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Takeaway
Employee retention refers to a company’s ability to keep employees over a specific period. Organizations with low employee retention generally experience high turnover spurred by myriad issues like poor leadership, toxic work culture, few growth opportunities and more. Read how to calculate employee retention, why it matters to successful organizations and what your business can do to keep more people.
Retaining top talent is crucial for every business — that statement is nothing new, but it’s never been truer than it is today.
The Department of Labor found the average employee tenure was just over four years in 2022, reflecting a downward trend as younger workers prioritize career growth. In this increasingly competitive job landscape, employers that hold on to their best and brightest rise above the pack.
Let’s explore the complexities of employee retention, from what it is and why it’s important to all the factors that influence it.
What is employee retention?
Employee retention refers to an organization’s ability to keep its employees over a specific period, effectively reducing turnover and maintaining a stable workforce. It’s expressed as a percentage because this figure accurately reflects the proportion of employees who remain with the company over time relative to the total number of employees at the start of the measured period.
For example, if a company starts the year with 100 employees and ends the year with 80 of those original workers, the employee retention rate would be 80%. This percentage helps businesses quantify their success in keeping talent and identifies areas where their retention strategies need improvement.
What are the benefits of employee retention?
Retention plays a central role in the success of a business, directly impacting:
- employee satisfaction
- company culture
- employer brand
High retention rates usually indicate an employee-friendly work environment where individuals feel valued and motivated, leading to higher levels of productivity and innovation. Moreover, businesses with solid retention strategies will likely have a good reputation as employers, attracting top talent and fostering loyalty among existing employees.
These advantages can enhance the company’s competitive edge and significantly reduce the costs and disruptions associated with recruiting and training new hires, contributing to stability and growth within the organization.
Boosts efficiency
Low turnover means reducing the need for recruiting, hiring and training new staff, all of which are costly and time-consuming. When companies keep their employees for extended periods, they avoid the costs associated with turnover, from job postings and interviewing to the lost productivity of new hires getting their bearings. For this reason, maintaining a skilled and experienced workforce directly impacts an organization’s bottom line.
Avoids organizational knowledge loss
Long-standing team members carry invaluable insights, skills and experiences that contribute to the company’s competitive edge. When these employees remain within the organization, they sustain and share this critical knowledge, fostering continuity and innovation while avoiding the gaps in expertise that can occur with high turnover rates.
Increases productivity
Employee retention increases productivity by maintaining an experienced workforce, one that’s well-acquainted with the company’s processes and more efficient at their tasks. Long-term employees develop a deeper understanding of their roles and the organization, allowing them to work more effectively and collaborate seamlessly with their colleagues. This can lead to higher productivity levels and better business outcomes.
Heightens employee satisfaction
Employee retention strategies typically focus on creating a positive and supportive work environment. Workers who feel valued — with clearly defined career paths and a sense of belonging within the organization — are more likely to enjoy their jobs. This can motivate them to stay with the company and contribute to its overarching culture and goals.
Improves workplace culture
By promoting stability and continuity, employee retention can create a stronger, more people-friendly workplace culture. Employees who stay with the company longer build deeper relationships and a shared understanding of its goals and values, leading to a more cohesive and supportive work environment. This, in turn, can improve collaboration and morale, making the workplace more enjoyable and productive for everyone.
Promotes development
Retaining workers means accumulating skills and experience within the workforce, as long-term employees continually improve and expand their abilities through ongoing work and training opportunities. This upskilling process makes the workforce more competent and versatile, equipping the organization with a deep pool of expertise to draw upon for innovation and problem-solving.
Raises customer satisfaction
Experienced employees are more familiar with the company’s products and services, ensuring that clients consistently receive high-quality service. Long-term workers are typically more adept at understanding customer needs, building strong relationships and providing personalized solutions, which can lead to improved customer experiences and brand loyalty.
What are some employee retention metrics?
Businesses can employ several metrics to gauge employee retention, offering unique insights into how well the organization holds onto its workforce over time. These metrics help them quantify and assess the effectiveness of their retention strategies, highlighting successes and identifying opportunities for improvement. They also allow them to better understand trends in employee behavior, the impact of workplace policies and the overall satisfaction and engagement levels within their teams.
Turnover rate
The turnover rate is a foundational employee retention metric, representing the percentage of employees who leave a company over a specific period, whether by:
- resignation
- retirement
- termination
By quantifying the rate at which staff departs, businesses can evaluate the effectiveness of their retention strategies and identify areas for improvement. High turnover rates can indicate underlying issues within the organization, too, like a general dissatisfaction with workplace culture or management practices, indicating a need for strategic changes.
Involuntary and voluntary turnovers
Involuntary and voluntary turnovers are distinct categories within the turnover rate that offer deeper insights into employee retention. Involuntary turnover refers to employees leaving for reasons beyond their control, like layoffs or dismissals. In contrast, voluntary turnover occurs when employees choose to leave the company, usually due to dissatisfaction or better opportunities elsewhere.
Analyzing these metrics separately helps employers understand the different dynamics affecting their workforce stability and adjust their retention strategies to address specific issues, whether it’s improving the work environment or reevaluating dismissal policies.
Turnover rate per manager
This metric measures the rate at which employees leave a manager’s team within a specific time frame, providing insight into managerial effectiveness and the impact of leadership styles on employee retention. By identifying managers with unusually high turnover rates, companies can pinpoint potential issues in management practices or team dynamics. This can inform targeted interventions to improve leadership skills and, consequently, retention rates under specific managers.
Employee absence lengths
The length of employee absences help organizations identify patterns of absenteeism that might indicate underlying issues affecting employee engagement, satisfaction or health. High rates of prolonged absences can signal dissatisfaction or burnout, prompting businesses to investigate and address the root causes to improve overall retention and workplace morale.
Employee engagement
Engagement is a critical employee retention metric that measures employee commitment, enthusiasm and involvement toward their work and the organization. High engagement levels are closely linked to increased retention, as engaged employees are likelier to:
- remain with the company
- contribute positively
- feel satisfied with their roles
Assessing employee engagement helps businesses identify things that will enhance work experiences, strengthen employee-company connections and, ultimately, reduce turnover.
How to calculate employee retention rate
To understand how well they keep their employees over a specific period, all you need is a simple formula. Start by selecting the time frame you want to evaluate, like a fiscal year, and then count the total number of employees at the beginning of this period and how many of those same employees were still with the company at the end of it. The retention rate is then calculated by dividing the number of employees who stayed by the total number at the start, then multiplying by 100 to get a percentage:
(Remaining employees)/(starting employees) x 100 = (employee retention rate)%
For example, if your company had 200 employees at the beginning of the year and 190 were left by the end of it, your formula would be 190/200 x 100 = 95. This means your employee retention rate for that year was 95%.
Causes of low employee retention
There are a lot of factors that can contribute to low employee retention rates, stemming from both internal and external influences on the organization. Internally, issues could arise from:
- workplace environment
- leadership styles
- recognition practices (or lack thereof)
- slim opportunities for growth and development
- and more
All of the above play crucial roles in an employee’s decision to stay with or leave a company. Externally, things like market trends, employment opportunities and economic conditions can also significantly impact employee retention. To improve retention rates and maintain a stable, engaged workforce, employers need to understand and address these complex — yet interrelated — factors.
Unhealthy workplace culture
Unhealthy workplace cultures can significantly contribute to low employee retention rates, whether stemming from poor communication, a lack of trust or excessive stress. Employees in these environments often feel undervalued and overwhelmed, driving them to seek employment elsewhere — somewhere with the potential for a more positive and supportive work environment.
Low compensation
Nothing makes employees feel undervalued like low compensation. When salaries don’t reflect the market rate or fail to compensate for the level of work and expertise an employee brings to the company, it leads to dissatisfaction and a decreased sense of loyalty. This financial discontent can drive the decision to explore higher-paying opportunities elsewhere.
Noncompetitive benefits
Less-than-stellar benefits can also contribute to low employee retention, failing to meet employees’ needs compared to what other organizations offer. Workers feel less attached to the company when benefits like health insurance, retirement plans and flexible working arrangements don’t align with industry standards or employee values, causing them to seek employment where they feel their needs and well-being are better supported and valued.
Lack of growth opportunities
A shortage of growth opportunities can lead to low retention, as employees feel stagnant and unable to advance their careers. When workers feel there isn’t a clear path for development or promotion, their motivation and engagement decrease, prompting them to seek other avenues for development both individually and professionally.
Overworking/burnout
Feeling overworked or burnt out can erode job satisfaction and, more importantly, an individual’s mental health. Employees who face consistently high workloads, long hours and insufficient recovery time will inevitably experience burnout — and all the exhaustion and cynicism that comes with it. This state of mind can diminish productivity and increase the likelihood of seeking a healthier work-life balance elsewhere.
Disengagement
When employees feel disconnected from their work, company goals or culture, their natural reaction is to disengage. This disconnection manifests as a lack of enthusiasm and a reduction in effort, with a minimal interest in the job’s outcomes. Disengaged employees are more likely to leave for roles that align with their values and aspirations.
No communication from leadership
A lack of communication from leadership can create an environment of uncertainty and disconnection. Without clear direction, feedback or acknowledgment from management, employees often feel undervalued and isolated, undermining their trust in the organization. This gap in communication can cause employees to seek other opportunities — roles where they feel more informed and engaged with the company’s vision and goals.
Put simply, employee retention is fundamental to the health and success of any organization. It offers a range of benefits, from reduced turnover costs to improved productivity and a stronger workplace culture. If a company has high retention rates, it likely has a positive work environment where employees feel valued, engaged and satisfied in a way that optimizes business performance.
Low retention rates, on the other hand, can stem from a multitude of causes, from culture and compensation to poor communication from leadership. These are the things that erode job satisfaction and employee well-being, driving talent to leave in search of better opportunities. And for businesses that want a committed and motivated workforce — and all the success that comes from it — addressing these issues is imperative.
Explore Paycom’s resources to learn more about employee retention, engagement and more!