What is retention rate?

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.

Why is employee retention rate important?

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.

Retention rate vs. turnover rate

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:

• You start the time frame with 50 employees.
• Two employees quit.
• Two new employees get hired.
• You end the period with 50 employees.

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.

Using the retention rate formula

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. 

Step-by-step retention rate calculation

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 suggested steps:

1. Select a time period: You need a start date and an end date. Your time period should be long enough to gather enough data but manageable enough to make corrections if you start to see negative patterns. Make culture changes when retention rates dip and track the results in successive periods.
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2. Do a starting headcount: The number of employees on the first day of your reporting period is your base number for calculating employee retention. Do an accurate count and record it somewhere you can find it. Count only the employees working there from the beginning, not those joining you mid-period.     
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3. Subtract employees who leave: At the end of the period, subtract the number of employees who left from the total number you counted at the beginning. The remainder is the number of employees you retained from the original batch. Don’t count anyone you hired during the period. 
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4. Divide the end group by the beginning group: You need two numbers: the number of original employees you counted on the first day and the number of originals left on the last day. Divide the ending number by the beginning number to get a decimal you can turn into a percentage. That’s your retention rate.  
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5. Analyze and innovate: A high retention rate is good. A low one is bad. Last year's national average turnover rate was 3.8%, so you’re looking for a retention rate of 96% or better. If you don’t have that, you should consider making some changes. 

Additional tips for calculating retention rates

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:

Retention rate by hiring cohort

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. 

Calculating quarterly employee retention rate

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.    

Calculating annual employee retention rate

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.   

How to improve employee retention rate

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:  

Strategy 1: Consider your compensation and benefits

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.   

Strategy 2: Establishing a values-based culture

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 signal 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.

Strategy 3: Hiring the right people

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 employees who’ve worked in that position. You can also research job sites like Indeed or Monster 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.