The U.S. Bureau of Labor Statistics projects that over the next decade the economy will add 6 million jobs. While competition for talent will be most intense in high-demand industries like healthcare, minimizing turnover is a goal for most businesses. The question is, should they really be worrying about retention?
It’s a subtle but important distinction. Here’s why.
Employee Retention vs. Turnover: What’s the Difference?
Retention isn’t simply the inverse of turnover. There are important differences in how the two are calculated and what each indicates. However, taken together, they give a holistic view of staffing stability and movement within the company.
Employee retention refers to both the rate at which people stay with a given company over a period of time and the strategies employed to keep them there. Employee turnover as a metric refers to people leaving the company, either on their own accord (voluntary turnover) or because of a decision made by the employer (involuntary turnover).
3 Key Differences
The major differences between retention and turnover are:
- Retention rate does not include new hires. It accounts only for people already employed during the period for which the rate is being calculated. Turnover rate calculations, on the other hand, include people hired during the time period for which the rate is being calculated.
- Some businesses exclude involuntary turnover from the retention rate calculation, but that’s not a hard-and-fast rule. Involuntary turnovers are departures that result because of an employer’s decision when the employee is still capable of and willing to perform his or her job duties and includes terminations that are the result of performance, behavioral issues, seasonal layoffs and reductions in force (RIFs).
- Given that it’s a measure of the company’s stability, retention rates are most often calculated over a longer period of time, typically annually. Turnover rates provide important snapshots of employee movement and are, for that reason, calculated and viewed by month or quarter. This provides a more accurate and actionable view of departures that are the result of, for instance, seasonal layoffs and give more accurate long-term insights into that rate. Monthly turnover rates are added together to calculate and compare annual turnover rates.
Why Measuring Employee Retention & Turnover Matters
If a business doesn’t have the right people with the right skills, it can’t deliver its products and services. And if it can’t attract more people with new and specialized skills, it can’t innovate or execute on growth plans.
Employee turnover and retention rates provide strong indicators about how well the business is taking care of its people. This includes whether it is paying competitive salaries, providing training and opportunities for advancement and offering a good work/life balance for employees, as well as how effective management is. High turnover and low retention rates signal problems with aspects of the organization’s culture and employee experience.
Turnover and retention are closely linked to employee engagement. Companies with higher levels of employee engagement have lower turnover rates — as much as 43% lower for companies that have less than 40% annualized turnover, according to a study of more than 112,000 business units by analytics firm Gallup. And employee engagement is linked to organizational outcomes, with a very important effect being that companies with lower turnover are more profitable and have more loyal customers. When comparing top quartile and bottom quartile engagement business units and teams, Gallup found a differential of 23% in profitability and 10% in customer loyalty.
How to Calculate Employee Retention & Turnover Rates
There are a number of turnover and retention metrics a business can calculate; each provides important insights into different aspects of the employee experience.
How do you calculate retention and turnover rate?
Employee retention rate
Retention rate is calculated by looking at the percentage of the people who started at the beginning of the time period, subtracting the people who left voluntarily and dividing it by the former.
Retention does not include new hires during that time period. The Society for Human Resources Management (SHRM) recommends counting only employees who remained working during the entire measurement period, not workers hired within it.
The formula for calculating retention is:
Retention rate = # of individual employees who remained employed for the entire measurement period / # of employees at the start of the measurement period x 100
For example, say music supply store Drumroll Please employs 100 people across three locations. In 2019, 10 people left. The company hired eight people to replace those 10.
To calculate the retention rate for 2019, using the formula above, there were 90 people who remained employees for the entire measurement period and 100 at the start. The eight hired to replace the 10 who left are not counted in the retention rate calculation.
90/100 x 100 = 90%
The retention rate for Drumroll Please for 2019 is 90%. Drumroll Please may want to look at whether there are differences in retention by store, or by managers on certain shifts to uncover issues or opportunities.
Retention rates can be further broken down into more granular metrics, including retention rate by manager or retention by department. Consider that one store with 33 employees saw five departures. While the overall retention rate is 90%, the rate for that store is lower. The business can look into the characteristics driving turnover at that store.
28/33 x 100 = 84%
Employee turnover rate
Turnover may be voluntary or involuntary.
Voluntary turnover measures those who left to take a new job, pursue educational opportunities, for personal reasons or to retire or who have passed away.
Involuntary turnover is severance from employment by the employer when the employee was willing and able to continue performing services. This includes termination for performance or behavioral reasons, seasonal layoffs or reductions in force (RIF).
To calculate employee turnover rate, SHRM advises dividing the number of separations during a month by the average number of employees on the payroll, multiplied by 100.
The formula for turnover is:
Turnover Rate = # of Separations / Avg. # of Employees x 100
To get those numbers, you’ll need to run reports from your HR management system on:
Total employee headcount: This includes all employees on payroll and direct-hire temp workers, as well as those on a temporary layoff, leave of absence or furlough. It should not include temporary workers or independent contractors on a separate agency’s payroll.
Average number of employees: From there, calculate the average number of employees per month by taking each month’s total and dividing by the number of months or the total headcount from each report if run more than once a month/number of reports used.
Total separations: The number of separations during a month includes both voluntary and involuntary terminations; employees who are temporarily laid off, on furloughs or on a leave of absence are not included.
Using the example above of Drumroll Please with its 100 employees, 10 separations and eight new hires, let’s say that in August, three employees left the business to return to school and three new people were hired to replace them in September. The remaining seven left at different months in the year, and five more were rehired.
The average number of employees per month is 99.
For August, there were three separations/an average of 99 employees, for a turnover rate of 3.3%.
3/99 x 100 = 3.3%
Those three new positions are counted for the month of September, and one more person decides to leave, for a turnover rate of 1%.
1/99 x 100 = 1%
Each monthly turnover rate is added together to calculate the annual turnover rate. Turnover can also be calculated by breaking down involuntary and voluntary turnover rates and high-performer turnover rates.
Who Is Responsible for Retention and Turnover?
The stewards of employee retention and turnover data are human resources professionals and, sometimes, recruiting teams. They are charged with monitoring the metrics that gauge the overall employee experience and ensuring that the business has enough people to meet its immediate objectives and growth plans.
While the responsibility for ensuring good retention and turnover rates belongs to the entire organization—from senior leadership to HR and rank-and-file colleagues—the individual with the greatest singular impact on employee retention is the employee’s manager.
Poor managers are consistently named across retention and turnover studies as a top reason that employees leave—and good ones are a key reason people stay. In the Gallup study, some 52% of employees who voluntarily left a company said their managers could have taken steps to prevent them from leaving. More than half say that, in the three months before they left, no one—a manager or any other leader in the organization—spoke with them about their job satisfaction or future career plans.
The manager is often the main touch point for solving, or at least discussing, many of the issues that cause voluntary turnover, including compensation, lack of a career path and a need for better work-life balance. Unfortunately, analyst firm the Work Institute’s 2020 Retention Report indicates that manager behavior and communication had worsened year-over-year. This is an area HR teams need to address because even modest improvements in supervisor ratings can significantly decrease the likelihood of an employee leaving.
Why Do Employees Leave Jobs?
U.S. Bureau of Labor Statistics show that 45 million people left their jobs in 2019. That accounts for total separations, including quits, which are voluntary separations, and layoffs and discharges, which are involuntary separations.
The Bureau of Labor defines retirements, deaths, disabilities as “other” separations. Some three out of four workers who left their job in 2019 did so voluntarily, the Work Institute says.
The reasons employees leave are remarkably consistent across studies: poor career development opportunities, poor work-life balance, a bad manager and inadequate compensation and benefits.
Improve Retention and Turnover With Software
Human resources software plays a crucial role in reducing turnover and helping to retain employees. HR analytics, also known as “people analytics,” is poised to be a major initiative for companies over the next five years, and having a central database of information will ease the collection of HR data and ensure everyone is working with the same numbers.
The more easily HR teams can track KPIs, the better they can help reduce turnover because analyzed data becomes actionable data. HR software makes it very easy for HRIS analysts to give managers and senior leaders answers and tell stories around data, instead of handing over spreadsheets full of numbers and leaving them to draw their own conclusions.
HCM systems are rich in functionality to improve employee engagement and retention. For instance, the one-year mark is a crucial point in turnover, with research from employee recognition strategies firm O.C. Tanner showing that ten times as many employees quit at the one-year mark vs. at five or 10 years. With software, HR can automate an alert in advance of an employee’s one-year anniversary so they and a manager can check in.
HR performance management systems make that process less formulaic and more conversational and relevant. Goals are linked with, for instance, sales targets in the CRM system, so that achievements can be recognized in real time. And with succession-planning tools, the organization is able to visualize bench strength and prepare high performers with training opportunities and clearly defined career paths.
Recognition needn’t only come from the employee’s manager. Empowering employees to recognize their peers can be equally, if not more, effective, and peer-to-peer recognition is becoming a powerful tool for retention.
Finally, make the transactional parts of an employee’s job as easy and accurate as possible. Getting paid correctly and on time, accurate vacation accruals, ease of benefits enrollment and getting prompt answers from HR go a long way toward a positive employee experience.
Many of the causes of turnover are preventable. With the right retention strategies, businesses can decrease voluntary turnover and even head off the need for involuntary turnover and instead put the money that may have been used for recruiting back to work for the business.