How to Calculate Retention Rate for Employees: With Examples

Employees are the foundation of any company. Without them, achieving organizational goals becomes impossible. This makes it important for employers to pay close attention to retention rates, even though improving retention can be a complex challenge.

According to a 2023 report, 93% of companies are worried about retaining their workforce. Understanding how to calculate retention rate for employees is a critical step in addressing this concern.

This article explains how to calculate retention rate in 4 simple steps, with examples to provide a clear and comprehensive understanding of the concept. We will also interpret different retention rates to help your organization create long-term strategies.

What is retention rate?

Retention rate refers to a metric that measures the percentage of employees who stay with a company within a specified period. It's the basis for employers to understand employee loyalty, evaluate HR practices, and improve business performance.

A high retention rate means employees are satisfied, while a low rate may point to issues with engagement, culture, or management. Pay inequity can sometimes contribute to poor retention rates, but this can be addressed through pay gap assessments within the organization.

To calculate the retention rate, use this basic formula: (# of employees who stayed for the whole period ÷ total # of employees at the start) x 100

For example, if a company starts the year with 100 employees and 85 remain at the end, the retention rate is: (85 ÷ 100) x 100 = 85%

Remember, employee retention rate is different from customer retention rate, which focuses on keeping customers and increasing their customer lifetime value.

Why is retention rate calculation important?

Knowing how to calculate retention rate is important because it gives HR a clear picture of workforce health. Tracking the rates helps them to:

• Identify trends in employee happiness and engagement.

• Find potential retention issues before they get worse.

• Minimize turnover costs, such as recruitment and training.

• Keep the company stable by maintaining a motivated and committed team.

• Improve the company's ability to attract and keep talented workers.

• Build long-term loyalty, supporting the company’s success.

Take advantage of these benefits by ensuring pay transparency. Use tools like Pay Equity Suite to evaluate your pay practices and ensure they align with your business goals and DE&I initiatives.

Retention rate vs turnover rate

The difference between retention rate and turnover rate is that retention rate shows the percentage of employees who stay with the company. On the other hand, turnover rate is basically the opposite, with a focus on the percentage of employees who leave during a specific period.

Feature	Retention rate	Turnover rate
Focus	Keeping existing employees.	Losing employees.
Formula	(# of employees who stayed for the whole period ÷ total # of employees at the start) x 100	(# of employees who left ÷ average # of employees during the same timeframe) x 100
Ideal outcome	High retention rate (e.g., 90% or higher)	Low turnover rate (e.g., 10% or lower)
Impact on business	Lower hiring and training costs, higher productivity and employee morale, and a stronger company culture.	Higher costs, lower productivity, and poor morale.

What is a good employee retention rate?

Generally, a good or average retention rate falls 90% or higher, meaning an organization should aim for a turnover rate of no more than 10%. This shows that most employees are happy, engaged, and likely to stay.

But keep in mind that industry averages may vary, so it's important to compare your organization's retention rate to similar businesses for a more accurate benchmark.

Retention rates are often used in workforce analysis and benchmarking. Here are some interpretations of retention rates:

What does 80% retention rate mean?

An 80% employee retention rate means that 80% of employees stay with the company, while 20% leave. For example, if a company has 100 employees, it indicates that 80 employees remain, and 20 employees depart during the same period.

What does 50% retention mean?

50% retention means half of the employees stay, and half leave. For example, in a company with 520 employees, 260 would stay, and 260 would leave. This shows how well the company keeps its employees.

Is 40% retention rate good?

No, a 40% retention rate is generally considered low. As mentioned, companies should aim for a 90% retention rate, as this suggests good employee engagement. High turnover, like this, means the company needs to improve its retention strategies.

Is 20% retention good?

No, a 20% retention rate is considered bad. Imagine having 500 employees, and then for a given period, only 100 employees remain while 400 employees leave. This rate indicates serious issues that need to be quickly addressed by the organization.

One major issue employees face is unfair pay, which can lead to a low retention rate. Ensuring fair pay is crucial, and you can achieve this by using tools like the Pay Equity tool to address pay gaps and inequality.

How to calculate employee retention rate

So, how to calculate retention rate? Since you understand the interpretation, here’s a simple step-by-step guide:

1. Step 1: Know the retention rate formula

   The foundation of calculating employee retention rate is understanding the formula: Retention rate = (# of employees who stayed ÷ total # of employees at the start) x 100

   This shows the percentage of employees who stayed with the company during a specific time period, whether monthly, quarterly, or annually.

2. Step 2: Choose a timeframe and gather the needed data

   Before calculating, choose the timeframe for evaluating retention, such as monthly, quarterly, or annually. Then, gather the necessary data points, which are crucial for the calculation:

   • Initial number of employees

   • Final number of employees

   • Employees who departed

3. Step 3: Calculate the remaining employees

   To find the number of employees who stayed, subtract the employees who left from the starting count. This gives the core figure for the retention rate calculation.

   For example, if there were 320 employees at the start and 50 left, the number of employees who stayed would be: 320-50 = 270

4. Step 4: Start calculating the retention rate

   With the remaining employees and starting count, divide the number of remaining employees by the starting count, then multiply by 100 to get the retention rate as a percentage.

   For example, if 270 employees stayed, divide by the original 320 employees, then multiply by 100, you'll get an 84.38% retention rate, which shows strong employee stability.

   Retention rate = (270 ÷ 320) x 100 = 84.375 ~ 84.38%

   • Example calculation 1: Monthly retention rate

     Scenario: Company A has 15 employees at the start of the month. During the month, 8 employees leave the company for various reasons. To calculate the retention rate for that month, we subtract the 8 employees who left from the initial 15 employees, leaving 7 employees who stayed.

     For the calculation:

     Retention rate = (7 ÷ 15) x 100 = 46.666 ~ 46.67%

     This means Company A has a retention rate of 46.67% for that particular month, which can be a concern, knowing higher rates indicate better employee retention.

   • Example calculation 2: Annual retention rate

     Scenario: Company B focuses on employee well-being and creates a supportive work environment, including pay transparency. The company starts the year with 120 employees, and by year-end, 5 employees have left.

     To calculate the retention rate, subtract the 5 employees who left from the 120, leaving 115 employees who stayed.

     For the calculation:

     Retention rate = (115 ÷ 120) x 100 = 95.83%

     Here, Company B has a retention rate of 95.83% for the year, which means most employees chose to stay.

Promoting pay transparency supports and boosts retention by building trust and fairness. Salary.com's Pay Equity tool offers features like regression analysis and pay gap identification to analyze data, address disparities, ensure competitive compensation, and promote fair pay practices.