Employee retention rate: formula and practices

Employees are the backbone of any firm. A solid employee base makes a strong firm and helps the firm in achieving its long-term goals. In today’s competitive world, where every firm is in search of the right talent, to make their base strong, where poaching employees have become a common practice, companies must hold their top talents tight enough. They must make elaborate plans to retain them in the long-run as everyone knows hiring someone completely new is a long, exhausting and an expensive process. So, having employee retention plans in order, planning extensively on employee retention formulas and how to calculate them are something that must be included in the company’s strategic planning. So, let us start with understanding what exactly the employee retention rate is?

What is the employee retention rate?

Employee retention is generally expressed as the percentage of the workforce that has stayed with the company for a fixed period. It is the employees that stuck around in the firm till now. It is often expressed as a statistic as it is such an important matrix for measuring HR analytics. Retaining employees is a huge task for employers and is a constant work to keep the employees motivated so that they choose to remain employed and provide benefits to the company. So, effective employee retention strategies must be in place to reduce employee turnover and the costs associated with it.

Why do employees leave jobs?

There are quite a few reasons as to why do the employees leave their jobs. So, some of them are:

  • Lack of job satisfaction
  • Too much workload for the employee to handle leads to employee burnout
  • Bad relationships with co-workers and bosses
  • A feeling of not being recognized at work
  • Lack of flexibility
  • No career advancement
  • The bad work culture of the firm
  • Insufficient compensation

Why is employee retention so important for the firm?

Employees are the most important asset of any firm. So, keeping the back at any firm must be of utmost importance. So, employee retention is important due to the following factors:

  • Reduced time and cost wastage of the firm: Hiring new employees is a big blow to the company’s resources in terms of both time and cost, and companies want to minimize it as much as possible.
  • Keep the productive flow of the firm going: Employees who work for a longer period builds up a bond with the company and the team and are more skilful and they how to contribute to the firm’s success.
  • Reduced training times: New employees require huge training periods to get accustomed to the firm’s business, so the entire process has to be repeated.

What is the formula for the employee retention rate?

Calculating employee retention rate is a mammoth task, and there is a simple formula that most firms use to arrive at an answer. So, the formula is:

Employee retention rate formula = (Number of employees who stayed with the company for the entire period/ Number of employees in the firm at the start of the period) *100

OR

Employee retention rate formula = [(Total number of employees – Number of employees that left)/Total number of employees] *100

So, any 2 of the 3 inputs are required for calculating the retention rate:

  • Number of employees at the beginning of the period
  • Number of employees who stuck till the end of the period
  • Number of employees who left during the period

How to calculate the employee retention rate?

Let us understand how to calculate employee retention rate using an example:

Example:

Suppose the company hired 25 employees in April and 5 of them were replaced by the month-end. So, what is the retention rate for April?

Total no. of employees = 25

No. of employees who left the firm= 5

So, no. of employees still at the firm = 25-5 = 20

 So, retention rate = (20/25) *100

                           = 80%

One important thing to note here is that, while calculating the retention rate, if

some of the employees have left the firm and then they are replaced, then these new employees are not taken into account. Here, as the number of people hired, fired or replaced are not taken into account while calculating the retention rate, so to have a clear idea about the employee landscape in any firm, the employee turnover ratio must also be taken into account.

What is a good employee retention rate?

There are no such hard and fast rules but a benchmark to see how the firms are performing as compared to the other firms. Firms can have a good retention rate, but if the few people who are leaving the firm are the top talents, then the firm might not be in good shape. A good employee retention ratio is more than 90% for all sectors worldwide. But in recent years, the retention rates in India have dropped to 80-85% and is dropping further, which is a topic of worry.

What is an employee retention strategy?

Employee retention strategies are practices that the firms follow to retain their top talents and prevent them from leaving the organization. The company aims at minimizing employee turnover as higher turnover rates are expensive and time-consuming. Losing an employee affects the team morale, reduces productivity and creates a wreck in the workflow if the leaving employee is someone at a higher post like a manager or higher. So, employee retention strategies should be in place in every firm, and every firm must make sure that they have the least turnover percentage.

What are some of the effective employee retention strategies?

Some of the effective employee retention strategies are:

  • The retention process starts with the recruitment process by identifying the employees who will stay for the long haul – Looking for candidates who stayed longer at their previous jobs, having qualities of loyalty, patience, perseverance must be the first pick as employees for the firm. Job hopping candidates are risky as they may leave the firm as soon as another opportunity knocks on their door.
  • Providing education support and clear advancement in careers: Many employees leave because they feel stuck at their jobs with no way out, and thus they do not see any advancement in their career. So, firms that provide continuous promotions make the employees realize that they are a crucial part of the firm and are valued. Also, helping the candidates in developing the right skills for the job role helps in retaining employees.
  • Providing the right kind of benefits to the employees: Benefits and perks play a huge role in keeping the employees satisfied and happy in their jobs. Providing stock options, flexible work options, generous paid leaves, health insurance, and many more is one of the most effective ways of retaining employees.
  • Keep the communication channels open between the lower level and top-level management: Doing this makes the employees realize their opinions and voice matters, and they can provide useful insights into important matters. And people tend to stay where they are a matter for a longer period.
  • Using data, AI to work and leveraging technology: Use employee’s data to predict which employees are most likely to leave and then work on retaining them by working on the factors which will cause them to leave.
  • Provide a nice and happy working environment to the employees: A happy employee stays the longest, and a good work environment is something that contributes greatly to that.

Employee retention is a crucial matter for every organization, and retention strategies must be carefully planned out so that the firms have the strongest workforce. Improving the retention rate every year must be the firm’s goal, and careful thought must be put into it.

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