What is employee retention rate?
Employee retention rates represent the number of employees who stay within your company over a given period of time. It looks at how many employees worked for your company at the start of the period compared to how many of those original employees are still there at the end of the period. It’s often calculated on a yearly or quarterly basis. The retention rate allows businesses to determine the total number of employees they are able to keep. It can give you insight into the employee experience and help you recognize areas that have room for improvement.
Why is your retention rate calculation important?
The employee retention rate is an important metric because it allows businesses to evaluate the methods they use to train and keep qualified employees. If you have high turnover, you can experience many hidden costs, including lower productivity and reduced work quality. It can cost anywhere from half to two times an employee’s yearly salary to onboard a replacement. When employees remain in an organization for a long period of time, the organization reduces the costs associated with recruiting and hiring new employees.
Retention rate formula
To calculate retention rate, use the formula:
(Total number of employees at the start of the time period) – (the number of employees who left during the time period) = (the number of original employees who remain at the end of the time period)
Using your final value from the first part, calculate the final retention rate with the last part of the formula:
(Number of original employees remaining at the end of the period) ÷ (total number of employees) = (percentage of retention)
The retention rate will appear as a decimal, which you can then convert to a percentage by multiplying by 100 or moving the decimal point two spaces to the right.
How to calculate employee retention rate
The following steps provide a guide for you to calculate your employee retention rate:
1. Determine your time period
To start, you must determine the time period you want to measure. This can be a fiscal year, a quarter or a six-month period for instance. Knowing the time period you want to measure allows you to calculate the appropriate number of employees.
As an example, use a fiscal year, starting October 1 through September 30.
2. Take a headcount
Count the number of employees you had at the start of your time period. Count only the employees who were working on the day your time period started, and leave out any employees who came on board during the middle of the period.
For instance, using the fiscal year example, assume you count 36 employees on October 1. This is your total headcount.
Once you have the total number of employees during the period, subtract the number of original employees who are left at the end of the period from the total number of employees you counted. You will use this value to determine the percentage rate. Here’s an example:
The employee headcount on October 1 is 36.
The number of employees remaining on September 30 is 31.
Subtract: 36 – 31 = 5
This means five employees left during the time period.
Divide the number of remaining employees by the total number of employees at the start of the time period. Your solution will be a decimal. This decimal represents the rate at which employees stay in your organization. Take a look:
31 (remaining employees) ÷ 36 (total number of employees at the start of the period) = .86
Change the decimal to a percent by moving the decimal point to the right two places. This gives an 86% retention rate. While this value represents a healthy retention rate, if the percent appears low, such as 50% or lower, evaluate the methods that your HR department uses to retain employees.
For instance, evaluate incentive programs, vacation policies and rewards programs that can affect employee satisfaction and their decision to stay with your company. Improving employee rewards, bonuses and paid time off allowances or exploring other methods for maintaining employee satisfaction can help keep your retention rate at a healthy percentage.
Related: How to Reduce Employee Turnover
Retention rate formula examples
Here are some additional examples of calculating retention rate for your business:
An advertising agency has 40 employees at the beginning of Q1. On the last day Q1, 38 of the original employees still work there.
Starting number: 40
Remaining number: 38
Calculation: 40 – 38 = 2 employees left during the quarter
Divide the remaining employees by the total employees at the start: 38 ÷ 40 = 0.95
Move the decimal two spots to the right to get the percentage. In this example, the retention rate is 95%.
A manufacturing company has 127 employees at the beginning of the fiscal year. Of those 127 original employees, 85 still worked there on the last day of the year.
Starting number: 127
Remaining number: 85
Calculation: 127 – 85 = 42 people left during the fiscal year
Divide the remaining employees by the total employees at the start: 85 ÷ 127 = 0.669
The retention rate is 66.9% when you move the decimal.
A call center has 65 employees at the beginning of the calendar year, and 49 of them remain at the end of the calendar year.
Starting number: 65
Remaining number: 49
Calculation: 65 – 49 = 16 people left during the calendar year
Divide the remaining employees by the total employees at the start: 49 ÷ 65 = 0.753
The retention rate for the call center is 75.3%.
How to improve the employee retention rate
If your calculations show that your employee retention rate needs help, make a plan to improve your workplace. There are many employee retention strategies that your HR department can implement to increase the retention rate. Here are some ways to improve employee retention.
Improve the work culture
Managers can foster a comfortable work culture through effective training and feedback. If the work environment is unwelcoming or negative, you’re more likely to have higher turnover among your employees. Surveying your current employees can help you understand how they feel about the company culture and where you can make improvements.
Improve hiring practices
Hiring the right employees can set you up for a better retention rate. Improve hiring practices by integrating more detailed employee screenings, such as reference and background checks. Look for people with the right skills who can work well within your established company culture.
Offer better benefits and perks
Additionally, evaluate your rewards, time off policies and base salaries. These aspects of your business can have a lasting impact on employee satisfaction and may ultimately influence their decision to remain with your company. Therefore, you might strategize with HR managers to incorporate more flexible PTO policies, increase base salaries or implement additional professional development training.
Have a career path
If your employees have nowhere to go with your company, they’re likely to eventually look for work elsewhere. Create career paths that give your top employees a chance to move up through the ranks. Communicate the options, set goals with your employees, and work on a career path with them to let them know about these opportunities.
Provide ongoing education
Another way to keep employees with your company is by helping them develop. Establish training programs within your company. Encourage your employees to attend conferences and other educational opportunities in the field.
Give your employees feedback
Your employees want to know how well they’re doing. If they work hard and never get praise, they’ll feel unappreciated. Even corrective feedback can be a good thing. It helps your employees develop and shows them that you care about their development. Train your managers to give regular feedback to your employees beyond yearly reviews.
Let your employees be creative
Giving your employees autonomy over their jobs can also help retention. Micromanaging everything they do is a good way to drive your employees away. Having trust in your employees and giving them creative freedoms and decision-making power can boost morale and help you hold on to your top employees.
Encourage work-life balance
Pushing your employees to be their best is a good thing, but you also need to establish a good work-life balance. Encourage employees to take vacations, and give them flexibility with family situations.
Calculating retention rate FAQs
These frequently asked questions can provide additional information about calculating your employee retention rate:
How does the retention rate relate to the turnover rate?
The retention rate is typically the inverse of the turnover rate for your company. For instance, if your employee retention rate is 92%, meaning 92% of the time you retain employees, then your turnover rate would be the remaining 8%, which is the difference between the retention rate and the total percentage of employees (100%).
How do I calculate the turnover rate?
The turnover rate works similarly to the retention rate. Simply divide the number of employees who leave (either voluntarily or through termination) during a specific time period by the total number of employees at the start of the period you’re measuring. For instance, assume seven employees out of 40 left during a fiscal year. Calculate the turnover rate like this: 7 ÷ 40 = .175. This decimal converts to 17.5%, which means that 17.5% of your employees left during the time period measured.
How often should you calculate retention rates?
It’s common to calculate your retention rate annually. You can use either the calendar year or the fiscal year as your period. If you want to calculate it now but you’re not near the start of a new year, simply recalculate in one year. Some companies calculate retention rates more frequently, such as quarterly. This method can help you more closely monitor the situation if you have a low retention rate and are actively working to improve it.