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What is Employee Retention and Why is it Important?

One of the biggest mistakes an executive officer can make is assuming their business’ main source of success is in their product. The product is the skeleton of an organization, sure – but their people are the heart and the brain. They make up the culture, they drive productivity, they create new initiatives and ideas, and they can even save your company money. Letting too many of these workers go, on the other hand, will cost you more money over time than a subpar product ever will. That’s why employee retention is so critical.

Employee retention is defined as an organization’s ability to prevent employee turnover. When employees start leaving a company, employee retention is lower and turnover rates are higher. It’s actually a common misconception, however, that turnover is the exact inverse of retention, despite the way it’s defined. Here are the differences between high turnover and low retention:

  1. Per SHRM, when measuring over a year, retention rate does not include new hires, while turnover rate does. It’s a small difference, but one that separates them mathematically – including new hires in your retention rate could lead the numbers to tell you that employee retention is higher than expected because your newest employees haven’t left the company. Retention is most effective when used to measure whether the more established members of your team are leaving.
  2. Turnover often includes involuntary departures, like terminations and layoffs, while employee retention calculations often don’t. This varies on a case by case basis; if you feel like you’ve had a recent string of involuntary departures that would misrepresent retention rates, you could elect to exclude them from the calculation. On the other hand, a lost employee is a lost employee – you may want to keep all departures in the count to get a holistic view of your organization’s status.
  3. Retention rates are usually analyzed over a long period of time (a year+) while turnover rates are more often called in for shorter time periods where departures are particularly rampant, like after a round of layoffs or in the midst of a struggling economy. If you want to know how many people just left, calculate the turnover rate. If you want to know how many people are staying in general, calculate employee retention.

How to Measure Your Employee Retention Rate

To calculate your company’s employee retention rate, it’s necessary to only count employees that were present at the start of the measurement period, as opposed to new hires made within the year. With that in mind, the employee retention formula is as follows:

Retention rate = # of individual employees who remained employed for the entire measurement period / # of employees at the start of the measurement period x 100

So, if you had 380 workers at the beginning of 2021, and 352 of them remained employed for the entire measurement period, you would divide 352 by 380 and then multiply it by 100 to get 92.6%. 

28 employees leaving in a year seems a bit high, but 92.6% is actually a great rate. The general rule for organizations is that a 90% employee retention rate is a good goal to strive for. It’s helpful to take your industry’s context into account when determining how urgent your company’s retention problem is – for instance, retail and franchise environments often see higher turnover as a result of the volatility of shorter average tenure. In any case, 90% is always a strong number, and the higher the number is, the better.

If you’re calculating turnover instead, due to the addition of new hires to the equation, you may want to aim for 15%, since the average voluntary employee turnover rate is 18%

The Advantages of Employee Retention

It might seem rather obvious that high employee retention is great for business, but there are a ton of different elements that you might not have considered. Our top five benefits for employee retention are:

  1. Increased Revenue/Cost Reduction
  2. Better Customer Experience
  3. Increased Productivity
  4. Improved Employee Experience/Satisfaction
  5. Less Recruitment/Training

We put Increased Revenue/Cost Reduction on top for a big reason: per industry analyst Josh Bersin, the cost of replacing an employee can be 1.5x-2x their salary. That’s an enormous number that could be secretly chewing away at your overhead.

Bringing all these elements together also fosters a strong culture full of employee engagement, which in turn helps curb turnover itself. Boosting employee retention can single-handedly turn a company around, and if there’s ever a time to capitalize on it, it’s right now.

In 2021, 47 million workers left their jobs in a movement called The Great Resignation. It’s lasted into 2022 and has continued to wreak havoc among human resources and management teams everywhere. There are two different types of “resigners” taking part in this movement, and it’s helpful to distinguish between the two. The first type is the younger workers who want to turn away from the structure of capitalist employment and make money independently. They’re not as common as most people think, but they’re out there – and you probably won’t find them in your recruitment searches.

The main type of resigner aren’t people who are QUITTING work, but SWITCHING work. Millions of people are seeking better employment opportunities in talent destinations where they believe they’ll be engaged, inspired, and treated well. You can’t have high employee retention without building a culture that attracts talent, because the workplaces that don’t have that culture are the ones being abandoned.

The Great Resignation is hitting organizations that don’t prioritize the employee experience, but The Great Retention is found in organizations that do. Now, how do you get your company to that point?

We recommend you check out our article, How to Retain Employees in 2022! We have a lot more on the subject as well – take a look at our Employee Retention Strategies PDF, or our 10 HR Strategies For the Retention Crisis piece, as told by experts from many of the industries we discussed above. All of our resources can be found in our Library – check them out here! To see HelloTeam, the employee retention platform, in action, click here — and to set up a meeting with us, go here!

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