The U.S. Bureau of Labor Statistics predicts an addition of 6 million jobs to the economy in the upcoming decade. With the anticipated intense competition for talent in high-demand sectors like healthcare, the priority for most businesses is not only to curb employee turnover but also to adopt robust employee retention strategies. This sparks a crucial question – should the focus solely be on reducing turnover, or is there more value in elevating and investing in comprehensive employee retention strategies?
This distinction, subtle yet pivotal, carries significant implications. Here’s why.
Understanding Employee Retention vs. Turnover: Identifying the Distinctions
Retention and turnover, though seemingly contrasting terms, are not simple inverses of each other. They each have unique calculation methods and imply different aspects of the organizational dynamics. However, when analyzed together, they provide a comprehensive picture of a company’s staffing consistency and internal mobility.
Employee retention refers to the rate at which individuals remain employed within a company over a specific period, as well as the strategies implemented to encourage their continued tenure. In contrast, employee turnover as a metric refers to individuals departing the company, which could be of their own volition (voluntary turnover) or resulting from an employer’s decision (involuntary turnover).
Three Crucial Distinctions
The primary disparities between retention and turnover include:
- Exclusion of New Hires in Retention Rate: The retention rate only encompasses employees who were already part of the company during the period for which the rate is calculated. In contrast, the turnover rate includes those who were hired during the same period.
- Inclusion or Exclusion of Involuntary Turnover: Some organizations opt to exclude involuntary turnover from their retention rate calculation, though this is not a universally applied rule. Involuntary turnover refers to employee departures prompted by the employer, despite the employee’s capability and willingness to perform their job duties. This can include terminations due to performance issues, behavioral problems, seasonal layoffs, or reductions in force (RIFs).
- Calculation Period: As a measure of organizational stability, retention rates are typically calculated annually. On the other hand, turnover rates offer valuable insight into short-term employee flux and are generally calculated and analyzed monthly or quarterly. These frequent calculations provide a more precise view of occurrences such as seasonal layoffs, enabling a more accurate understanding of long-term trends. Monthly turnover rates are summed up to calculate and compare annual turnover rates.
The Significance of Assessing Employee Retention and Turnover
A business’s success hinges on the presence of the right people with the right skills to deliver its products and services. Furthermore, the capacity to attract more talent with fresh and specialized skills is critical for fostering innovation and executing growth strategies.
Measurements of employee turnover and retention rates serve as robust indicators of a business’s proficiency in nurturing its workforce. This encompasses considerations like competitive pay scales, access to training, advancement opportunities, maintaining a healthy work-life balance for employees, and the efficacy of the management team. High turnover and low retention rates may be indicative of issues related to organizational culture and the overall employee experience.
Employee engagement is intimately intertwined with turnover and retention. Companies demonstrating higher levels of employee engagement typically report lower turnover rates — with an impressive 43% decrease for companies that experience less than 40% annualized turnover, according to a study by analytics firm Gallup involving over 112,000 business units. Furthermore, employee engagement is closely associated with organizational outcomes. Notably, companies with lower turnover are generally more profitable and command greater customer loyalty. In a comparison between business units and teams with the highest and lowest quartiles of engagement, Gallup reported a substantial differential — 23% in profitability and 10% in customer loyalty.
Methods for Calculating Employee Retention and Turnover Rates
A business can employ numerous metrics to measure turnover and retention, each offering valuable insights into diverse aspects of the employee experience.
How does one calculate retention and turnover rate?
Employee Retention Rate
Retention rate is determined by taking the percentage of employees who were present at the start of a measurement period, deducting those who left voluntarily, and dividing the result by the initial number.
Retention calculations do not include new hires within the same time period. The Society for Human Resources Management (SHRM) advises considering only employees who remained throughout the entire measurement period, excluding those hired during that period.
Retention Formula:
Retention Rate = (Number of employees who remained employed throughout the measurement period / Number of employees at the start of the measurement period) x 100
Sample Calculations:
Consider a music supply store, Drumroll Please, which employs 100 people across three locations. In 2019, 10 employees left, and the company hired eight replacements.
Using the formula above, the retention rate for 2019 is calculated with 90 employees (who stayed employed throughout) and the initial count of 100 employees. The eight replacements are not included in this calculation.
90/100 x 100 = 90%
Hence, the 2019 retention rate for Drumroll Please is 90%. The company might explore potential discrepancies in retention across different stores or shifts to identify problems or opportunities.
Retention rates can be segmented further into more detailed metrics like retention rate per manager or per department. For instance, if a store with 33 employees experienced five departures, the retention rate for that store would be less than the overall 90%.
28/33 x 100 = 84%
Employee Turnover Rate
Turnover can be either voluntary or involuntary. Voluntary turnover refers to employees leaving for a new job, educational pursuits, personal reasons, retirement, or due to death. Involuntary turnover refers to termination by the employer, where the employee was willing and capable of continuing their role. This can be due to performance or behavioral issues, seasonal layoffs, or reductions in force (RIF).
Turnover Formula:
To calculate the employee turnover rate, SHRM recommends dividing the number of separations during a month by the average number of employees on the payroll, multiplied by 100.
Turnover Rate = (Number of separations / Average number of employees) x 100
To obtain these numbers, you’ll need to generate reports from your HR management system on:
Total employee headcount: This encompasses all employees on the payroll, including direct-hire temporary workers, those on temporary layoffs, leave of absence, or furlough. It should not include temporary workers or independent contractors from an external agency’s payroll.
Average number of employees: Calculate the average number of employees per month by taking each month’s total and dividing it by the number of months, or divide the total headcount from each report by the number of reports if they’re run more frequently than monthly.
Total separations: The number of separations during a month includes both voluntary and involuntary terminations. It does not include employees temporarily laid off, on furloughs, or on a leave of absence.
Example Calculations:
Returning to the example of Drumroll Please, with its 100 employees, 10 separations, and eight new hires, assume that three employees left in August to return to school, with three replacements hired in September. The remaining seven left in different months, and five were rehired. The average number of employees per month is 99.
In August, the turnover rate is 3.3% (three separations divided by an average of 99 employees).
3/99 x 100 = 3.3%
In September, the three new hires are included, and one more person decides to leave, resulting in a turnover rate of 1%.
1/99 x 100 = 1%
The monthly turnover rates are added together to calculate the annual turnover rate. The turnover can be further broken down into voluntary and involuntary turnover rates, as well as turnover rates for high-performing employees.
Who Holds the Reins for Employee Retention and Turnover?
Human resources professionals, and occasionally recruitment teams, are primarily responsible for handling employee retention and turnover data. Their role is to monitor the metrics reflecting the overall employee experience and ensure the business has sufficient staff to achieve both its immediate and long-term growth objectives.
Although the task of maintaining healthy retention and turnover rates is an organization-wide responsibility—spanning from senior leadership to HR and everyday employees—the person wielding the most substantial influence over employee retention is the direct manager of the employee.
Studies recurrently cite ineffective management as a leading cause for employees to resign, while efficient management is often a primary factor for employee retention. In a Gallup survey, 52% of voluntary departures from a company indicated that their managers could have intervened to prevent their resignation. Over half claimed that no one from the organization—neither a manager nor any other leader—had engaged them in discussions about their job satisfaction or future career plans in the three months preceding their departure.
Managers typically serve as the key liaison for addressing or discussing many issues that drive voluntary turnover, including compensation, absence of career progression, and the necessity for improved work-life balance. Regrettably, the Work Institute’s 2020 Retention Report revealed a year-over-year decline in manager behavior and communication. HR teams need to focus on this area, as even slight improvements in supervisor ratings can significantly lower the chances of an employee’s departure.
Why Do Employees Opt to Depart Their Jobs?
According to the U.S. Bureau of Labor Statistics, a staggering 45 million people opted to quit their jobs in 2019. This figure encompasses total separations, including voluntary exits—referred to as quits—and involuntary separations such as layoffs and discharges.
The Bureau of Labor categorizes retirements, deaths, and disabilities under the umbrella of “other” separations. According to the Work Institute, approximately three-quarters of those who exited their jobs in 2019 did so of their own volition.
The motivating factors for employee departures remain strikingly consistent across multiple studies, with lack of career development opportunities, insufficient work-life balance, unsatisfactory management, and inadequate compensation and benefits leading the charge.
Leveraging Software to Enhance Employee Retention and Reduce Turnover
Human resources software is instrumental in curbing turnover and fostering employee retention through effective employee retention strategies. HR analytics, or “people analytics”, is projected to be a significant endeavor for companies in the upcoming five years. Having a centralized database will streamline the collection of HR data and ensure consistency in the figures used across the organization.
The ability for HR teams to efficiently track Key Performance Indicators (KPIs) enhances their capacity to implement strategic employee retention measures, as data analysis paves the way for actionable insights. HR software simplifies the process for HRIS analysts to present comprehensible narratives around data to managers and senior leaders, rather than burdening them with deciphering complex spreadsheets.
Human Capital Management (HCM) systems come loaded with functionalities designed to boost employee engagement and retention. For instance, research from employee recognition strategies firm O.C. Tanner reveals that the one-year tenure mark is a critical turnover threshold. With targeted employee retention strategies and the help of software, HR can automate reminders prior to an employee’s one-year anniversary, facilitating a check-in between the employee and their manager.
HR performance management systems can transform retention procedures from a formulaic process to a more relevant and engaging conversation. Achievements, for example, can be linked with sales targets in the CRM system, facilitating real-time recognition. Additionally, succession-planning tools enable the organization to visualize its bench strength and equip high performers with training opportunities and clearly outlined career paths.
Recognition shouldn’t be the sole responsibility of the employee’s manager. Empowering employees to appreciate their colleagues can prove to be equally, if not more, impactful. Peer-to-peer recognition is emerging as a potent tool in effective employee retention strategies.
It’s crucial to simplify and streamline the transactional elements of an employee’s role. Ensuring employees are paid accurately and punctually, maintaining precise vacation accruals, simplifying benefits enrollment, and ensuring prompt responses from HR all contribute significantly to a positive employee experience.
The majority of turnover causes are preventable. With the right employee retention strategies in place, businesses can reduce voluntary turnover and potentially avert the necessity for involuntary turnover, redirecting funds that would otherwise have been spent on recruitment back into the business.
