Percentage of all headcount during the period that did not terminate.
(Start of period headcount + External hires Terminations) / (Start of period headcount + External hires) * 100
Retention Rate for a specified period measures the percentage of all employees present at any point during the period that are still with the organisation at the end of the period.
In a yearly view, this measure answers the question, ‘What percentage of all the people who have walked through our doors this year are still here?’ A result of 80 per cent indicates that 80 per cent of employees who were with the organisation 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 organisation related to cost, efficiency, productivity and customer service. Many separated employees are replaced by external hires.
Separation 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 organisational knowledge of history, culture and process. Depending on the calibre of replacement, turnover may also carry a net loss of skills and knowledge among the workforce. Finally, turnover can negatively impact the morale, workload and stress levels of remaining employees.
Excessively low turnover, however, can also negatively impact the organisation. 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.
Some organisations prefer to track Retention Rate as a more positive view on the turnover issue than is provided by Separation Rate. Note that organisations may instead use variations of this Retention Rate formula that use only average headcount or start of period headcount as a denominator.
Organisations typically source separation actions from either a separation reason or separation date field in an HRIS job table. Climate and opinion survey results relating to intention to leave or job search activity may also be applied as lead indicators.
Employers can analyse Retention Rate by a large number of subgroups and characteristics to identify high- or low-result pockets for best practice sharing or corrective action.
Understanding retention within these populations can also help organisations monitor potential skill gaps, diversity issues or threats to business strategy success.
Common dimensions used for analysis on the measure include organisational unit, tenure, performance rating, grade, occupation, job family, job function, employment level, ethnic background, age and gender.
Retention Rate does not indicate what level of turnover is the result of employee initiated or organisation initiated actions, or the specific reasons for separations. Retention Rate does not fully measure turnover, as it does not account for the level of separations replaced with new staff. This measure provides only a very indirect notion of the organisational costs of turnover.
Most organisations target moving their Retention Rate results toward the 75th percentile or above within a relevant benchmark group. Depending on industry and labour market conditions, this often translates to an absolute target of between 90 and 95 per cent at the total organisational level.
Organisations might have lower targets if they expect temporary fluctuations (e.g. reorganisations) or if they are working from a very low result gradually to a higher level over a period of years.