What Is Employee Retention? Importance, Benefits, and Calculation

Grant Kieckhaefer | Content Strategist | March 22, 2024

Retaining valuable employees is a top priority for every organization, but it’s especially critical in sectors that face severe worker shortages, such as construction, education, healthcare, and transportation. Leaders must take steps to improve employee retention to stay competitive—and, ultimately, to stay in business. To help you take the right actions, here’s what you need to know about employee retention, including what it is, why it’s so important, and how you can improve it.

What Is Employee Retention?

Employee retention refers to an organization’s ability to hold on to its people and reduce turnover. Employers can improve their retention numbers in several ways, including by offering competitive compensation and benefits, creating a positive workplace culture, giving workers some flexibility with where and when they work, formally recognizing high achievers, and promoting work-life balance.

Key Takeaways

  • Implementing employee retention strategies is essential to staying competitive.
  • Improving employee retention rates can lower costs, increase worker productivity, and ultimately boost revenues and profits.
  • Key to improving employee retention is creating a work environment in which people feel valued and supported, engage regularly with their colleagues and managers, and see a well-defined career path.

Employee Retention Explained

Too many employers only pay lip service to the idea that their people are their greatest asset. But the most astute employers nurture their people and make employee retention one of the company’s metrics and values. Retaining skilled employees is key to every organization’s ability to execute efficiently, innovate, and maintain a competitive advantage. A company with high employee retention spends less time and money finding and training new hires and hangs on to valuable institutional knowledge—both of which can help the business succeed.

Retaining employees and keeping staff turnover low requires a strong focus on employee engagement and fulfillment. A 2022 global survey by Gallup found that more than half of employees expressed some level of interest in leaving their jobs, 59% were “quiet quitting” (not engaged at work), and 18% were “loud quitting” (actively disengaged). When asked what could change to improve their workplace, 41% of survey respondents cited engagement or culture (including better recognition and communications), 28% cited pay and benefits, and 16% cited well-being (including less overtime and the ability to work from home). Gallup estimates that low engagement levels cost the global economy US$8.8 trillion.

Why Is Employee Retention Important?

Employee retention plays a large role in the success and sustainability of every organization. Companies with high employee turnover risk financial instability because the cost of recruiting, onboarding, and training new hires can be considerable. So too are the opportunity costs of losing business because of understaffing. Employee morale can also suffer when people see their colleagues leave, especially if they’re forced to take on extra work as a result. Poor morale saps productivity. Meanwhile, the loss of institutional knowledge and continuity can slow down a business at the most critical times. It’s during moments of crisis or emerging opportunity that experienced team members shine brightest, seeing what needs to be done and knowing when and how to take the right actions. Companies with poor retention risk losing the valuable insights and proven skills those veteran employees bring.

High turnover rates can also damage a company's reputation. Customers may perceive the steady stream of new faces as a sign of instability, which can erode brand loyalty and negatively impact sales. By retaining top-performing and highly skilled employees, companies stand a better chance of maintaining or improving productivity, efficiency, and innovation.

Key Causes of Employee Attrition

Employee attrition refers to the departure of workers from a company due to events such as resignation and retirement. High employee attrition means a company has poor employee retention. Exit interviews are a valuable way to understand why employees are leaving. Departing employees will likely cite one or more of the following reasons:

  • Insufficient pay and/or benefits
  • Poor work-life balance
  • Lack of career growth or opportunities
  • Inadequate recognition or rewards
  • Better job opportunities elsewhere
  • Monotonous, unchallenging work
  • Fear about the company’s strategy or financial health
  • Burnout
  • Ineffective management

Employee Retention and Employee Experience

The employee experience is the cumulative result of the daily interactions employees have within an organization’s culture and work environment. It encompasses the entire employee lifecycle, from recruitment through onboarding, training, professional development, performance evaluations, promotions, exiting, and even their experience as an alum.

The employee experience is shaped by a wide range of factors, including first impressions during onboarding and training, employee-manager relationships and communications, benefits such as paid time off and healthcare, and career development opportunities, including promotions, salary increases, and new assignments. Employee retention is closely related to the employee experience. Quality workers are more likely to leave their jobs if their day-to-day experiences with colleagues and management don’t match their expectations.

Technology can improve the employee experience, providing easy access to the information people need to do their jobs and navigate HR issues. Having an effective manager who communicates well can significantly increase the chance an employee stays with a company. Companies also build loyalty and strong retention by coming through at key moments of an employee’s life, including personal ones, such as the birth or adoption of a child or the death of a loved one, and by providing professional support—for example, performance reviews and educational opportunities. All these elements factor into the employee experience. An excellent employee experience is a powerful reason for people to stay with an organization for a long time.

Benefits of Employee Retention

Here are several of the benefits organizations stand to reap from keeping their most talented and skilled people.

  • Better process efficiency: Employees that have been with an organization for a long time know how things work and how to get things done.
  • Higher employee productivity: Long-time employees are usually more efficient and make fewer mistakes than newer ones, who typically need time to get acclimated to the company and its work processes.
  • Higher morale: When employees stay on the job for some time, they tend to feel a sense of belonging, which can contribute to higher morale. High employee turnover rates, however, can demoralize the people who remain, as they see their colleagues leave and often have to cover for them.
  • Lower costs: The hard costs of employee turnover, including recruitment and training, vary by employer, industry, and position. Estimates of the cost to replace a person put the general range at one-half to two times the employee’s annual salary. That doesn’t take into account the costs of lower productivity (due to lower employee morale, higher burnout, and lost institutional knowledge) and lost business due to staff shortages and damage to the employer’s reputation.
  • A better experience for your customers: People gravitate toward businesses they view as stable and approachable, ones with which they’re able to develop a consistent relationship. According to a study conducted by Gallup, highly engaged business units achieve 10% higher customer ratings and 18% higher sales than those deemed to be less engaged. Companies with low employee turnover rates tend to have high engagement rates.
  • Greater profitability: The Gallup study also found that businesses with highly engaged employees and low turnover rates are 23% more profitable than those with employees who aren’t engaged.
To retain the best people, organizations need to offer competitive pay, perks, and training in addition to rewards for outstanding performance.

10 Strategies and Best Practices to Improve Employee Retention

In the current job market, individuals have more employment choices than ever before. Workers feel empowered to find not only higher-paying jobs but also ones that offer them more career growth and a greater sense of purpose. Here are 10 best practices employers should consider to keep their top people from moving on.

  1. Refine the hiring and onboarding processes. A survey of job seekers in 11 countries across four continents, conducted by HR consultancy Robert Half, found that 91% would be willing to quit within the first month. Improving employee retention starts with recruitment and the ability to identify skilled and talented people likely to fit well into the organization’s culture. It’s also important for employers to make a great first impression. Needlessly lengthy and complicated interview processes are likely to cause job candidates, especially the most in-demand ones, to go to nimbler competitors. Once employees are hired, set them up for success by teaching them not only about the job and internal processes but also about the company and how they fit in. Introduce them to colleagues. Take them out to lunch. Assign them a mentor. Show them that the company culture is a nurturing, engaging one.
  2. Offer competitive pay and benefits. This is a no-brainer. Employers need to continuously benchmark what they’re paying their people (including bonuses) against the going market and industry salaries for their positions—and adjust them accordingly.
  3. Add workplace perks. Offering employees perks can help create a positive, energizing workplace, one where people will want to stay for the long term. Popular perks include flexible work schedules, the ability to work from home or from different locations, free food or beverages at company offices, subsidized onsite or nearby daycare for children, after-hours team sports leagues and social events, the opportunity to travel to live conferences or workshops, tuition reimbursement or subsidies, and opportunities to do community service on company time.
  4. Improve wellness offerings. The pandemic challenged many organizations to offer new or extended physical and mental health programs to support their employees’ well-being—for example, stress management and nutrition programs, reimbursement for onsite or offsite fitness or yoga classes, and onsite vaccinations. These offerings can also include financial wellness programs run by the organization’s 401(k) administrator or a specialist advisory firm.
  5. Communicate clearly (and often). The shift to remote and hybrid work hasn’t reduced the importance of strong workplace communications, even if it has changed the channels we use to communicate. Regardless of whether your workers are onsite, remote, or hybrid, they should feel they can come to you at any time with ideas, questions, and concerns. And organizations with remote and hybrid workers must make sure their workers still have opportunities for engaging conversations and face-to-face interactions online.
  6. Solicit continuous feedback and provide support. Every organization needs to gauge how engaged its employees are and whether they’re invested in its success. Yearly surveys provide some insights into workplace challenges that might cause employees to leave, but pulse surveys are a better alternative. These surveys are conducted more frequently, tend to focus on a particular topic, and can be used to drive timely changes. Pulse surveys also convey to employees that the organization is interested in and responding to their input on an ongoing basis and isn’t just going through the motions once a year.
  7. Schedule frequent performance check-ins. Similar to the continuous feedback loop described above, managers should schedule more-frequent performance discussions with their reports. More than half of the voluntarily exiting employees surveyed by Gallup said that in the three months before they left, neither their manager nor any other leader spoke with them about their job satisfaction or future with the organization. Frequent one-on-one meetings are an opportunity to talk with your people about their professional goals.
  8. Offer training and development. As part of helping their reports identify areas for professional growth, managers should help them identify related training and development courses, workshops, and other programs. Training and development programs not only help employers retain their key people, but they also bring new and enhanced skills into the organization.
  9. Weed out bad managers. The cliché that “people don’t quit jobs, they quit managers” holds truer than ever. In an employee survey by GoodHire, 82% of respondents said they would consider quitting because of a bad manager. Look for higher-than-average employee attrition in each department and figure out whether poor managers are to blame. If they are, give them the training and support they need to improve—or replace them.
  10. Recognize and reward top performers. Everyone wants to feel appreciated for the excellent work they do. At a minimum, take time to thank employees who go above and beyond. And by formally recognizing and rewarding truly outstanding work—with bonuses, promotions, awards, and/or special perks or privileges—you’ll not only increase the chance those employees will stay with the organization, but you’ll also showcase a model for others to follow.
Among the many benefits organizations gain from keeping their most skilled people are lower costs, higher morale, better customer experience, and greater profits.

How to Calculate Employee Retention

Employers typically calculate retention rates annually, dividing the number of employees that stayed with the company for the duration of the period by the number of employees at the beginning of the period and then multiplying that number by 100.

  1. Choose the period you want to measure retention for, such as a specific quarter or the fiscal year.
  2. Count the number of employees at the beginning of the period.
  3. Count the number of employees at the end of the period.
  4. Count how many new employees were hired during the period.
  5. Subtract the number of new hires from the number of employees at the end of the period, divide this by the number of employees at the start of the period, and then multiply by 100 to get the percentage.

Employee retention rate = [ (number of employees at end of period – number of new employees during period) / number of employees at start of period ] × 100

Employee Retention Example

To deliver on the 10 employee retention best practices cited above, it’s important for employers to leverage the latest human capital management (HCM) applications to help them manage recruiting, onboarding, employee engagement, training, performance management, payroll, benefits, and other HR processes. Here is an example of how one company uses those tools.

Silver Fern Farms: Silver Fern Farms, a New Zealand—based food manufacturer with 7,000 employees, replaced its homegrown HR tools with a single cloud-based HCM system, Oracle Fusion Cloud HCM, to improve several HR processes. For example, through an initiative linking Oracle Learning and LinkedIn Learning, company executives can more easily track employee development and provide opportunities to enhance skills, which in turn has boosted employee engagement. Using Oracle Workforce Compensation, Silver Fern Farms streamlined its annual review of workforce remuneration, stating that it reduced that process by 10 days while allowing multiple compensation processes to be handled simultaneously. Using the performance management application, half of the company’s permanent staff outlined their impact and development goals by the end of the first year the application was implemented. The application also promotes organizational transparency and effective internal communications.

Maximize Employee Retention Strategies with Oracle ME

Employees expect their work experiences to be positive, collaborative, rewarding, and meaningful. Oracle ME, part of the Oracle Fusion Cloud HCM suite of applications, is a complete employee experience platform that guides employees through professional and personal activities, delivers responsive HR service support, and streamlines communication across the organization. It provides tools to strengthen the manager-employee relationship and connect employees with their peers to nurture a greater sense of workplace belonging that encourages people to stay.

Employee Retention FAQs

Which types of companies should use employee retention strategies?
Any business looking for ways to keep its top talent and stay competitive can benefit from implementing employee retention strategies.

How do I know if my employee retention strategies are working?
One indicator is to compare your organization’s retention rate at the time the retention strategy was implemented with what it is now. Another way is to gather feedback from current employees and those who are leaving the organization.

How does employee experience relate to employee retention?
Organizations that create a positive, collaborative work environment for their employees generally have higher retention rates than those that don’t.

Would it be more effective to hire new employees versus trying to retain them?
In general, it costs far less for organizations to retain existing employees than to recruit, onboard, and train new ones, especially in industries where the demand exceeds the supply of qualified candidates.

6 CHRO Strategies to Connect Employee Success and Business Growth

CHROs face a chasm between employee expectations and business goals. Here’s how to bridge the gap.