How to calculate retention rate for employees (with examples)
Understanding your employee retention rate can help you better contextualize employee morale, company culture, and how teams feel about your work environment.
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1 minute
October 2, 2024
Kevin Flynn is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.
Employee retention is a growth metric and a tool to evaluate your employees’ experience. Calculating it can tell you if your company is expanding or contracting. More importantly, it can help give you signals of whether or not your employee morale, company culture, and work environment are good. This article will explain that and cover the following points:
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An employee retention rate calculation is a comparison of the number of employees at the start of a period of time to the end of the period. For example, if your employee headcount was fifty at the beginning of the period and two people left, your workforce is down to forty-eight, not counting new hires. That’s a 96% retention rate.
Most companies examine this quarterly or annually to monitor the number of new employees they hire over any given period. A high retention rate typically means the company is doing well because employees choose to stay. A low retention rate can be a red flag indicator that something may be wrong.
Measuring employee retention shows you your turnover rate. That’s important because employees' onboarding and training costs can be anywhere from half to double their salary. According to a 2019 Gallup Poll, this problem costs US businesses $1 trillion annually, which could be avoided with more proactive management strategies.
Forbes Advisor recently reported that the average turnover rate in the United States was 3.8% in 2023. Two-thirds of those were initiated by employees (voluntary quits); the rest were layoffs and firings. The Forbes report also puts the average cost of onboarding a new employee at $1,400.
Improving the employee experience within your organization can boost employee morale and reduce attrition and churn rates among new hires. Your company culture will also benefit from it. New employees don’t want to enter an environment with high turnover that affects productivity and stunts career development. Correcting that problem should be a priority.
There’s an inverse relationship between retention rate and employee turnover rate. Although they can be tracked over the same time period, retention tells you how many employees you kept, and turnover tells you the total number of employees you lost. The separations are a signal that job satisfaction is low. A good employee retention rate can signify the opposite.
The retention rate measures more than just the average number of employees. You could have the same headcount on the last day of your measuring time frame and still not have 100% retention. Here’s an example of what we’re talking about:
The number at the end is the same as the beginning, but the retention rate is only 96% because you lost 4% of your original workforce. That number (4%) is your turnover rate. The new hires will count towards the starting number for the next reporting period.
The retention rate formula can be used on any given time period. Count your employees at the start of the period. Keep track of anyone who leaves the company during the period. Divide the number of original employees left on the last day of the period by the headcount you took on the first day. The quotient of that equation is your retention rate.
SaaS companies use this same formula to calculate the customer retention rate for subscribers. In those cases, your starting number is your paying customer base at the beginning of the reporting period. The number of customers you have left at the end of the period is used for the calculation. New customers are not included in the equation.
Retaining workers or subscribers comes down to employee or customer experience. If they enjoy doing business with you, they’ll stay. If your company struggles with that, look for culture development opportunities that make your business more appealing.
There are five steps to calculating a retention rate. Do them in the order they’re laid out to achieve accurate results, and remember that retention and turnover rates are different numbers. If you did the math and got a number that didn’t make sense, you may have calculated the turnover ratio. Here are the steps you should follow:
It’s easy to get caught up in the analytics and forget that retention rates are about people. Employees are staying or going based on their experience and compensation with your company. The numbers are important so you can see if there’s a problem. Finding solutions to improve employee retention is even more important. Here are some more tips on that:
Small businesses often hire employees in cohorts. An example would be hiring a “batch” of interns from a specific school. It’s important to track the retention rate for that cohort so you can make decisions about using that source in the future. If retention rates are consistently low, you might want to look for another school to do your recruiting or change your intern program.
Quarterly retention calculations give you short-term data that you can use to modify company culture before turnover rates get out of hand. For instance, dropping three or four retention percentage points two quarters in a row means losing a significant portion of your workforce. You can’t correct that problem if you don’t know it’s happening.
Annual employee retention rates are good for corporate financial reporting. They won’t appear on the balance sheet but can be included as notes on your annual report to shareholders and partners. Annual retention rates can also be used as a caveat for hiring new employees.
An employee retention rate of 90% or higher is generally considered good, but that can vary by industry and position.
Employee retention strategies are programs designed to improve the employee experience. These can include paying employees more money, offering a better benefits package, or implementing initiatives like a work-from-home option. Ask yourself why they would want to work for you. More importantly, why would they stay? Here are a few ideas but please consider your specific circumstances:
If you underpay your employees, they may go elsewhere, particularly if a competitor has a better benefits package.
This strategy requires understanding the industry standard for the people you employ. Focus on getting your money’s worth with a premium compensation package, and you’ll be able to recruit and retain top talent.
Culture should not be overlooked. Managers should regularly meet with workers to discuss goals. Ownership should offer employee development programs and educational opportunities so employees can improve themselves. These programs suggest that employees are valued.
Developing a mission and vision statement is a great way to communicate company values to your employees. Having employees collaborate on an employee handbook is another way to do this. Some companies also do a monthly newsletter or have company team meetings to keep everyone in the loop on what’s going on. Transparency is an important value to job seekers.
One of the best ways to improve retention is to hire the right people. Don’t try to fit a square peg in a round hole. Find the person who is best qualified for the position. Hiring the wrong person could lead to turnover, new onboarding, and training costs, not to mention unhappiness on both sides: employer and employee.
Review your job descriptions to ensure they match the job requirements. If unsure, ask current or former employees who’ve worked in that position. You can also research job sites to see how others describe positions. You might be pleasantly surprised by what happens when you change a few words on the job boards.
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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.