What is the employee retention rate? How to calculate & improve it

Although the “Great Resignation” is more or less in our collective rearview mirror (1), managing employee retention remains critical. By late 2023, the U.S. Department of Labor reported a total of 3.5 million resignations nationwide, with the employee quit rate continuing to spike among professional and business services. (2)

Our recent Workforce Trends Report revealed that one in three employees plans to change jobs in the next 12 months. (3) Now, more than ever before, employee retention must become a strategic business objective. 

So, what is the employee retention rate? Better yet, why does employee retention matter for today’s organizations, particularly in an employment landscape riddled with voluntary resignations and continuous quitting?

This article will explore the meaning of employee retention alongside actionable insights for HR leaders and team managers to effectively measure — and magnify — the average retention rate at your organization.

1. Axios, 2023

2. U.S. Bureau of Labor Statistics, 2023

3. Leapsome Workforce Trends Report, 2023
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Main takeaways from this article:

• Learning how to calculate and improve your employee retention rate is integral to your company’s long-term success. 
• Calculating retention rate is as simple as plugging the number of employees over a set period into the given employee retention formula.
• Factors that influence your rate of retention include your company culture, career development opportunities, and employees’ work-life balance.
• Tips to improve employee retention rates range from enhancing employee onboarding and development experiences to encouraging regular feedback.
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What is the employee retention rate?

Employee retention rate is a business metric that describes the percentage of employees who remained at an organization over a given period. In other words, the employee retention rate measures how many employees stayed employed over a set period, such as quarterly or annually. It defines how long a company retains employees. 
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Why is your employee retention rate important?

Many human resources professionals assume that the employee retention rate reflects an organization's talent acquisition and hiring abilities. If employee retention is high, it must mean hiring managers are sourcing applicants with top talent and optimal job fit, right? Well, yes and no. A high employee retention rate indicates well-qualified hires, but it’s also much more than that. 

Employee retention rate is a key performance indicator (KPI) of a business’s overall health. It’s no secret that a stable workforce is an organization’s most valuable asset — and this is where a solid employee retention rate comes into play. Your employee retention rate reflects everything from employees’ job satisfaction and work-life balance to their connection with your company culture.

Employees who stay long-term likely do so because they relate to your organization’s mission and values. These long-standing team members often contribute to a positive working environment that appeals to new hires and potential applicants. Retained employees also obtain nuanced knowledge over months or even years to enhance productivity and profitability.
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How to calculate your employee retention rate

When calculating employee retention rates, it helps to be specific. Employee retention is confined to a specific period, so you can choose to calculate the retention rate monthly, quarterly, or yearly. As you determine your organization's retention rate, consider the simple calculation and pointers below.
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Employee retention rate formula

The employee retention rate calculation might be simple, but the insights it reveals are significant. First, decide on the timeframe to measure the retention percentage. Next, divide your remaining headcount during this timeframe by the number of employees at the start and multiply the result by 100.

When written out, the basic formula for retention rate looks like this: 

Retention rate (%) = (Number of individual employees at end of period / Number of employees at start of period) x 100
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Example retention rate calculation

You don’t have to be a math whiz to learn how to calculate retention rate — all you need are a few basic details! For instance, imagine you want to calculate your business’ annual retention rate.

First, you’d need to determine the period for the formula. In this case, you’d measure your average retention rate over one business year, from January 1, 2023 to December 31, 2023.

Next, gather the number of employees you had at the start of the year and the number of employees you had at the end of the year. The staff members still employed at the end of the year can be referred to as your business’ remaining headcount. 

For this example, imagine you had 400 employees on January 1, 2023, and 360 employees on December 31, 2023. To calculate your employee retention rate, first divide 360 by 400. Then, multiply that number (0.9) by 100 to determine your annual employee retention rate, which is 90%: 

Retention rate (%) = (360/400) x 100

Retention rate (%) = (0.9) x 100

Retention rate = 90%

Simply swap out the example headcount numbers to calculate your organization's annual retention rate. 
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The difference between employee retention vs. employee turnover

Employee retention rate refers to the percentage of a workforce that remains with an organization. In contrast, employee turnover rate refers to the percentage of a workforce that leaves an organization within a given period. While the employee retention rate and employee turnover metrics are linked due to how employees move in and out of a business, the terms cannot be used interchangeably. 

It can be helpful to consider employee retention as you would customer retention and view employee turnover the same way you would customer churn rate. A high retention rate is always good — it indicates an optimal fit and maximum satisfaction. A high turnover or churn rate is always bad, implying a lack of alignment, limited engagement, and low satisfaction rates.

Another difference between retention and turnover is that turnover metrics provide context for why employees leave an organization. There are two types of employee turnover: voluntary and involuntary turnover. Voluntary turnover occurs when employees leave an organization by choice, while involuntary turnover occurs when employees are terminated or laid off by an organization. 
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How to interpret employee retention rates

Now that you know how to measure retention rates at your organization, you might be curious about how to interpret them. After all, employee retention rates can vary by industry, department, and even specific roles within the same department. To gain a complete view of job satisfaction and fit among your employees, it’s essential to take these three steps:

• Dig deeper than the surface numbers. We surveyed 2,500 global professionals and learned that almost one-third of workers are not comfortable reporting issues to HR. If your retention rate is low, but employee feedback has been minimal, consider implementing employee engagement surveys to identify the problem areas and necessary actions for improvement.
  
  
• Look for trends over time. Our Workforce Trends Report revealed that only one in three HR leaders track essential metrics like engagement or turnover; of those who do, only one-third use dedicated surveys. It’s vital to try and identify how engagement metrics correlate with churn to allocate retention efforts and pinpoint trends within individual teams properly.
  
  
• Compare against industry benchmarks. Keeping your employee retention metrics in a silo with only your organization’s data can limit the impact of your findings, making it vital to compare your retention rate against industry averages. For instance, the average turnover rate for HR professionals is 14.6%, putting average employee retention for this job type close to 85%.
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Factors that influence employee retention

To determine which factors influence employee retention, we recently asked thousands of global employees about what makes them want to leave their current organization.

The top reasons for turnover included an unhappy workplace culture, lack of development opportunities, and poor employee-manager relationships.

Understanding how the following factors influence your employee retention rate, alongside your turnover rate, helps you build an effective retention strategy.

• Organizational culture: A shocking one-third of employees cite poor workplace culture as a reason for voluntary turnover. Negative work environments and nonexistent company culture drive employees away, whereas positive employee experiences pave the way for higher retention.
  
  
• Career growth opportunities: A lack of career growth and development opportunities is why 36% of employees leave their current positions. Limited options for advancement are quick to prematurely nip an employee’s tenure in the bud and drive employee churn rates.
  
  
• Competitive compensation: Did you know that eight out of 10 employees self-report that they consistently go above and beyond in their roles? While almost half of all employees (48%) consider good compensation and benefits as reasons to stay, 76% cite insufficient compensation as a reason to leave.
  
  
• Work-life balance: Work-life balance is the most cited factor influencing employee retention. However, a 2022 survey revealed that less than half of employees feel their work-life balance is ‘excellent’ or ‘good,’ and another 15% consider their work-life balance to be ‘poor’ or ‘very poor.’ By creating a culture of work-life balance, you will help your organization stand out from the crowd.
  
  
• Recognition and rewards: At a time when 80% of US employees report they don’t feel recognized nor rewarded for their workplace contributions, we’ve learned that building a culture rich in feedback and recognition helps the whole team feel that their work has value and is recognized, effectively boosting employee morale and their commitment to your organization. 

It’s important to remember that these factors vary by employee age, tenure, and responsibilities. So, while you may not be able to control some of the above factors, like deciding to increase compensation company-wide, for example, you can boost retention by addressing the factors you can control. 

Before we dive into measures for boosting employee retention, let’s review a solid employee retention rate to strive for. We’ll explore the average employee retention rate, along with the rewards of a high retention rate and the repercussions of a low rate, to set the stage for time-tested retention strategies. 
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What is a good employee retention rate?

There is no such thing as a universally “good” employee retention rate. However, realistically, employee retention rates average around 90%, regardless of industry. Higher employee retention rates can be seen in industries like education, insurance, and finance, while hospitality has the lowest rates. 

At Leapsome, we’ve seen the impacts of a thriving employee retention rate and triumphant work culture firsthand, witnessing long-standing workforces forge resilient organizations. On the flip side, we’ve also observed the ramifications of poor employee retention, which extend much farther than you’d think. 
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The cost of a low employee retention rate

Anyone who has gone through the effort of crafting the perfect job descriptions, sourcing ideal candidates, screening promising applicants, and carrying out onboarding procedures, only to repeat the process just a few weeks later understands the cost of a low employee retention rate. To better understand how a low employee retention rate can impact your business, consider factors like: 

• Financial costs — When considering cumulative recruiting, onboarding, and training expenses, the total cost to hire a new employee can be up to four times the position’s salary. These costs do not account for the 44 days it takes to hire for an open role, during which sales efforts can slow or stall completely.
  
  
• Cultural impacts — Beyond sky-high turnover costs, a low employee retention rate can limit other employees’ engagement levels. An organization’s mission and values can fall to the wayside without a long-standing team to embody their workplace culture, leading to a lack of involvement and engagement.
  
  
• Brain drain — The term ‘brain drain’ refers to a loss of institutional knowledge and expertise brought on by employee turnover. When an organization struggles to maintain its workforce, especially its top performers, its operational workflows and organizational efficiency can begin to struggle.
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Benefits of a high employee retention rate

High employee retention rates build high-performing organizations. Looking at the following points, it becomes clear what differences a positive employee retention rate can make on an organization compared to the drawbacks of low retention: 

• Industry credibility —  It’s far easier to attract talent when your business receives glowing employee reviews across networks like LinkedIn and GlassDoor. Plus, you can plug your job descriptions with your impressive retention rate to signal employee satisfaction.
  
  
• Increased productivity and profitability – A high employee retention rate can enhance progress on business goals. Businesses that take the necessary steps to engage and retain their current employees boast 23% higher profits than organizations that do not.
  
  
• Preserving customer relationships — Customer relationships are the lifeblood of any organization, particularly business-to-business (B2B) and sales-related companies. Maintaining a consistent workforce encourages the ongoing rapport between salespeople and current customers, helping to drive better customer retention rates.
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Improve employee retention rate: Five impactful employee retention strategies

Chances are, your company is willing to implement several strategies in the pursuit of a high retention rate. To improve retention at your organization, it’s crucial to begin your efforts on day one and continue from onboarding throughout an employee’s tenure.

Here’s a look at five impactful employee retention strategies to help drive higher rates at your organization. 
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1. Develop a comprehensive onboarding program 

Onboarding is a new hire’s first taste of what it’s like working for your organization. Unfortunately, one in five employees report that their most recent onboarding experience was poor or, worse, that they received no onboarding period. A lack of onboarding often leads to a lack of clarity on the company’s direction, which has been reason enough for 30% of employees to abandon their positions altogether. 

Luckily, a comprehensive onboarding program can help with that. Robust employee onboarding, such as a library of learning materials powered by Leapsome, allows employees to align themselves with your organization's ethos, company culture, brand values, and internal processes, so there’s never a question of direction. 
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2. Make employee development a priority 

Survey results of 2,500 professionals reveal that a lack of career development opportunities significantly influences employee retention rates. As a matter of fact, one-third of HR professionals report a lack of career development opportunities to be a significant source of employee turnover. 

If you want employees to stick around for more than just a quarter or two, giving them opportunities to expand their skill sets and responsibilities is vital. With a product like Leapsome, you can encourage managers to set up recurring goal cycles with fixed timelines so that employees can continually strive for ongoing career development. 

Of course, not every employee is set on the same career path. That’s why Leapsome empowers organizations to create multiple learning paths. Simply create as many paths as your organization needs, then manually or automatically assign them to employees as new hires or recently promoted employees display that they’re ready to level up.
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3. Cultivate an engaging work environment

Did you know that, despite HR estimates that over half their workforce is completely engaged at work, that figure is actually less than one-third of employees? Indeed, Gallup has found that a concerning 60% of employees are emotionally detached at work, plummeting the global engagement rate to just 21%. 

To create a more positive work environment that cultivates active engagement and interaction among your term, utilize engagement surveys to collect meaningful feedback. Then, using the responses, look for trends and patterns that indicate specific factors influencing engagement levels. You can also lean on the support on a people analytics tools to make more informed decisions from this data.

Employee engagement surveys will support you in pinpointing where to direct resources and help define initiatives that will have a lasting impact. Even better, you can opt to automate your survey tools with Leapsome, so running engagement surveys and unearthing relevant trends becomes routine. 
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4. Competitive compensation and benefits 

Competitive compensation goes beyond the benefits package you offer new hires — it includes how you make top performers feel valued for their contributions. At a time when 80% of employees consider themselves top performers, quick fixes like one-off bonuses won’t keep dissatisfied staff at their jobs forever. 

Rather, it’s paramount to correlate individual performance data with transparent compensation processes to reward promotion-ready talent. Compensation frameworks from Leapsome create consistent promotion workflows that can help identify top performers and ensure fair compensation in relation to performance. 
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5. Regular communication & feedback

Given that three in four employees want more feedback and recognition from their managers and nine in 10 remote workers are dissatisfied with their current company’s feedback culture, feedback tools help streamline and scale routine communication to enhance retention rates. 

Platforms like Leapsome offer a dedicated Praise Wall designed to encourage a culture of public appreciation between colleagues. This feature is included in our Instant Feedback module, which is specifically designed to give employee achievements the visibility they deserve.
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🚀  Ready to give employees the feedback they’re yearning for? 

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The future of employee retention

So, what does the future of employee retention look like? According to our research, key trends to anticipate in employee retention strategies include artificial intelligence (AI) and data analytics, flexible working arrangements, and diverse and inclusive working environments. Nine in 10 HR leaders already use AI at least once a week and 91% report that it has improved HR processes, helping eliminate manual tasks and freeing up time to fine-tune retention strategies. 

We’ve also discovered an increased focus on mental health that may lead to more flexible working arrangements in the near future. While 97% of HR leaders believe that the state of employee mental health is “good/very good,” only 88% of employees agree — and a handful list their mental health as “very bad.” Employees across the US and the UK state that flexibility in hours and the ability to work from home can enhance their work-life balance, improve their mental health, and boost retention rates. 
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Empower your people and boost employee retention with Leapsome

Is your employee retention rate skewing lower than you’d prefer — or lower than your company profits can handle? You’re not alone. Discover why some of the best places to work trust Leapsome to create a continuous cycle of employee enablement beginning day one. We know that multiple factors play into employee retention, and we are here to offer you a holistic approach to all the above.

Leapsome enables HR leaders to effortlessly track critical employee metrics, such as engagement, satisfaction, and turnover, with our Surveys module, while our Learning module provides a flexible framework from onboarding through career development to drive higher retention rates. 

Access comprehensive data through dedicated employee engagement surveys, anonymous suggestion boxes, and even monthly pulse checks that will never leave you surprised at your retention rate. It’s never been easier to build a high-performing organization and enter a new era of employee retention as it is with Leapsome, the platform that will always put your people first. 
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🚀  Ready to transform your employee retention strategies?

With Leapsome's tools like Instant Feedback, Compensation, and Surveys, you can build a culture of feedback, compensate your people fairly, and engage them effectively. 

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