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The Modern HR Leader’s Guide to Employee Retention Rate

Jan 26, 2022| Reading time: 20min

BY Sharon Rusinowitz

Director of Content Marketing

Holding onto your talent is no easy feat, especially in times when employees feel empowered to demand what’s best for them. But there are certainly huge benefits to reap if you succeed.

For starters, employees who willingly stick around care about your company and will therefore put their best foot forward. This makes it no surprise that companies that prioritize employee retention experience rapid business growth and have more positive organizational cultures.

As a result, every company must regularly revisit their efforts to keep employees feeling fulfilled.

Achieving this goal starts by frequently tracking employee retention rate to measure how many of your workers stay at your company. Read on for everything you need to know about this core HR metric and how you can use it to your advantage.

Develop a data-driven plan for growth in our Startup’s Guide for Intentional Growth

DISCOVER HOW

The Basics of Employee Retention Rate

Employee retention rate is the percentage of employees who remain with your company over a given period of time. When tracked and used right, your retention rate can help you avoid a talent shortage and push you to drive positive change in your organization.

Generally speaking, a high retention rate is desirable. However, it’s important to prioritize a healthy retention rate over a high one. Specifically, you should focus on retaining your desirable employees—those who are productive and therefore bring value to your company. You can still have a high retention rate if you retain more of your undesirable employees, but it won’t be healthy.

How do you determine if you have a healthy retention rate? A good practice is to consistently track your retention rate and compare it with your past rates to see how it changes over time. You want to know when it fluctuates—could it be tied to an internal event, such as a new policy update or initiative (or lack thereof)? Based on this information, you can track changes in trends, get insights, and make informed decisions about how to improve retention.

In addition to tracking your company’s historical rates, you should also compare your retention rate with the average for your industry. This serves as a benchmark to see how you fare against the broader market and can help put your own retention efforts in context. To do so, look at the total separations for your industry published by the US Bureau of Labor Statistics (BLS). Since separation rate is the opposite of retention rate, you can subtract the separation rate from 100 to get your industry’s retention rate. For example, if your industry’s total separation rate is 40%, that means the retention rate is 60%.

Staying ahead of the industry benchmarks and continuing to improve your retention rate requires listening to your employees and responding to what they tell you. According to the IBM Institute for Business Value, here are the top three areas companies need to start focusing on:

  • Work-life balance (according to 51% of employees)
  • Career advancement opportunities (according to 43% of employees)
  • Compensation and benefits + ethics and values (according to 41% of employees)

Another study by McKinsey & Company revealed that 70% of employees think their sense of purpose is tied to their work. Employees are likely to stay if your company makes their work more meaningful by celebrating their efforts and allowing them to work on projects about which they’re passionate.

The Importance of Retention Rate

Retention rate is a core HR metric since it tells you a lot about what your employees think of your organization. A healthy employee retention rate indicates strong organizational health. In turn, that provides a solid foundation on which to grow your business long-term by keeping top-performers on board and by putting your company in a better position to attract top talent for new roles.

Critically, the companies that use this metric to drive strategic decisions are more likely to experience rapid business growth, build attractive employer brands, and record higher profits. Here’s how:

It can help identify what your employees care about

Regardless of where you stand, you can always improve your company’s retention rate. Your job as a leader is to find out what your employees care about, take action, and then use retention rate as a key measure to determine if your efforts have the desired impact. This entails getting employee feedback to further improve those areas and investing more time and money in them.

Start by looking at what your company already does that makes your existing employees want to stay. Is it your culture, DEI efforts, the benefits you offer, or something else? Run frequent employee surveys to pinpoint common variables. You can also look at your longest-tenured employees and see what they have in common. Did they have a similar training and onboarding experience that could be replicated and applied to other employees?

Once you identify the variables that can be attributed to a high retention rate, double down on them to ensure that your employees stick around for even longer.

It will inspire your people to bring their best to work

According to Salesforce, employees who believe that their voice is heard are more than four times as likely to bring their best to work.

Once again, this all starts by asking your employees what they want and then showing that you’re listening by taking action on what they tell you. If you double down on what your employees want in this way, it will not only demonstrate that you genuinely care about them, but it will also help motivate them to work harder and more sincerely.

All of this matters because increased engagement from employees can lead to more creativity and innovation as well as greater productivity. Together, these can support substantial business growth. These efforts also come full-circle by helping you cultivate a strong employer brand that enables you to attract top talent in your industry.

It can drive more sustainable growth

Maintaining headcount can have a positive impact on your business’ bottom line since replacing an employee can be costly. Specifically, businesses pay an average 1.5-2X the annual salary of an employee to hire, onboard, and train their replacement.

But the power of improving employee retention extends beyond mere costs. When you invest in your employees, they will feel valued, which can help foster loyalty and trust. And when loyalty and trust are present, employees are more likely to want to stick around and help grow the business.

One of the best ways to invest in your employees is to focus on their professional development, for example by helping them take on new roles through upskilling or reskilling. Not only does this effort help your employees grow and feel valued, but it can also benefit your business since current employees require less training around workflows, policies, and company culture to assume their new roles.

How to Calculate Employee Retention Rate

The easiest way to calculate employee retention rate is with a people analytics solution. The reporting capabilities of this platform will bring together all of the necessary data and provide you with both current and historical information, no additional work or spreadsheets required. With this type of automation in place, you can easily keep tabs on how your retention rate trends over time.

This ongoing focus is important because, as Kathy Zadroga, HR consultant at Flex HR, points out, calculating retention rate more frequently can help you stay on top of negative trends before they become serious issues and it’s already too late. When a company calculates its retention rate on an annual basis, it risks missing out on what the trends mean.

Without a people analytics solution, you can calculate your employee retention rate using the following formula:

(Employees at the end of the timeframe – New hires during the timeframe) / Employees at the beginning of the timeframe) x 100

Start by choosing a timeframe. A good practice is to calculate your retention rate on a monthly basis to consistently track the number of employees who remain at your organization.

Once you’ve determined the best timeframe for your organization, find out how many employees you had at the beginning and the end of the period you chose. Then subtract the number of new employees you hired during that timeframe (your goal is to measure how many employees you retain, so including new hires would throw off your results). Finally, run the numbers. The figure that comes out is your retention rate for that timeframe.

What We Can Learn from 4 Companies with Impressive Retention Rates

At a time when retaining employees has become more difficult, there are some companies that are successfully holding on to their top talent. And it’s not luck—these organizations do things differently, and their employees are aware of those differences.

But what’s the secret to their high employee retention? Here are lessons from four companies and tips on how you can replicate their success:

Zapier: Build a strong culture by promoting values

Zapier has an employee retention rate of 95%. Their remote team now has over 300 employees. This is largely due to the investments they’ve made in building a strong culture.

Wade Foster, CEO at Zapier, says, “If you invest in your culture, you invest in your values, and you invest in the type of company you are, your retention rates are really [going to be] high. Of our first 10 employees, eight are still here.”

Zapier encourages every employee to actually implement the values they preach. For instance, one of Zapier’s core values is “default to action,” which entails doing something and showing results rather than simply talking about it. But with siloed information, taking action can be challenging. To that end, Zapier has made all of its chat rooms readily available. “All chat rooms are open to everybody. It’s not uncommon to see support diving into engineering rooms or marketing diving into support, and folks are generally happy to help,” says Foster. As an example, anyone from marketing can skim through the sales room and see their challenges to improve sales enablement content.

What’s more, the company evaluates the performance of their employees on the basis of how they embody the core values. As a result, more employees are encouraged to live by the company’s philosophy.

You can take a page out of Zapier’s book and take tangible steps to foster a culture in which your employees thrive. This should include celebrating employee achievements, improving company-wide transparency, and using surveys to get feedback so you can keep a pulse on how employees feel about those efforts. Along the way, you should also use data to identify gaps and further improve your culture.

Cardinal Health: Amp up your DEI efforts

According to a survey by Korn Ferry, 84% of business executives say that a focus on DEI can increase employee retention. Employees would prefer to work for a company that offers equal growth opportunities and inclusiveness.

Cardinal Health is a Fortune 100 company that champions DEI. They also have one of the highest employee retention rates. The company recently launched an initiative to increase diversity at the base manager level and above by the year 2030.

In a press release, Ola Snow, Cardinal Health’s Chief Human Resources Officer (CHRO), said, “[We] are excited to continue refining our recruiting, development, succession and retention practices to help ensure equitable access and opportunity.” It’s initiatives like this that make Cardinal Health an ideal place for so many of its employees. 

Celebrate diversity and inclusion in your company to replicate their success. Start by educating the C-suite about the benefits of focusing on diversity. After getting buy-in from the top, create an inclusive environment by training employees to be more sensitive to cultural and personal differences. Additionally, using a people analytics platform can help you more easily track progress around your DEI efforts, gauge the sentiments of your employees toward those changes, and hold leaders accountable for any potential gaps.

Buffer: Promote pay transparency

According to a Beqom survey, 58% of employees would consider making a job switch for increased pay transparency. In addition, Payscale’s “Fair Pay Impact” report found that increased pay transparency is more likely to make employees stay. That’s because this type of transparency allows employees to hold companies accountable for any disparities in pay and ensures they’re working in an equitable environment.

Buffer, a marketing SaaS company, has always been an example to look up to in this area. In 2013, the company launched its increased pay transparency program, which made its employees’ salaries public. At any given moment, employees at Buffer can check how much they earn relative to their colleagues on their website.

Even if you don’t want to list each employee’s salary publicly, you can still create a transparent culture by establishing set ranges for compensation packages based on role and level. Then you can share those ranges with employees and include them in future job ads. Doing so not only helps existing employees understand where they fall, but it also sets expectations for current and potential employees. Most importantly, it creates a more equitable environment by standardizing pay based on set criteria and ensuring that all of your employees know that.

Charles Schwab: Focus on the future of your employees

According to AZ Business magazine, the Arizona office for the brokerage firm Charles Schwab is one of the state’s most admired companies, with a retention rate of 92.1%. A key reason for that is the company actually cares about the financial future of its employees—just as much as it does for its customers.

For starters, the company offers a 401k plan with a 5% match that employees rate highly on Glassdoor (4.2 out of 5). The 401k plan is also tied to an employee recognition program. Employees can use the rewards they earn from the program to boost their retirement savings. In addition, employees also get complimentary Charles Schwab financial consultations.

These benefits show that the company genuinely cares about its employees. While offering financial benefits—such as a 401k plan—is definitely an option, there are countless other ways to invest in the future of your employees. For instance, you could offer mental health support, professional development stipends, and mentorship programs, to name a few. Speak to your employees to understand what they want, consider your company culture, and offer benefits that will have a long-term impact on your people.

Dig Deeper and Get More Insights

Measuring your employee retention rate itself won’t help you set your company up for success—it only serves as a barometer to see where you stand. The hard work lies in digging into other key metrics, such as your employee net promoter score (eNPS), to identify trends, find out what your employees want, and then take action.

Along the way, it’s important to consistently measure your employee retention rate to gauge the effectiveness of your efforts.

In doing so, you’ll be able to retain more of your talent, avoid frequent hiring costs, and cultivate a reputation that attracts the cream of the crop in your industry. As a result, you’ll experience long-term business growth that won’t be easy to replicate—the ultimate competitive edge.

Ready to take the next step? There are no shortcuts when it comes to growth; instead, your company needs a data-driven plan of action. Discover what it takes in our Startup’s Guide to Intentional Growth.

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