What is a good employee retention rate? This is a question many HR and business professionals are wondering as they look at the fluctuations in their workforce and try to figure out if it’s natural or indicative of a deeper problem.
Employee retention rates are becoming an increasingly important people analytics metric for companies to track. At its core, a high employee retention rate indicates two things:
- HR processes like recruitment, hiring, and training are effective in setting employees up for success.
- The workplace is positive. Employees believe in the work they do and its underlying purpose, and are likely to advocate for your organization.
Conversely, a low employee retention rate suggests that employees are not satisfied with their company and are more likely to leave. It may also show that your company is hiring the wrong people for the job.
Although every company experiences turnover, keeping your attrition rate to a minimum is crucial to the success of your business. Replacing an employee on average costs an employer 33% of that employee's annual salary. In addition to the financial costs, there are also more obscure costs associated with high turnover rates, such as decreased productivity, knowledge loss and low morale.
What is a good employee retention rate?
Your organization spends significant time and money acquiring talented employees, and you want to be able to build long-term working relationships with them.
To monitor the effectiveness of your efforts to boost and sustain retention, it’s good practice to regularly calculate your organization's employee retention rates. At minimum, you should do this every year, but you can calculate employee retention over shorter time periods if you want more frequent insight into your workforce. But first you may be wondering: what is a good employee retention rate?
While turnover rates vary by industry, a 90% employee retention rate is generally considered healthy. This means that your company should be striving to get as close as possible to a 10% turnover rate.
According to the U.S Bureau of Labor Statics, the average annual turnover rate across all sectors in 2021 was 57.3%, and voluntary turnover alone amounted to 25%. This indicates that turnover rates are higher than they should be, meaning there is room for improving HR processes, the workplace environment and the employee experience.
How to calculate employee retention rate?
Calculating your organization’s employee retention rate provides you with a baseline to track your company's progress and how it compares with industry averages.
To calculate your company's employee retention rate, you will need to gather the following data:
- Number of employees at the end of the measurement period (A)
- Number of employees at the start of the measurement period (B)
To calculate retention, divide the number of employees at the end of the retention period or year (A) by the number of employees at the start of the retention period (B) and multiply by 100.
RR = (B/A) X 100
To put this formula into perspective, let's say you had 50 employees at the start of the year and 45 employees at the end of the year. Your retention rate would be 90% (45/50) x 100 = 90%.
Gain more insight by calculating employee turnover rate
Measuring your company's turnover rate is equally as important as it can better help you identify what's causing employees to leave. The turnover rate refers to the number of employees who voluntarily or involuntarily left the company within a specific time frame.
Voluntary turnover refers to employees who left the company of their own accord, while involuntary turnover shows employees who were fired, laid-off, or resigned. If you have a high voluntary turnover rate, it could be a sign that employees are unhappy with their job or their company, and your company is not meeting their needs. Meanwhile, a high involuntary turnover rate may indicate that your organization is hiring employees that do not match your organization’s culture fit and skill requirements, causing them to be let go.
To calculate your company's turnover rate, you will need to gather the following data:
- Number of employees you employed at the beginning of the measurement period (B)
- Number of employees who left the company during the measurement period, whether voluntarily or involuntarily (C)
Divide the number of people who left the company during the measurement period by the number of people employed at the beginning of the measurement period and multiply by 100.
TR= (C/B) X 100
Putting it all together, calculating your employee retention rate and turnover rate will give you a good overview of how healthy your employee retention is. If your company's attrition rate is high, you need to investigate what might be causing employees to leave.
What makes for a healthy employee retention rate?
Many factors contribute to a healthy employee retention rate. Some of the most critical are:
Hiring the right talent
It's essential to hire employees who are a good fit for your company. Interviewing candidates extensively and checking references can help you ensure that you're hiring people with the right skills and values.
Providing opportunities for growth and development
Employees want to feel like they are constantly learning and growing. Providing opportunities for growth and development can keep your employees engaged and interested in their job.
Creating a positive work environment
A positive work environment is key to keeping employees happy and engaged. Creating a culture where employees feel valued and appreciated is important, as is providing a work environment that is stimulating and challenging. Employees should feel like they can come to work and be themselves without fear of judgment.
Offering competitive salaries and benefits
Employees are more likely to stay with a company if they feel like they are being compensated fairly. Offering competitive salaries and benefits is one way to show your employees that you value them.
Ensuring a good work-life balance
A work-life balance is vital for employees. They need to feel like they can have a life outside of work. Offering flexible hours, telecommuting and plenty of vacation days are just a few ways to help employees achieve a good work-life balance and avoid workplace burnout.
Improve your employee retention rate with people analytics
While you can't avoid turnover altogether, you can take steps to improve your organization’s employee retention rate. However, this can be difficult when you don’t know what’s causing your employees to leave in the first place, such as when you have a global, dispersed team or a remote work environment.
The only solution to this challenge is to make your digital work environment transparent by pulling and visualizing its collective tool analytics. We refer to this data as people analytics.
Not to be confused with employee monitoring, people analytics isn't tracking any data that wouldn’t already be recorded. It’s simply connecting the dots between the data to show you trends your workforce is facing. Things like an outdated digital system, lack of advancement opportunities, a high workload, etc...
Want to learn exactly what people analytics is tracking and how it can help you create a healthy employee retention rate? Check out our recent blog: What is people analytics?