How to Calculate Your Employee Retention Rate

Your employee retention rate is a critical factor in evaluating the stability of your organization and your workforce. Many common challenges talent management professionals face can negatively impact retention, such as ineffective hiring, outdated tools, poor employee engagement, and low morale. If not appropriately addressed, these factors can cause employees to seek employment elsewhere, and their departure can result in increased hiring and onboarding expenses, reduced productivity, and reputational harm for organizations of all sizes across all industries.

By understanding how to accurately measure your employee retention rate, you can pinpoint areas for improvement and minimize your risk of losing your top talent. In this article, you’ll learn what an employee retention rate is and how to calculate yours, explore strategies to improve retention, and discover how HR technology can help you create, implement, and maintain an effective retention strategy. Let’s start with a definition.

In This Article

What Is an Employee Retention Rate?

Employee retention rate is a key performance indicator (KPI) that measures the proportion of employees an organization retains over a specific timeframe, often annually. It highlights the success of a company's efforts to maintain a stable and engaged workforce. Understanding this rate can help you identify the strengths and weaknesses of your talent management strategies, gauge the effectiveness of employee engagement initiatives, and assess your organizational culture.

Regularly evaluating and monitoring employee retention is vital for mitigating turnover, as the data you gather can signal when and where strategic adjustments are necessary to keep valuable talent within the organization.

Why Is Employee Retention Rate Important?

A high retention rate is typically indicative of a positive workplace culture and effective talent management practices. It brings numerous benefits to an organization, including:

• Reduced recruitment costs: Employee retention allows you to spend less on finding, hiring, and training new employees — an average of nearly $7,000 per employee.

• Increased productivity: Employees who are overworked due to understaffing tend to have higher levels of stress and lower levels of productivity.

• Enhanced employee morale: When employees see their colleagues leave, they may feel less secure in their own roles, leading to decreased morale and increased turnover.

• Improved reputation: With job candidates trusting employees three times more than companies, it’s no surprise that companies with high employee retention and positive sentiment are more attractive to top talent.

• Protecting tribal knowledge: Not everything in an organization makes its way to documentation. Keeping experience in the company helps avoid the loss of tips, tricks, and workarounds relevant to the daily operations of your business.

Prioritizing high employee retention allows you to inherently work towards minimizing turnover, setting the stage for a more engaged and committed workforce. To address retention in your organization, first consider the differences between turnover rate and retention rate.

Employee Retention Rate vs. Employee Turnover Rate

Though often used interchangeably, employee retention rate and employee turnover rate are two different KPIs. The employee retention rate measures the percentage of employees who remain with an organization over a specific period, reflecting the company's ability to retain its workforce. Conversely, the turnover rate quantifies the percentage of staff members who leave the company — either voluntarily or involuntarily — indicating the rate at which a company loses its workforce. 

These two metrics are inversely related; a high retention rate typically signifies a low turnover rate, and vice versa. Understanding and calculating these rates provides visibility into employment trends and calls attention to areas for improvement in talent management strategies.

Employee Retention Rate Formula

Calculating your employee retention gives you actionable insight you can use to prevent or reduce employee turnover. The formula for employee retention for a given time period is:

(Remaining employees at end of time period / Starting employees at beginning of time period) x 100

Note that the remaining employees at the end of the time period must exclude any new hires made during the time period. This calculation is key to understanding how well your organization is retaining talent over time. Learning how to apply the results of your calculation helps you see how you compare to competitors in your industry.

How to Calculate Your Employee Retention Rate

The first step in calculating your employee retention rate is deciding on the frequency of your calculations — usually annually, quarterly, or monthly — to ensure you have consistent data to reference. Next, identify the number of employees at the start of the period and compare it to the number who remain at the end, removing any new hires. For example, if you started the year with 100 employees and ended with 85 (after taking out new hires), your retention rate is (85/100) x 100 = 85%.

Although retention benchmarks vary across industries, a 90% retention rate is considered ideal. However, rates significantly higher than this can signal issues like stagnation or the retention of underperforming employees, emphasizing the importance of natural attrition. Natural attrition is normal turnover due to factors like retirement, resignation, or internal mobility. This allows for the influx of new talent, promoting innovation and preventing complacency. 

Instead of focusing on specific numbers, aiming for consistent improvement can help you reach your employee retention goals. It’s also helpful to distinguish between involuntary turnover, such as layoffs, and voluntary turnover. This gives you a better idea of the root of your retention issues and can help you develop an effective strategy for improving your retention rate.

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How to Improve Your Employee Retention Rate

Improving your retention rate starts with assessing your current practices and incorporating the following strategies into your process:

Hire the Right People for the Right Roles

Ensuring a good fit from the start is fundamental for long-term retention. Aligning candidates' skills, values, and career goals with the role and company culture is critical to ensuring you find and hire the right people. Consider using a comprehensive recruitment solution that offers features like behavior-based interviews and skill assessments. That way, you can identify qualified candidates who are enthusiastic about the opportunity to grow professionally and contribute to your organization’s success. 

Provide Opportunities for Development and Growth

With 94% of employees reporting that they would stay with their current employer longer if the employer invested in their careers, it’s clear that professional development is essential to retention. Many organizations approach this by using HR technology to offer employees options like personalized training programs for specific skills or roles, mentorship opportunities for knowledge transfer, and career pathing for internal advancement.

These initiatives demonstrate your commitment to employees’ career growth, and this promotes engagement and loyalty. Consider discussing career plans in performance reviews so you can tailor development opportunities to suit each employee’s goals.

Build a Work Culture That Prioritizes Employee Recognition and Feedback

A culture of recognition and open feedback can help you nurture a positive work environment and boost employee morale. You can foster professional growth by implementing recognition programs to show employees you value their contributions and achievements.

Using your employees’ goals as a framework, you can also provide individualized feedback to help them identify their strengths and areas for improvement. Remember to be open to feedback from employees during these conversations, too. Your willingness to accept recognition and constructive criticism is key to establishing mutual respect and trust. 

Offer Competitive Compensation and Benefits

One in five employees who left their job in 2022 did so because they were dissatisfied with their salary or benefits package. Today’s workforce is looking for more than the bare minimum, especially when it comes to benefits.

In fact, more than 75% of employees surveyed said they wanted more variety than what their employer offered. Regularly reviewing and adjusting your offerings to match or exceed industry standards — including salaries, health benefits, retirement plans, and work-life balance initiatives — is critical to maintaining job satisfaction. By offering competitive pay and benefits, you can improve your retention rate and avoid the hiring costs associated with high employee turnover.

Create Opportunities for Networking

Facilitating networking opportunities within your organization helps employees find and connect with colleagues who share similar interests and backgrounds. Initiatives like team-building activities, interest-based clubs, and professional development groups foster a supportive and inclusive work environment.

By leveraging an intelligent talent management solution, you can seamlessly integrate these strategies into your employee retention improvement plan. This technology supports the implementation of personalized development programs, facilitates feedback loops, and helps manage competitive compensation frameworks, ensuring a cohesive approach to talent retention.

How HR Technology Can Help You Improve Your Employee Retention Rate

HR technology plays a pivotal role in enhancing employee retention by promoting employee engagement and development within organizations. Talent management solutions that include features like talent marketplaces and career pathing empower employees to navigate their professional growth and explore internal mobility opportunities.

This autonomy and visibility into potential career trajectories can boost morale and satisfaction with the company’s offerings — two key factors in employee retention. Through precise data collection and evaluation, solutions like workforce intelligence and succession planning tools can support organizations in their efforts to monitor the success of their retention efforts by tracking other important KPIs, including:

• Turnover rate

• Average length of employment

• Employee engagement metrics

• Employee absenteeism rates

• New hire retention rate

• Number of defined career paths compared to total number of employees

• Number of mentors assigned to employees compared to total number of employees

• Adoption rate of learning and development opportunities by employees

• Number and type of skills being reported by employees 

• Number and type of skills being validated by peers and managers

Innovative HR solutions may also offer upskilling and growth opportunities like internal gig projects, mentoring programs, and employee resource groups (ERGs). These offerings enable staff to develop new skills, receive guidance, and connect with peers who share similar interests or backgrounds and enrich the employee experience by promoting a sense of community and belonging.

HR technology that brings together these elements in a single platform simplifies the retention process, benefiting both companies and employees. It streamlines access to development and networking opportunities, making it easier for workers to engage with the resources they need to grow and thrive. In turn, their contributions help the organization succeed.

Hire Better and Retain Longer With an Employee Retention Solution from Phenom

We’ve explored the significance of understanding employee retention and its impact on reducing turnover, the critical difference between employee retention and turnover rates, and the formula for calculating your organization's retention rate. We also covered actionable strategies for improving staff retention, such as hiring the right people, offering development opportunities, building a positive work culture, and providing competitive compensation.

Improving and maintaining employee retention is both an art and a science. It requires management teams to engage with employees on an individual level and develop creative solutions for addressing concerns that can lead to employee turnover. It also requires advanced technology that simplifies the details, giving recruiters and talent managers more time to devote to optimizing the employee experience. 

The Phenom Intelligent Talent Experience platform uses AI-powered technology and automated features to help talent management teams identify the most qualified internal candidates for open jobs and facilitate employee growth. With solutions designed to make professional development opportunities and succession planning accessible and efficient, the platform effortlessly streamlines employee retention strategies. Using Phenom’s data-driven insights and AI-powered features, organizations can attract and retain top talent by providing employees with personalized experiences and preparing them for internal mobility.

Book a demo today to discover how Phenom can transform your talent retention strategy and drive organizational success.