Whether the economy is up or down, predicting how potential candidates will respond to hiring efforts is nearly impossible. That’s one reason retention rates are a top concern for employers. Another reason is that employee retention can affect talent, communications, performance and workforce management. If an organization struggles in any of these core areas, it may be time to take a closer look at retention rate metrics.
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What is retention rate?
Retention rate measures a company’s ability to retain its workforce. It’s the inverse of turnover, which is the rate at which employees leave their jobs.
Like engagement rates, retention rates reflect how people feel about an organization, their work environments and their roles. Retention is also influenced by outside factors, such as the economy and the local job market, so understanding the big picture is essential.
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Poor retention rates can be an expensive problem. Even replacing just one employee can cost an organization one-half to two times the employee's yearly salary.¹ That cost rises, of course, if many employees leave. High turnover can also harm the morale and productivity of current staff, disrupt client relationships and rob organizations of competitive skill sets.
How to calculate employee retention rate
The retention rate formula is as follows:
(Total workforce head count – Number of employees who leave) / Total workforce head count x 100
Some employers calculate annual retention rates based on the number of people employed for the entire year. However, this method does not account for employees who joined the organization and left in the same year. Excluding these short-term workers from the calculation can skew the results and hide retention issues.
A more accurate alternative is to look at length of service, or employee tenure, by determining the number of people employed for each year of service. Tenure is also helpful in understanding where an organization’s institutional knowledge resides, where to expect retirements, and how to approach recruitment, training and succession planning.
Retention rate calculation examples
During the first quarter of the year, 62 employees leave Company ABC. If the company had 3,200 employees at the start of the quarter, what is the retention rate percentage for that period?
3,200 - 62 = 3,138
3,138 / 3,200 x 100 = 98% retention rate
In the next three months, 125 more employees leave the organization. What is Company ABC’s retention rate for the second quarter?
3,138 - 125 = 3,013
3,013 / 3,138 x 100 = 96% retention rate
How to improve retention rates
Retention rates are the symptom of a potential problem, not the cause. To reduce turnover, employers must understand the wants and needs of their workforce – an objective not always easily achieved. Employee reasons for staying and leaving are individualistic, which means one-size-fits-all approaches rarely work. If employers rely on data to lead the way rather than assumptions, they may be able to improve employee retention rates using the following strategies:
- Pay employees fairly and flexibly
When employees perceive a pay gap, whether their perceptions are correct or not, it has a direct and often negative impact on retention, resulting in a 16 percent decrease in intent to stay.2 - Offer flexible pay options
The vast majority of employers offering earned wage access indicate that their employees like it and that it helps them retain talent.3 - Invest in desirable benefits
Group health and retirement benefits play an increasingly important role in employees' decisions to stay or leave a company. - Create a diversity, equity and inclusion (DE&I) plan
Seventy-six percent of workers say they'd consider looking for a new job if they discovered their organization did not have diversity and inclusion policies.4 - Provide options for growth and development
Organizations that offer their employees growth and development opportunities, including upskilling when required, can increase employee satisfaction and retention. - Optimize onboarding
Organizations with a strong onboarding process improve new-hire retention by 82 percent and productivity by over 70 percent.5 - Offer flexible schedules
Fifty-three percent of workers say they'd be willing to take a pay cut for better work-life balance, and 50 percent say they'd take less money to guarantee flexibility in how they structure their hours.4 - Check-in with employees frequently
Team members who are fully engaged are at least 1.8 times less likely to leave voluntarily within six months.6
Frequently asked questions about retention rate
What is considered a good employee retention rate?
Retention rates vary significantly by industry. ADP data shows that hospitality, retail, and resources and mining have the lowest monthly retention rates of 97% or lower. Education and health, finance, manufacturing, information, and professional services have the highest monthly retention of 97.7% or higher.
Organization size is also significant. Retention rates at smaller organizations can vary widely, from 95% to 100%. As organizations grow, turnover declines and retention rates increase, partly due to scale.
Why should HR leaders care about employee retention rates?
Retention rates are important because losing experienced, high performers can negatively affect the quality of an organization’s products and services, as well as its relationships with clients. It can also cause poor morale and loss of productivity among the remaining workers, all of which impact the bottom line.
How can HR leaders use employee retention rates beneficially?
HR leaders can use retention rates to guide their employee retention strategies. Once they’ve uncovered more information about why people stay or leave, they can identify what’s working well and where there are opportunities for change.
How often should you calculate retention rates?
It’s common practice to review retention rates quarterly. This time frame can help employers identify turnover before it becomes a wide-scale problem and assess whether retention initiatives are effective.
What is employee retention vs turnover rate?
Employee retention rates measure how well an employer keeps valued employees, whereas turnover rates measure how many employees leave a company. One is the inverse of the other. So, if a company has a turnover rate of 3% during a given period, the retention rate for that same time is 97%.
1Gallup, 2019. This Fixable Problem Costs U.S. Businesses $1 Trillion.
2Beqom, 2021. 2021 Compensation and Culture Report.
3ADP, 2022. Earned Wage Access: Tapping into the Potential of Flexible Pay for Today's World of Work.
4ADP, 2022. People at Work 2022: A Global Workforce View.
5Brandon Hall Group, 2015. The True Cost of a Bad Hire.
6The Marcus Buckingham Company. Internal engagement research
This article is intended to be used as a starting point in analyzing the retention rate meaning and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
