How to Determine and Grow Your Employee Retention Rate

Do you know how much money your company loses due to employee attrition? Turnover is expensive, costing nearly $17,000 for employers who have to replace an employee earning a median wage. And in today’s tight labor market, the cost of replacing your best employees is even higher. So how do you prevent your best talent from jumping ship? Are you even tracking your employee retention rate? Turnover, albeit unfortunate, is a part of every organization. But chances are you can take a few steps to increase your employee retention rate. Let’s examine how.

First off, what’s a good employee retention rate?

The average total turnover rate for all industries is 17.8 percent, according to a 2016 Compensation Force Study. But employee retention rates vary by industry. For example, the restaurant, hospitality, and retail industries experience lower rates of retention due to abnormal hours and high levels of stress, while utility companies and insurance agencies experience a much lower percentage of attrition.

Averages and percentages are well and good, but how can you tell if your company has a solid retention rate? In order to gauge your retention rate, you’ll first have to calculate the turnover rate for your company. To do so, determine these two numbers:

  • The number of people you employed at the start of the period (A)

  • The number of terminations you had during that period (B)

Use these numbers with the following formula: B / A x 100 = Turnover Rate

Imagine you run a small business that employees 80 people at the start of the 2nd quarter. During that time period, 6 people quit. With the above formula your turnover rate for the 2nd quarter was 7.5 percent.

But what about over the course of a year? Determining a year-long turnover percentage is a bit more complicated, but to do so you’ll need to know when your business added and lost employees. So, for example:

  • There were 3 months with 77 employees: 77 x 3 = 231

  • There were 8 months with 81 employees: 81 x 8 = 648

  • There was 1 month with 79 employees: 79 x 1 = 79

  • There are 12 months in a year

So the average number of employees over the course of the year looks like:

231 + 648 + 79 = 958

958 / 12 = 79.83

So your small business had an average number of 79.83 employees for the year. Now, let’s say you terminated 11 people over the year. The average turnover rate for your business is 11 / 79.83 x 100, or, 13.78 percent. Not bad for a fictional small business!

Retain your best employees with a proper onboarding process

But is my retention rate healthy?

For our fictional small business, their turnover rate is nearly 14 percent, meaning their retention rate is 86 percent. The million (or $17,000 per replaced employee) dollar question is, is that healthy?

It’s hard to say. Retention and turnover rates are a bit subjective because you have to consider who is leaving the organization. If your business is shedding dead weight, I.E. former employees who hardly performed at their best, then you can say it is healthy because you’ve replaced them with better workers. But if your best employees seem to constantly walk out the door every year, you may have to evaluate the way you treat those top people.

How do I Improve Employee Retention and Reduce Turnover?

If you’re losing top talent every year, it’s time to create an employee retention plan. You may want to reevaluate your benefits or change up management styles. Our video provides some great steps to reduce turnover and improve retention rates. Every organization will experience turnover. As an employer you should be aware of where you stand next to industry averages and have a plan for retaining your best employees.