Manage Employee Retention to Reach Your Goals

Take two companies competing in the same market, with everything being equal except retention, and you can predict which one will outperform and outlast the other. Employee retention is a critical performance indicator, leaving its mark on profitability, productivity, and growth.

There are several ways to look at your retention rate, also called stability index or retention ratio, to gauge how well your company is managing and retaining talent. This article explains why employee retention is so important and how to measure it accurately to serve your goals.

Overview: What is a retention rate?

A retention rate is a measure of how many employees stay with a company through a specific period. The higher your retention rate, the more stable, and presumably happy, your workforce.

Employee turnover rates, which track people who leave, have been rising for nearly a decade. Turnover includes all employee separations, including people who quit, are fired, or are laid off. According to data from the U.S. Bureau of Labor Statistics (BLS), employees are quitting at higher rates each year.

This trend reflects a strong job market and low unemployment. It also underscores the fact that much of this turnover is preventable. In fact, a survey by The Work Institute found that three out of four employees who quit could have been retained by their employers.

Why are retention rates important for small businesses?

Retention drives your company's financial and competitive performance in many ways.

• Operating costs: When a worker walks out the door, you lose the time and money you invested in hiring, recruiting, onboarding, and training that person. You also have to pay all of those costs over again to bring on a replacement. The Work Institute estimates that employers lose $15,000 per worker on these costs alone.
• Productivity: With each departure, your productivity takes a hit as well. During the entire time that you're recruiting a replacement, you're down an employee. And once on board, the new team member needs time to ramp up to full capacity.
• Employee engagement: Employee churn damages workplace morale, which takes a further toll on productivity. Watching coworkers get fired or leave for greener pastures can be stressful. Team members who are left behind often have to scramble to keep things together until a replacement comes on board.
• Customer service: It takes seasoned, motivated employees to build strong customer relationships. If your customers are dealing with a new representative every other month, you have a problem. Chaos in your teams means a chaotic customer experience.
• Growth: This invisible drag on profits and production inhibits your ability to go all in when opportunity knocks.

While terminations and layoffs have been relatively flat, quits have risen steadily over the past decade. Image source: Author

How to calculate your retention rate

You can't manage what you don't measure, and employee retention is no exception.

To calculate your employee retention rate, you need to choose a time period to examine. Then determine how many employees you had on day one, and how many of those employees stayed on through the final date. Ignore employees who come in after day one of your chosen period.

Use those numbers to calculate retention as follows:

Retention = # employees who stay through entire period ÷ # employees on day 1 × 100

Because retention is often measured annually, you might also see retention expressed as the number of staff with one or more years of service divided by total staff one year ago.

Example:

You want to measure retention for the past calendar year. Your stats are:

• You started the year with 32 employees.
• 28 of those workers stayed through December 31; four of them left.
• 13 employees were hired after January 1; six of them left.
• Your final head count on December 31 is 35, a net gain of three for the year.

Putting your numbers in to the retention rate formula, you get:

28 ÷ 32 × 100 = 87.5% retention rate

Considering retention alone, you're doing pretty well.

But retention doesn't account for employees who came and went during the time period. It's just a snapshot of how many of the employees who were there on day one stayed with you.

To get a better sense of employee churn, you need to calculate your turnover rate as well.

Employee turnover rate is calculated as:

Turnover = # separations during period ÷ average # employees during period × 100

Let's look at your stats again:

• You started the year with 32 employees.
• 28 of those workers stayed through December 31; four of them left.
• 13 employees were hired after January 1; six of them left.
• Your final head count is 35, a net gain of three for the year.

Your turnover rate would be:

10 ÷ [ (35 + 32) ÷ 2 ] × 100 = 29.9% turnover rate

This gives you a much more precise picture of how long employees are staying with your company than the retention formula alone.

To get a more nuanced picture of your human resources (HR) metrics, you can separate quits, terminations, and layoffs and benchmark them against statistics for your industry. Many HR software programs can track these metrics, calculate retention rates, and break them down for you to deliver the insights you need.

Your best source for retention benchmarking data is the BLS's Job Openings and Labor Turnover Survey (JOLTS), published monthly. It's broken down by region, industry, and type of separation, so you can get a detailed picture of where you stand.

Across the board, JOLTS shows that employers tend to lose about 3% to 4% of their workforce each month. In 2019, annual turnover rates for all industries was a whopping 45%. Of that, the quit rate was 27.9%.

Looking at quit rates for your industry is important, since they range from 7.3% for the federal government to 58.3% for accommodation and food services. Leisure and hospitality also has high employee churn at 55.4%, as does retail at 39.9%.

Quit rates also vary substantially by region, with the Northeast seeing the lowest rates at 20.9% and the South with the highest at 31%.

BLS publishes fresh statistics each month. The COVID-19 pandemic has wreaked havoc across the board in 2020, with layoffs reaching 7.6% in March and 5.9% in April before dropping back to more normal levels, and quits subsiding throughout. Once again, you can track new developments monthly to see where you stand.

Steps for boosting retention

You've probably heard that employees leave managers, not companies. There may be truth in that statement, but your company's retention rate reflects more widespread influences in your business. If you have lower retention than you would like, there are steps you can take to improve it.

Step 1: Identify opportunities

The first and most important step is to understand why employees are leaving your company. The Work Institute found that the top reasons why employees quit are:

• Lack of career development
• Work-life balance
• Manager behavior
• Pay and benefits
• Well-being

You can find out whether these trends hold true for your company by conducting exit interviews, talking with team members, and talking with managers when employees leave.

You can also use a formal questionnaire for departing employees to get consistent data on their reasons for leaving. Reviews on sites such as Glassdoor can also provide insights into the employee experience at your company.

Does your data reveal problem departments or areas within the company, or is turnover consistent throughout?

Step 2: Know your strengths

Retention isn't just about employees who leave. It's also about the ones who stay. You can use a combination of personal interviews and surveys to assess why current employees are happy in their jobs. From those sources, you can get a better idea of strengths to build and HR strategies to pursue to nurture retention.

Look for departments with exceptional cohesion and satisfaction. What's happening in those areas that could be applied to others?

Step 3: Tailor solutions

Based on your workforce research, you can tailor solutions with the greatest promise for your business. Examples include:

• Creating career paths and development plans for your employees
• Providing training and professional development opportunities
• Considering new benefits such as tuition assistance
• Providing flexible schedules, remote work, or other work-life balance benefits
• Training managers to enhance employee development, communication, team building, and conflict management skills as needed
• Benchmarking employee pay and benefits
• Living your company values every day, in every team

Business success is built on personal success

Your customer experience, productivity, profitability, and growth all depend on having a skilled and happy workforce. By actively managing retention, you can be that company with the invisible tailwind driving just a little faster, and just a little lighter, toward your goals.