Retention rate and turnover rate are two distinct metrics that measure employee longevity in an organization. Understanding employee retention rate is essential for businesses to succeed.
How to Calculate Employee Retention Rate
Retention rate refers to the percentage of the workforce who remain with the organization for a specific period of time. It measures employee stability and shows the effectiveness of a company's efforts to keep employees engaged and satisfied with their job.
Healthy retention rates mean greater expertise, increased productivity, and overall success for any organization. Using data from previous trends or even running an exploratory data analysis can give insight into solutions that make everybody happier in the long run.
However, before we dive into the specifics of ways to calculate, it is also important I call out that finding “a retention rate” is only the beginning. In the modern age of people analytics, we need to have a people data platform that allows us to break our data down to draw unique understandings and insights. What does it look like for various groups? What’s the difference between exempt and nonexempt workers? Are our recruiters impacting our new hire retention? To manage your employee retention rate effectively, it’s becoming increasingly important to truly understand what goes into that retention rate. Measuring this can help explain why employees choose to stay and identify key focus areas to keep it that way.
So, which retention rate formula to use?
Retention rates can be tricky to calculate. There are multiple formulas that can be used for the metric and multiple factors to consider when calculating.
One of the most common formulas involves dividing the number of employees at the end of a period by the number of employees at the beginning of a period.
A glaringly obvious problem with this formula is the fact that it’s not taking into consideration any new hires or acquisitions taking place during the time period. A company’s retention rate could easily exceed 100% if there were more hires than terminations during the period, which wouldn’t be an accurate indicator of true employee retention. And even if excluding hires from the calculation, the retention rate would be better holistically, but not necessarily as good at a more granular level when considering employees’ internal movements within the company.
There are also other retention rate formulas to consider:
One Model has dimensions we've created to look back and identify employees who stayed or left the company after a given number of months (typically 6 or 12) from a specific time. We can use this dimension, called Is Future Terminated, along with a headcount metric to calculate the retention rate for a historical time period.
The Is Future Terminated dimension is not only helpful for calculating a retention rate, but is also used in One Model’s One AI recipe to determine the likelihood of attrition for groups of employees. Read more about One AI here!
Another popular retention rate focuses solely on a company’s new hires. Like the calculation used for One AI, the new hire retention rate will determine how many of the newly hired employees stayed with the company after a certain amount of time. As with the others, this calculation is good to look at new hires in the company overall, but can be complex if you are trying to determine new hire retention rate in certain departments or positions. For example, if an employee is hired in one department and transfers to a new department after six months, but terminates only one month after being in the new department, should the retention rate metric consider the new hire’s attributes – like department – at the time of hire or at the time of termination?
The best news is that at One Model, we understand different companies and industries may have different metrics and measures that best represent them. We will work with you on this to determine the best method for your organization, helping you build the metrics that tell your story.
One Model makes it easy and Phil shows us how:
People Analytics Uncovers Factors Affecting Employee Stability
What Can You Do About It?
Once you have calculated your retention rate, you then need to determine the factors affecting your employee stability — which is where people analytics comes into play.
People analytics generates business benefits and allows you to collect and analyze data on employee behavior and attitudes in order to enhance employee satisfaction. For example, if the data shows that certain departments have a significantly higher retention rate, you can look for common factors, such as the level of managerial support or training the employees receive, that may be contributing to this trend.
Another strategy that can improve retention is to use the data to develop targeted workforce engagement programs. People analytics can provide information on what types of benefits, training opportunities, or other incentives are most likely to engage employees and improve retention. By using this information to create targeted engagement programs, you can make the most of your resources and increase your chances of success.
You can also compare differences between those who stay versus those who leave and see if there are certain programs/paths that are working better.
Employee Retention Rate in the HR Revolution
The HR revolution is transforming the way businesses approach employee retention. Companies are investing in new technology and data-driven approaches to help them better understand and engage with their employees. This shift is enabling organizations to develop more effective retention strategies that are tailored to the unique needs of their workforce.
By tracking and improving your employee retention rate, you can reduce the costs of turnover, enhance employee satisfaction, and build a more stable, productive, and knowledgeable workforce. Embracing the employee voice and utilizing people analytics software will also help you take a more data-driven approach to retain workers and stay ahead of the competition.
Let Us Show You Building Retention Dashboards Today!
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