on the start date, and multiply by 100 to reach a percentage:

(Remaining employee on the end date / Employee count on the start date) x 100

For example, if you had 150 employees and in 12 months you hired 12 new members of staff, all of whom stayed, and exactly one year later your headcount was 155. As we don't count new hires, you'll need to subtract 12 from 155, giving you 143. You'd now divide 143 by 150 and multiply by 100 to get a rounded retention rate of 95%.

Your employee retention rate calculation is also known as your stability index, but as you can see, it doesn't account for anyone that joined and left during the specified period. This is where we need to measure turnover.

To do this, take the number of departures, or separations, in the given time period, divide it by the average number of those employed during that period, and multiply by 100.

So in our example above, we have 7 separations, and an average employee count of 152.5 ((150+155)/2). Dividing 7 by 152.5 and multiplying by 100 gives us a rounded turnover rate of 5%.

Here we have a straightforward inversion of your retention rate. However, if we change the scenario and say 3 of the 12 new hires left and were replaced in the measurement period, the figures no longer mirror. We now have 10 separations, with the same average employee count, so the turnover rate becomes a rounded 7%.

This is why it's important to measure both in conjunction since retention rates on their own do not give you the full picture.

Why Is Employee Retention Important?

Employee retention is an important business goal because turnover is costly. If your top talent moves on to pastures new you not only lose their skill set, but you also incur disruption, a loss of productivity, and the expense of replacing them with someone new.

A high turnover rate can also be a sign there's an underlying problem with your company culture, which could well be affecting your growth potential.

Of course, you can't keep everyone happy all of the time, and losing staff every once in a while is par for the course. But in keeping tabs on both your retention and turnover rates you can develop valuable insight into workforce stability, what might be throwing it off course, and how to fix it.

How Do You Measure Employee Retention?

In theory, the process for measuring employee retention is fairly straightforward – we'll give you a standard formula in due course – but the reality of it is a little more complex.

Let's explore that by looking at some key metrics you might want to consider.

Key Metrics To Measure Employee Retention

Calculating the retention rates of your workforce as a whole is a useful exercise, but it ignores the intricacies of your workplace dynamic. To get a detailed picture of what's going on within your business, you'll need to dig a little deeper into the retention rate calculations.

1. Retention rates by department. If you have low retention rates in a particular department, it could indicate an issue within that specific team, or a problem with the way that department is run. Once you've identified a department with low retention, you can look closer at the issue and work to fix it.

2. Retention rates by manager. Along with individual departments, you might want to look at the retention rates of those working under a specific manager. Again, if these are low, it's a good indication that there are problems with the leadership style.

As we've mentioned, retention is closely linked to turnover, so you should look to track this as well, keeping in mind some distinctions. In particular, be wary of lumping those who leave of their own accord together with those you choose to let go of.

3. Voluntary Turnover Rate. Tracking this can help you determine employee satisfaction. While some staff losses are to be expected, a high voluntary turnover rate suggests you're not providing the experience employees are looking for.

4. Involuntary Turnover Rate. There are some distinctions within this category itself, for example, those that have been made redundant versus those whose employment has been terminated. In the latter case, if the figure is high you may need to revisit your recruitment strategy.

5. Turnover By Talent. This can be hard to define, but it's a useful metric to measure. If you're losing people highly valued by the business there's an issue that needs to be addressed somewhere along the line.

The metrics you choose to measure will depend on the nature of your business, its size, and its structure. If you're a small company with few staff, a measure of general retention should suffice. If you're a more complex organization, you'll find increased benefits in looking at the finer details.

Resources For A Retention Rate Formula

The easiest way to keep track of your figures is by calculating the employee retention rate in Excel. To do this, simply set up two columns, one for those employed at the start of the time period, and the other for those still in employment at the end, remembering to not include any new hires here. Then input a formula to divide the second column by the first.

You'll also find plenty of online retention rate calculator tools to help you assess workplace stability figures.

What Is A Good Employee Retention Rate?

This is hard to quantify. Most studies focus on turnover rates as opposed to retention rates, and as we've seen, the two are not necessarily the opposite of each other.

According to the employment website Monster.com, the average employee turnover rate in the UK is 15%, though there are significant distinctions between industry sectors. As a sweeping generalization, you could say a good annual retention rate was therefore somewhere around the 95% mark, but this is a very crude estimate.

It's not so much about employee retention, or indeed employee turnover rate benchmark, but what your figures mean to your organization. These statistics only give you surface data, and to fully understand the implications you need to look at what they equate to in terms of cost, productivity, and business performance.

How Do You Improve Your Retention Rate?

To ensure you keep top talent satisfied and engaged, it's crucial to have an effective employee retention strategy in place, and this needs to start at the very beginning:

1. Recruitment. Attracting the right people in the first place is key to retention. Approach recruitment from a holistic perspective, with attention not just to skills and experience, but also to personal qualities and behaviors that match your company culture.

2. Onboarding. The first few months are critical. Have a process in place that ensures new hires are fully integrated into the organization, and that they understand the value of their contribution, and how it impacts business objectives.

3. Leadership. Issues with managerial style contribute significantly to employee turnover, so focus on your leadership style. Create a culture built on mutual respect, inclusivity, and open communication.

4. Professional Development. If your employees feel stunted in their role, they're more likely to look around for new opportunities. Improve retention by offering plenty of scope for professional development and growth. Top talent will also appreciate constructive feedback, so make regular appraisals part of your schedule.

5. Benefits. Show you value your employees by offering a well-rounded package. Fair pay is of course paramount, but so too is a level of flexibility that promotes a healthy work-life balance. There's a lot to be said for additional perks and positive employee experiences like discounts and wellbeing programs too.

Ultimately, retention is all about creating the right workplace culture. When you do that, you create an environment in which employees feel appreciated, motivated, and loyal to your business.