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How to Manage and Improve Employee Retention

Donna Fuscaldo
Donna Fuscaldo

Employers can't afford to have high turnover, which is why employee retention is so important.

  • Employee turnover can get extremely costly if companies don't treat their employees correctly.
  • To retain top talent, you have to offer more than a competitive strategy; you must keep employees engaged, learning and growing.
  • You should track employee retention monthly so you can react quickly to any souring employee morale.
  • This article is for business owners who are looking for strategies to improve their employee retention rate.

Employee turnover doesn't come cheap and can happen even in bad economic times. Just look at Amazon for evidence: During the first few months of the COVID-19 pandemic, the company's turnover rate among frontline workers was double the industry average, The Seattle Times reported. That may not have hurt the e-commerce giant, but high turnover can put a serious dent in the finances of a small business. In fact, replacing just one individual can cost one-half to two times the employee's annual salary, according to 2019 research from Gallup.

To retain employees, businesses need to do more than offer competitive salaries and benefits; they also have to keep employees happy and engaged. How to do that depends on your business and budget.

What is employee retention?

Employee retention is the process of getting your staff to stay with your company. Companies go to great lengths to recruit talent, and once those workers are hired, business owners need to ensure those employees don't leave right away.

A company's employee retention rate measures the percentage of employees who stay with the organization for a set period, usually a year. Here is a formula used to calculate the retention rate:

(# of separations during the measurement period / average # of employees during the measurement period) x 10

Most companies calculate retention rates annually, but you can measure the rate in small periods to get faster results. The higher the retention rate, the better. If it's 80%, that means only 20% of employees leave the business during a given period. Keep in mind that the retention rate will vary from one industry to the next. [Read related article: Guide to Hiring Employees.]

Key takeaway: Employee retention is the process of keeping your employees, and a company's employee retention rate is the rate, measured as a percentage, at which workers stay with your organization.

Four ways to retain employees

Employee retention is very important for small businesses, because it's very costly and time-consuming to replace staff members, and it can hurt the remaining employees' productivity when people leave the company and the positions remain unfilled.

"The cost of recruiting people is steep in addition to the opportunity cost as a key position remain opens," Rhiannon Staples, chief marketing officer at Hibob, told Business News Daily. "That team is not performing optimally."

There are several effective strategies for keeping employees, and most of them are free or inexpensive. Here are four ways to improve employee retention:

Keep employees engaged.

One of the worst things for employee morale and productivity is boredom. If an employee has a mundane job and no opportunities for excitement, they'll become dissatisfied and more likely to leave the company.

"The key tenant of retention is making sure you have highly engaged employees day in and day out," said Traci Fiatte, CEO of professional and commercial staffing at Randstad US. "Many organizations have very quick and easy weekly, biweekly or monthly employee surveys to gauge how employees are feeling."

These questionnaires can be short and quick to complete; the idea is to spot any issues and respond to them before they lead to engagement problems.

Give them clear growth opportunities.

To keep employees over the long haul, companies have to provide opportunities for them to grow. Employers also need to make sure they're getting the word out about these opportunities. It's important for employees to understand how they'll grow, even in tumultuous times, Staples said.

"You have to create new opportunities within the workplace to utilize employees' other strengths," said Angela Simpson, an HR knowledge advisor at the Society for Human Resource Management. "You have to make it interesting, so they aren't looking elsewhere for development and growth opportunities."

Make them feel valued.

A company is only good as its employees – and that means everyone in the organization, not just those in the C-suite. Showing employees they matter boosts morale and gives them purpose.

"You have to make sure everyone in the organization, no matter the job, understands how important their job is to the total," Fiatte said.

If employees know the business can't function without them, they'll feel a lot better about coming to work every day, Fiatte said. It's about connecting the person's job to the value it brings the organization," she said.

A free and easy way to help employees feel valued is to say thank you. As simple as it sounds, it's not a given at many companies. "To me, that is the missing link," Fiatte said. "You can never say thank you enough."

Offer lifestyle-enhancement benefits.

Providing "lifestyle-enhancement benefits" can be a powerful way to recruit and keep employees, said Moses Balian, HR consulting manager at Justworks.

"There are a lot of increasingly popular fringe benefits that have to deal with lifestyle," Balian said. "Fitness, mental health and enhanced medical" are the big ones.

Balian said offering employees access to a gym membership, digital fitness classes, mental health apps, employee assistance programs and flexible work schedules can go a long way in keeping workers happy and loyal.

Key takeaway: Some ways to improve employee retention include increasing engagement, expressing gratitude, offering growth opportunities and providing wellness-related benefits.

Employee retention vs. employee turnover

The employee retention rate is the percentage of staffers who stay with an organization within a given time period, and the employee turnover rate is the percentage who leave during that time. Here is the formula for calculating annual turnover rate:

(# of employees who left / # of employees) x 100

The lower the turnover, the better. If a company has a 20% turnover rate, it means 80% of the staff is sticking with the company. (It also means the employee retention rate is 80%.)

There are two types of employee turnover:

  • Voluntary turnover occurs when the employee chooses to leave the company. It could be for a host of reasons, including employee burnout.

  • Involuntary turnover happens when the employer terminates the employee. It could be because of layoffs, performance issues or workplace behavior. This occurs when the employer terminates the employee.

Key takeaway: Employee retention is the rate at which workers stay with your company; turnover is the rate at which they leave. Analyzing both measures together will give you the clearest picture of what's going on with your workforce.

[Looking for a comprehensive software program that can handle HR for you? Check out our review of the best recruiting software for small businesses.]

Reasons employees leave

As of January 2020, the median number of years wage and salary workers stay with a company is 4.1, which is down slightly from 4.2 years in January 2018, according to the U.S. Bureau of Labor Statistics. Here are some of the main reasons employees leave their jobs:

  • They want higher compensation.
  • The work isn't challenging.
  • There is no clear path to grow within the company.
  • They lack access to health insurance and a retirement savings account.
  • They don't feel valued.
  • Flextime isn't an option.
  • They have problems with a manager.
  • They're burned out from being overworked and/or stressed.
  • They're not recognized for a job well done.
  • There is no clear direction from management.
  • They don't fit with the overall culture of the company.

Key takeaway: Some of the reasons employees leave include burnout, lack of growth opportunities, higher compensation and dissatisfaction with management.

Reasons employees stay

Employees are quick to change jobs when they don't feel appreciated and challenged, but they're also loyal when they're treated right. Here are some common reasons employees remain with a company:

  • A competitive salary
  • A high level of engagement
  • Flexible work schedules
  • A clear path to advance within the organization
  • Access to learning and development
  • Comprehensive benefits
  • Supportive and empathetic management
  • Respect and gratitude
  • A great company culture and team
  • Support for the company's mission

Key takeaway: Employees stay with a company when they receive competitive pay and benefits, have opportunities to grow, are respected and valued, and support the company culture and mission.

How to track employee retention

You can have the best retention plan in the world, but if it's not resonating with employees, it will be a big waste of time. That's why it's important to track your plan often to ensure it's working. Fiatte recommended tracking turnover monthly.

"By doing that, you start to see trends, and you can plan for that turnover," Fiatte said.

Turnover rates vary widely depending on the industry and types of roles within the organization. Businesses that have a lot of sales positions, for example, tend to have high turnover rates, and companies with more senior staff tend to have lower turnover. As a result, Fiatte said, it's important to compare similar retention rates when benchmarking.

Don't forget the power of exit interviews when tracking employee retention. Exit interviews provide helpful insights that can help you reduce turnover. Staples said to make sure you review your exit interview annually to ensure you're asking departing employees the right questions.

For example, in 2019, you may have asked employees about commuter benefits, but in 2020, access to more health benefits may matter more to employees. "You should ask them why they're leaving, if they took advantage of some of the fringe benefits and if the health insurance was to their liking," Balian said.

Questions could also focus on management and the culture of the organization. "It's really important to sit down and think about the exit interview questionaries," Balian said.

Key takeaway: Some tools for tracking employee retention include calculating your turnover rate monthly and using insight gleaned from carefully reviewed exit interviews.

Image Credit: Monkey Business Images / Shutterstock
Donna Fuscaldo
Donna Fuscaldo
Business News Daily Staff
Donna Fuscaldo is a senior finance writer at and has more than two decades of experience writing about business borrowing, funding, and investing for publications including the Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, and Most recently she was a senior contributor at Forbes covering the intersection of money and technology before joining Donna has carved out a name for herself in the finance and small business markets, writing hundreds of business articles offering advice, insightful analysis, and groundbreaking coverage. Her areas of focus at include business loans, accounting, and retirement benefits.