RETENTION RATE

Application

This measure will be most useful for organizations that employ turnover targets that are based on retention of existing employees rather than reduced turnover of current and future employees.

Description

Percentage of all headcount during the period that did not terminate.

Formula

(Start of Period Headcount + External Hires – Terminations) / (Start of Period Headcount + External Hires) * 100

Interpretation

Retention Rate for a specified period measures the percentage of all employees present at any point during the period that are still with the organization at the end of the period. In a yearly view, this measure answers the question, “What percentage of all the people that have walked through our doors this year are still here?” A result of 80% indicates that 80% of employees that were with the organization at the start of the period or were hired during the period are still employed at the end of the period.

High turnover can have negative consequences on an organization related to cost, efficiency, productivity, and customer service. Many terminating employees are replaced by external hires. Termination and replacement can create not only departure costs (e.g., accrued vacation) but also vacancy costs (e.g., lost productivity, recruitment advertising) and new hire costs (e.g., screening, relocation, ramp-up productivity losses).

Turnover often represents lost organizational knowledge of history, culture, and process. Depending on the caliber of replacement, turnover may also carry a net loss of skills and knowledge among the workforce. Lastly, turnover may negatively impact the morale, workload, and stress levels of remaining employees.

Excessively low turnover, however, can also negatively impact the organization. Low turnover might foster insularity, potentially inhibiting innovation and creating a stagnancy of skills and ideas. Low turnover may also reflect ineffective performance management programs that encourage career complacency or fail to manage out poor performers.

Retention Rate provides a slightly different perspective on turnover than does Termination Rate. Rather than comparing all terminations in a period to the average headcount in that period, Retention Rate instead views “retained” employees against total headcount for the year. Some organizations prefer to track Retention Rate as a more positive view on the turnover issue than is provided by Termination Rate. Note that organizations may instead use variations of this Retention Rate formula that use only average headcount or start of period headcount as a denominator.