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How to calculate employee retention

How to calculate retention rate

Employee retention is a critical metric for any organisation, as it helps to measure the stability and effectiveness of the workforce.

To calculate employee retention, businesses need to track the number of employees who leave the company over a set period of time and compare it to the total number of employees.

In this article, we will explore the basics of employee retention, employee retention rate calculation, and how it impacts businesses. We will also look at best practices for calculating and improving employee retention, as well as the role of HR in managing and increasing employee retention.

What is employee retention?

Employee retention is the measure of how long employees stay with an organisation. It's an important metric to track as it provides valuable insights into the effectiveness of an organisation's recruitment, training, and management processes. It's also a good indication of job satisfaction among employees.

Employee retention is closely linked to employee engagement. When employees are engaged in their work, they are more likely to stay with the organisation for longer periods of time. Companies should strive to create an environment that encourages employees to stay and be productive. This includes offering competitive salaries, providing meaningful work, and offering opportunities for learning and development, and career growth.

Related reading: How to reduce employee turnover and sick leave

Calculating employee retention rate

The most common way to calculate annual employee retention rate is by taking the total number of employees that have been with the organisation for a given period of time (usually measured in months) and dividing it by the total number of employees that were employed in the same period.

This can be further broken down by department, job type, or other internal divisions to get a better understanding of where - and to what extent - employees are staying or leaving. It's also important to consider the impact of external factors such as the economy and job market in determining the overall retention rate.

In addition to the annual retention rate, it's important to consider the average length of employment for each employee. This metric can provide insight into the overall job satisfaction of employees and helps you identify areas where improvements can be made to increase employee retention.

The employee retention formula

To calculate employee retention, you will need the following information:

  1. Number of employees at the beginning of the period (for example, the number of employees on January 1st)

  2. Number of new hires during the period (for example, the number of employees hired between January 1st and December 31st)

  3. Number of employees at the end of the period (for example, the number of employees on December 31st)

Once you have this information, you can use the following formula to calculate employee retention:

Retention Rate = (Number of Employees at the End of the Period - Number of New Hires During the Period) / Number of Employees at the Beginning of the Period

For example, if you had 100 employees on January 1st, hired 10 new employees during the year, and had 92 employees on December 31st, your retention rate would be:

Employee retention rate = (92 - 10) / 100 = 0.82 or 82%.

A high retention rate is generally an indicator of a healthy and successful organisation. It suggests that employees are satisfied with their jobs and that they're not leaving the company at high rates.

Improving employee retention

Improving employee retention requires a holistic approach that takes into account the entire employee experience. This includes understanding employee motivations, providing competitive salaries and benefits, creating a healthy work environment, offering meaningful development opportunities, and promoting a culture of feedback and appreciation.

Companies that succeed in creating a sense of community and belonging among their employees tend to enjoy higher retention rates. This can be done through team-building activities, providing social events, and encouraging collaboration and camaraderie. But also, most importantly, by ensuring a high level of psychological safety in the workplace, and creating a culture where people feel safe and are able to be themselves.

By creating a positive and feedback-driven work environment, employers can foster a sense of loyalty and commitment among their employees. This, in turn, leads to improved retention rates.

Retention rate and company culture

Having a high employee retention rate can also lead to a more positive company culture. When employees feel valued and appreciated, they are more likely to stay with the company and be more productive. This can lead to a more collaborative and supportive work environment, which can help foster innovation and creativity. A high retention rate also reduces costs associated with employee turnover, such as the cost of recruiting and training new staff.

Challenges that can impact employee retention

Employee retention can be affected by many factors, including poor management, inadequate compensation, and benefits, workplace culture issues, or lack of career development opportunities. Additionally, external factors such as the economy and job market can also play a role in determining employee retention rates.

Other challenges that can impact employee retention include a lack of recognition or appreciation for employees, a lack of trust between employees and management, or a lack of communication between departments. These issues can lead to a decrease in morale and an increase in turnover, which can have a negative impact on the overall success of the organisation.

Related reading: The drivers of employee engagement – and how to measure them

Employee engagement surveys and employee retention

Regular employee surveys can help increase employee retention by providing valuable insights into employee satisfaction, engagement, and retention. By regularly surveying employees, businesses can identify areas where they are excelling and areas that need improvement.

For example, an employee survey may reveal that employees are unhappy with their current benefits packages, or that they feel that they are not receiving enough recognition for their work. With this information, you can take steps to improve these areas.

By involving employees in the survey process, you demonstrate that their opinions and feedback are valued. This in itself can help increase employee engagement and motivation. When employees feel that their opinions are heard and valued, they're more likely to be happy with their jobs and stay with the company.

Regular employee surveys also allow businesses to track the effectiveness of their retention strategies over time, enabling them to make data-driven decisions on how to improve retention.

Conclusion

Employee retention is an important metric for companies to track to be able to improve their people and talent management strategies. Understanding how to calculate employee retention rates and strategies for improving them is key to ensuring a productive, motivated and engaged workforce.

By monitoring employee retention rates as well as employee satisfaction and employee engagement, companies can make informed decisions about how to boost employee retention rates and decrease employee turnover rate.

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