Understanding and Calculating Employee Retention Rate Effectively

In the private sector, working professionals typically stick around for a limited time period and switch continuously. This switching can happen within any time of the employee joining the company — from a few months to several years. In the IT sector and corporate industries, a switch is common after two to three years.

Interestingly, a few qualitative studies have found out that millennials change jobs a lot more frequently than the older generations. However, it is important to note that at the start of their career, millennials do not aspire to do so. If given a choice, they would also like to establish and progress their career in the first company they joined.

What are the reasons for employee turnover?

The human condition is the same all over. We all crave for fulfilling careers, coupled with stability and comfort. When we consider the universality of these aspects, the question begs to be asked — why do employees leave a company?

Here are some of the common reasons why employees end up switching companies:

1. For better salary and recognition

Everyone wants to be recognised for the kind of work they are doing. People also want to receive the right remuneration for their efforts. If there hasn’t been any increment in the income of the employees for years, they are definitely going to think about switching. If there have been times where they have felt that their contribution to the company is not fruitful or valuable, this feeling will also encourage them to leave.

2. To change the work environment

If the existing work environment has been getting toxic or uncomfortable, then the employee can make a decision of leaving in order to seek a healthy work environment.

3. For better opportunities in career advancement

An employee would usually quit if they don’t see their career growing beyond just a salary hike. They would prefer a company that offers them career growth along with monetary benefits.

These are the reasons why employees quit the organisations they are working for. Let us have a look at how this turnover affects the company.

How does turnover affect the company?

Any employee — whether just starting out in their career or someone at the executive level — leaving the company has serious repercussions on the performance and the profit margins. These include:

1. Affects the cost of training

Whenever an employee joins a company, they are trained by the company as per their expectations. Whenever the employee leaves and a new employee takes their place, the company has to invest in training the new employee, which affects the finances of the company.

2. Lack of staff that can take the mission ahead

Even though the company is working on various projects and short-term goals, there are always long-term goals that the management wants to achieve. In fact, the short-term goals are a broken-down version of the long-term goals of the organisation.

If employee turnover is high, it clearly means that there is a failure to understand the long-term goals on the employee side. And hence, due to this high turnover, there is a perennial lack of staff that can work towards the long-term goals.

3. Inability to plan for a longer time period since you don’t know when people are going to leave

If the employee turnover has been consistently high in a particular company, then it becomes difficult for the management to actually plan for the future. To envision and work for a longer period, one would need trustworthy staff that could be severely affected by employee turnover.

It is clear from the above points that employers need to actively work on employee retention in order to realise their full potential. So let us get a better understanding of the term — employee retention rate.

Employee retention — what is it?

Employee retention is the effort geared towards motivating the staff to remain in the company for a longer period and not switch immediately. But to understand retention and to make efforts in that direction, the company needs to understand the determinants of turnover.

These determinants include:

1. Happiness of employees

Employee happiness is directly a function of employee satisfaction. If a particular employee is not satisfied with the company or the kind of work they are doing, they are not going to be happy with their work-life. So, digging deeper into what makes a happy employee and what makes an unhappy employee would give the company a better idea for retaining their employees.

2. Turnover rate — voluntary and involuntary

Turnover is not always voluntary for employees. Often the company has offered them a limited period contract which makes it mandatory for them to leave. At such times, the company needs to check if they are letting go of the good workforce just for the sake of it.

Because of involuntary turnover, there is often a loss of top contributors to the company. Owing to limited period contracts, the companies may lose out on the people who invest qualitatively in the company.

3. The satisfaction rate of new employees

The job satisfaction rate of the newly joined employees should be taken into consideration. Measuring and keeping track of these figures regularly will help in developing strategies to counter it when it starts to drop. Efforts to retain them could be geared in that direction.

4. The retention rate of each department

While every employee is an asset, some employees are more valuable than others or perhaps, just an expensive asset to lose. This holds especially true for managers. Hence, it is important to keep track of the retention rate or the turnover rate at these levels. Also, if a specific department shows an exceedingly high turnover rate or inversely, a high retention rate, one needs to look at the underlying factors for the same. What is the department doing wrong or right?

While we are talking so much about turnover, it is important to understand that employee turnover is a completely normal process. There are going to be some employees that will leave anyway. But, it is nonetheless essential to calculate the retention rate to measure and maximise your company’s performance.

Employee retention rate

Employee retention rate is the ability of an organisation to retain its employees and prevent them from quitting. In a deeper sense, it is reflective of the internal efforts of the organisation to engage employees and make them feel valued at the organisation. It is important to know this rate in order to decide the direction of your efforts towards employee engagement and to make the company benefit qualitatively.

How to calculate employee retention rate?

The employee retention rate can be calculated with the following steps:

Step 1: Define the duration of time for which you are calculating the employee retention rate.
Generally, the organisations calculate employee retention rate on an annual basis. Doing so helps them compare it with the previous year’s performance. Many organisations do it along with the performance appraisal of the employees and other annual reports. The employee retention rate must be calculated at least once a year. But if a company is making active changes towards increasing employee engagement and employee retention, then the time duration can be shorter as well. Shorter time duration can also give an idea to the company about the feasibility of their efforts.

Step 2: Determine the actual number of employees working on day one of the earlier defined periods.
There could be many additions and reductions to this number in bigger companies. But to determine the employee retention rate accurately, the company should be more careful about not including unsalaried employees in it or even interns. The employees working on that day in an official capacity should be the number you are considering. This number gives you a ground to compare the loss of employees with. It becomes the scale you would compare the loss against.

Step 3: Decide the number of employees retained during the aforementioned time period.
This figure is basically the number of employees who continued to work in the organisation within that time period. So to obtain this number, you have to subtract the number of newly hired employees from the total employees on the last day of the period you are calculating the employee retention rate for. That should give you an idea of the number of employees that continue to work within the time frame in the organisation. One has to be very careful with the fact that they cannot include the newly hired employees in this figure.

Step 4: Calculate the employee retention rate.
To get the accurate figure of employee retention rate, you have to divide the number of employees retained from the last year to this time period by the number of employees on the first day. Since it is a rate that we are calculating in percentage, we need to multiply it by a hundred.

Hence, mathematically speaking,
Employee retention rate = (number of retained employees/number of total employees) × 100

If we want to make accurate uses of employee retention rate, we cannot just stop at calculating it without any further analysis. We also have to compare it with the industry standards and check where we are in terms of that comparison. This comparison should give us a wholesome idea of how we are performing as a company internally and not sales-wise. There is no such thing like the ideal rate of retention, but one can always get an idea of the range within which the retention rate lies for different industries.

Guidelines to improve employee retention rate

Knowing how to calculate employee retention rate is of no use if we cannot take the numbers out of the equations and put them into practice. Once we know about the employee retention rate, we have to make sure that we need to improve it and hence, direct our efforts towards our goals.

The employees’ retention rate can be improved by the following measures:

1. Offering competitive salaries
2. Focusing on employees’ individual growth along with the growth of the company
3. Offering flexibility and control to the employees that makes them feel more involved and less bound
4. Inclusion of diverse population and making efforts to make them feel comfortable
5. Checking employees job satisfaction regularly to catch the things going wrong
6. Increasing the quality of the employees, one is recruiting

This detailed information about employees turnover and employee retention can give us a better idea to frame HR strategy for the coming year.