How to calculate employee retention rate (and why you should)

Written by: Officevibe | Edited by: Sofia Acosta
Published on: April 28, 2023 |  Reading time: 11m

Employee retention is a crucial part of organizational success. Most employers know this, yet a surprising amount don’t measure it often enough (and some may not even know how to). If you want to create an engaged workforce that sticks around, calculating and tracking your retention rate over time is a big part of the equation.

But why does this visibility help? Let’s use your credit score as an example. If you have no idea what your score is, you won’t know if you have to change your spending and budgeting habits to improve it. You may not see the impact of this behavior right away but if left untended for too long, it can sneak up on you and change the course of a major life event — like buying a house. On the flip side, if you get an assessment and find out it’s low, you can work with a trusted advisor to build it back up.

You can think of your retention rate in the same way. Measuring it consistently tells you where you’re at, how you’re doing compared to previous time periods, and whether you need to work on your retention strategies.

Considering today’s ever-changing job market, retaining top talent is essential for businesses to maintain their competitive edge. So, we promise doing a little math is worth your time.

What is the employee retention rate and why should you track it?

The employee retention rate is a way to measure how successful your company is at keeping a stable workforce. It’s a percentage of the number of employees who stayed with your organization during a certain period of time.

Why is it so important to calculate this rate? It’s a key performance indicator (KPI) to measure the effectiveness of your HR strategies. Your employee retention rate tells you a few things about your workforce:

  1. It helps you understand how well your company is at keeping its employees, and whether you need to make any changes to your retention strategies.
  2. It spots issues or patterns that might be contributing to employee turnover and helps you take corrective action promptly. Once you catch these blips, you’re better primed to create strong employee retention strategies that fit your team’s needs.
  3. It helps you understand how satisfied your employees are with their jobs. If employees leave the company in large numbers, chances are they were unhappy with their role or compensation, or disengaged with their work, company culture, or career development.
  4. It can help you benchmark your performance against industry standards and competitors. This can help you stay competitive in the job market and attract and retain top talent.

In short, you can never go wrong with measuring your retention rate. It’s an important tool for employers to evaluate the health of their workforce and make informed decisions to improve their retention and recruitment strategies.

Retention rate vs. turnover rate: What’s the difference?

Both employee retention and turnover rates track the number of employees who leave the company, but subtle differences between the two make them useful in different ways.

Most employee turnover rate calculations include new hires. Meanwhile, employee retention rate calculations typically exclude them as they tend to be settling in and haven’t yet chosen to “stay” with the company.

Similarly, your employee turnover rate will include both voluntary and involuntary turnover — how many people choose to leave the organization and how many were dismissed. In contrast, the employee retention rate calculation does not include involuntary turnover or retirement.

Measuring both turnover and employee retention rates provides a good picture of how many employees want to stay in the workplace and the overall health of the organization. High turnover rates may reflect changing industry conditions or other external factors as well as voluntary turnover, while employee retention rates are a better indicator of employee engagement and overall workplace satisfaction.

Want to understand why employees choose to stay at your organization? Use these 6 stay interview questions to help build your retention strategies and boost your retention rate.

The perks of understanding employee retention and keeping it high

Businesses that regularly measure employee retention tend to have a better understanding of their workforce stability. They’re also more likely to be nipping retention problems in the bud before they seriously affect their retention rate. So naturally, businesses that know their retention rate and continuously work towards improving it have better chances of retaining their employees long-term.

There are numerous benefits of employee retention for businesses, including:

  • Reduced costs: Many studies show that losing employees is costly. Not only does it cost your business money to find, hire, and train a new employee, but it also results in lost productivity and decreased employee morale. When retention is high, you can avoid both the hard and soft costs of turnover.
  • Improved employee productivity: The longer a person works at a company, the more productive they become. Long-term employees understand the company’s processes and have the experience and know-how needed to do their job well. What’s more, replacing employees requires time and effort from other team members. Having to teach new hires the ropes makes the team as a whole less productive.
  • Boosted employee engagement: An employee who is enthusiastic about their work will be more likely to put in extra effort, and less likely to make mistakes. Improving retention also impacts engagement because it leads to a healthier workplace culture, better sense of community, and more positive morale in general.
  • Facilitated recruitment: A high retention rate is a KPI people leaders and recruiters should shout from the rooftops. It tells candidates and top talent that your organization is great place to work by showing first-hand that employees actively look to stay there.

How to calculate your employee retention rate

While there are several methods to calculate your employee retention rate, most of them use similar parameters and measure the same thing. As long as you use the same formula consistently when calculating employee retention rate, you should be able to track changes and effectively determine how various retention strategies work.

The first part of any employee retention formula is choosing the time period. Many organizations calculate retention rates on a yearly or quarterly basis. While this time period is fine for stable companies, it may not be often enough when evaluating the organization’s ability to improve retention through various strategies.

A good starting formula for employee retention rate is:

Total number of employees at the end of a given time period ÷ total number of employees at the start of the time period x 100

For instance, let’s say your company decides to calculate your retention rate monthly. At the start of the month, you have 200 employees, and at the end of the month, you’re down to 188. Plugging the numbers into the employee retention rate calculator, you’ll get:

188 ÷ 200 x 100 = 94%

While this formula is a great starting point when comparing retention rates across months, it doesn’t offer great clarity into who left and why. You may choose to leave out involuntary turnover and focus instead on employees who have chosen to leave.

What is a good employee retention rate?

A good retention rate, just like a good employee turnover rate, depends largely on your industry.

For instance, hospitality is notorious for having an extremely high turnover rate of 62%, with average employees only remaining on the job for 110 days, according to 7Shifts. In contrast, healthcare has an average turnover rate of 25.9%.

In general, most businesses aim to have a retention rate between 90% and 95% for a given period. This means your top employees are willing to stay and your ability to retain talent is high.

However, while high retention rates indicate a healthy work environment, you should allow for a little bit of leeway.

All organizations benefit from the flow of employees. This allows the company to hire external talent while making space for dedicated employees to move vertically through the organization.

You may also choose to part ways with low-performing employees, so having a less-than-100% employee retention rate is perfectly normal for most companies.

How to improve your employee retention rate

If your organization already has a high retention rate, you can pat yourself on the back for your success at maintaining high employee morale and ensuring productive employees remain in the workplace.

However, most companies’ retention rates have room for improvement. It’s worth implementing employee retention strategies to encourage employees to stay while improving engagement and productivity.

📊 Learn about the latest labor market trends and employee engagement statistics, and how they can help you build retention strategies for a modern workforce.

Step 1: See where you stand and how you compare to your industry average

If you’re consistently losing employees to other employers, or you struggle to attract new employees from other companies, knowing how to make employees stay will become an invaluable part of your HR strategy. It’s worth comparing your retention rate to your competitors, especially if it’s not something you usually do.

It’s important to refer to trusted sources when comparing your company’s performance to the industry standard or to your direct competitors. Retention rate benchmarks are sometimes difficult to find, so you can lean on your employee turnover rate to paint a better picture if needed.

Do you have your employee turnover rate on hand? The U.S. Bureau of Labor Statistics released their 2023 list of turnover rates per industry.

While where you stand in the industry is important, the main purpose of regularly calculating your retention rate is to discover how your employee retention strategies impact new and current employees. Once you’ve established procedures for regular retention rate evaluations for a given time period, you’ll be able to compare your current vs. previous performance, which is often a much more valuable metric comparison.

Step 2: Gather feedback on employee retention

As more employees expect higher standards from their workplace, it’s up to managers and senior executives to discover how to keep employees satisfied and motivated. If you’ve implemented ways to get employee feedback, you should be able to gather this information relatively easily.

Employee surveys are a great way to get feedback from a large number of employees at once. Officevibe’s Pulse Surveys are short weekly or bi-weekly surveys you can send to understand why your retention rate is suffering. These surveys are a valuable asset in determining whether employees are satisfied overall.

Psst: You can also send a survey to specifically address retention. Use these 20 employee retention survey questions to understand why employees choose to stay at your organization and how their employee experience can be improved.

Step 3: Build a retention strategy (based on collected feedback)

Getting feedback from a large number of employees can be exceptionally useful, but it’s only the first step in building a successful retention strategy.

Your strategy needs to take in every aspect of the employee experience, from their very first encounter until the day they leave your organization.

Create a great onboarding process

According to the Harvard Business Review, an effective onboarding process is essential to reducing turnover and boosting retention. Onboarding allows the company to put its best foot forward in welcoming new employees and building solid working relationships from the start.

Creating a great onboarding process requires understanding what employees expect and delivering a warm, human experience.

Ensure company-wide and team alignment

Understanding what success means at all levels is crucial to ensuring engagement and ultimately retention. Aligning on company, team, and individual goals gives employees a stronger sense of purpose because they can tie their objectives directly to the company’s. When employees know what’s expected of them, they’ll also have better clarity on their role and responsibilities.

Check out our Vibe Check episode about day-to-day alignment and how it can affect employee turnover.

Give meaningful recognition

Employees want to feel that their work has meaning, and a large part of that is receiving appreciation and recognition. However, if improperly handled, insincere recognition can backfire. It’s vital to have a solid strategy in place to improve employee recognition, both for teams and individuals.

Focus on professional development

While it’s not always possible to offer every employee the vertical mobility they crave, horizontal moves and a focus on career development can often be enough to entice employees to stay in a company. Having regular, honest career talks is key to maintaining a high average headcount of motivated and inspired employees.

Offer fair pay

Offering fair and adequate pay also helps improve your employee retention rate. Not only does this help people feel valued, but it also makes it less likely that they’ll leave for another company, which is often significantly more expensive for the organization than offering a pay raise.

Step 4: Recalculate your retention rate and keep tracking it over time

Once you start implementing various retention tactics, evaluate your rate over a monthly or quarterly time period to measure their success. Remember that some strategies, such as raises and meaningful recognition, may produce results rapidly, while others may take more time.

Step 5: Adapt and iterate your retention strategy

Workplace culture and employee perceptions evolve continuously, so it’s important that your retention strategy changes accordingly. Regular measurements and feedback from employees can help you adapt to these changes before they take a toll on your retention rate. Even small tweaks may be sufficient to keep your rate at optimal levels for your organizational needs.

Boost your employee retention rates and enjoy the benefits of an engaged workforce

High employee retention rates are an indicator of a satisfied workforce, and constant measurement can help you identify potential issues before they become major problems.

Employee experience tools like Officevibe — which include pulse surveys, anonymous feedback messaging, goal-setting features, and meeting templates — can bridge the gap between employees and management, improving productivity and reducing employee turnover. It’s a win-win situation for both the organization and the people who work for it.