In an increasingly competitive and fast-moving labor market, it is critical for businesses tounderstand why some employees go and others stay — not only for the bottom line, butalso toretain top talent. Understanding what employees value, measuring the financial impact ofretention and turnover, and managing and improving employee retention are all strategicadvantages.
What Is Employee Retention?
Employee turnover — the loss of organizational talent over a period of time — isasignificant issue for most organizations. More than 42 million U.S. workers(opens in newtab) left their jobs voluntarily in 2019. If thattrend continues, more than one in three employees will voluntarily leave their positions by2023.
Employee retention is defined as an organization’s ability to prevent employee turnover, or thenumber of people who leave their job in a certain period, either voluntarily orinvoluntarily. Increasing employee retention has a direct impact on business performance andsuccess.
Key Takeaways
- Employee retention is a high priority for leading HR organizations today.
- The most effective employee retention strategies reduce overall turnover and keep highperformers on board.
- A thoughtful and comprehensive employee retention strategy reduces the high costsassociated with replacing lost employees.
- Employers that recognize the subtle signs that show an employee might leave have abetter chance of identifying ways to retain that person.
Employee Retention Explained
Organizations need to keep their best employees around to thrive. This is the goal ofemployee retention. Employee retention refers to the strategies an organization develops tomitigate employee turnover risks and the processes it puts in place to retain its criticaltalent. Employee retention is a leading challenge for organizations and HR departmentstoday.
Individuals leave their jobs for many different reasons. Some are voluntary, such as takinganother job, while others are involuntary, such as getting laid off. Employee retentionstrategies primarily focus on voluntary turnover that is detrimental to the organization, asopposed to the loss of a poor performer. It also focuses on turnover that is avoidable, suchas an employee leaving their job because they’re moving out-of-state.
Why Does Employee Retention Matter?
Employee retention has become a critical aspect of modern human capitalmanagement programs. The numbers speak for themselves: It costs U.S. businesses morethan $1 trillion a year to replace employees who voluntarily decide to leave their jobs,according to Gallup. High turnover, some of which could be avoided with prior managementintervention, also comes at the expense of revenue, productivity, employee experience andknowledge retention.
9 Benefits of Employee Retention
As businesses compete for top talent, employee retentionis crucial. While some experts suggest that a 90% retention rate is a good goal, thereality is, it varies across different companies and industries. However, the ability toretain employees is universally beneficial for many reasons. Following are nine of the topbenefits:
- Cost reduction. U.S. employers spend hundreds of millions of dollarsevery year recruiting and training new workers. Those costs are sunk if an employeeleaves prematurely. Productivity, team cohesiveness and morale also take a hit —whichalso has a financial impact. Total replacement costs for each employee can range from 90% of a worker’s salary(opens innewtab) for an entry-level employee to 200% ormore for tenured professionals and leaders.
- Recruitment and training efficiency. By focusing on employee retention,companies reduce recruiting costs and enjoy greater returns on employee training.Recruiting costs include fees paid to recruiters or to advertise the position,interview-related travel and possible signing bonuses. Next comes training, which canalso be costly. If the employee leaves prematurely after being hired, that money iswasted.
- Increased productivity. Employee turnover sets back productivitybecause it takes time for a new worker to get up to speed and produce at a comparablelevel as their predecessor. It also takes a toll on remaining staff, who have to take onadditional work and may produce lower-quality output as a result. Conversely,high-retention workplaces tend to have more engaged workers who, as a result, are moreproductive.
- Improved employee morale. Organizations with successful employeeretention programs foster greater connectedness and engagement, which helps morale and,in turn, boosts retention. Conversely, a steady stream of departures has a dampeningeffect on workplace morale, with side effects that include a decrease in work qualityand more workers who decide to leave.
- Experienced employees. It stands to reason that the longer employeesremain at an organization, the more engaged, knowledgeable and skillful they are. Theyhave also forged valuable relationships with customers and co-workers. When an employeedeparts, the company incurs an opportunity cost in the potential value the employeecould have delivered.
- Better customer experience. Inexperienced and less adept new hires maybe more prone to missteps that negatively impact a customer’s experience with thecompany. Satisfied, longer-term employees are often more skilled in dealing withcustomers and may have strong relationships with them. This is as true during all thestages leading to a signed contract as it is post-sales, when a customer might reach outto customer service. A better customer experience can also be a key branddifferentiator.
- Improved employee satisfaction and experience. A symbiotic relationshipexists between retention and both employee satisfaction — worker happiness andfulfillment — and employeeengagement, the level of commitment workers bring to their roles. Satisfied andengaged employees are often more likely to stay in an organization, and organizationswith high retention rates often experience greater employee satisfaction and engagement.
- Stronger corporate culture. Corporate culture develops over time, basedon employees’ cumulative traits and interactions. When engaged employees who arealignedwith an organization’s culture stay, they strengthen the organizational ethos. Astrongcorporate culture also improves productivity and performance.
- Increased revenue. Employee retention is not just about cutting costs;anecdotal evidence shows it can have a positive impact on revenue as well. Employerswith better retention rates deliver a better customer and employeeexperience, hold on to experienced top talent and are more productive —each ofwhich can boost growth.
What Happens When Businesses Have High Employee Turnover?
A certain amount of turnover will always exist in an organization, and some may be beneficialas it makes way for new talent. Industries that tend to employ many first-time, part-time,seasonal and student workers are naturally prone to extreme or fluctuating attrition.
However, high turnover takes a toll. Companies with higher turnover lose what they’veinvested in recruiting, onboarding and training employees who leave. For those remaining,morale and quality of work can take a hit. In addition, organizations that experience higherattrition must focus more attention on replacing talent and addressing issues related tolost productivity, burnout among employees who pick up the slack and decreased employeeengagement. Those negative effects can lead to even greater turnover and hinder thecompany’s overall success.
What Causes High Employee Turnover?
What makes workers want to leave a company? The exact causes of employeeturnover vary, but often fall into the following categories:
- Personal reasons. There are a number of reasons for leaving a job thathave nothing to do with the employer, such as relocating for a spouse, family issues, acareer change or health reasons.
- Work-life balance. Issues related to long hours or rigidity about workstyles or location can drive employees to seek more flexible or less demandingalternatives.
- Incompatibility. Incompatibilities between employer and employee, whichcan often be traced back to poor hiring processes and decisions, are a common andlargely avoidable reason for turnover.
- Work relationships. Individuals may have issues or conflict with theirmanagers, co-workers or organizational leadership.
- Lack of opportunity. Employees who see a lack of workplace development,career path or opportunity to gain new experiences may leave for a business with bettermobility.
- Financial reasons. Better pay and benefits available elsewhere arealways a strong lure for employees to leave an organization.
Employee Retention Models
Over the years, researchers have developed a number of models seeking to explain jobsatisfaction. Rooted in psychology, these models have influenced HR’s approach toemployeeretention over the years. They include:
The Hierarchy of Needs. Although psychologist Abraham Maslow developed theHierarchy of Needs to better understand the essential needs of humans and which must be metfirst, the theory can also be used to examine the biggest contributors to job satisfaction.The five levels of needs, in order of importance, are psychological, safety, belongingness,esteem and self-actualization.
Motivation-Hygiene Theory. Two primary factors impact job satisfaction,according to psychologist Fredrick Herzberg: Motivators, also called job satisfiers, includerecognition, meaningful work and personal growth. Hygiene, also called job dissatisfiers,include salary, benefits and job security. Of note, proper management of hygiene factors canprevent employee dissatisfaction but are not considered sources of satisfaction ormotivation.
Human Motivation Theory. In his 1961 book The Achieving Society,psychologist David McClelland built on Maslow’s work and identified three intrinsichumanneeds: achievement, power and affiliation. By understanding which needs an employeeprioritizes, employers can increase their job satisfaction. Some employees, for example, maybe embarrassed by public praise. Some work best with goal-oriented tasks.
Job Characteristics Model. Organizational psychologists Greg R. Oldham andJ. Richard Hackman found the following job characteristics increase job satisfaction: skillvariety, task identity, task significance, autonomy and feedback. Jobs created with thesecharacteristics in mind lead to more productive and motivated employees.
How Can Businesses Tell That Employees Are Ready to Leave?
Employees may exhibit some telltale signs that they’re ready to depart, such as arésumé leftin view or an increase in extracurricular appointments. However, there are more subtlebehaviors that signal someone may be thinking about leaving. They include:
- Decreased initiative or productivity. An individual thinking aboutleaving may no longer put in extra effort or may seem noticeably less interested inpleasing others.
- Shift in attitude. Negativity — about the job, a manager orco-workers— can be a sign an employee is ready to move on.
- Lack of commitment. Employees who are heading out the door may avoidlong-term projects or put in shorter days.
- Dwindling enthusiasm. Individuals considering their options may seemnoticeably disconnected from the organizational mission or less eager to work withclients or customers.
Employers can use these cues in efforts to retain top performers or plan for their loss.Interventions with potentially immediate effects are promotions, pay increases and specialprojects. Employers can also benefit by conducting “stay interviews,” which arethe inverseof exit interviews. Stay interviews examine key drivers of retention and what the companycan do to meet an employee’s desires.
How to Improve Employee Retention
Improving employee retention begins with hiring the right person. This requires defining thejob itself — responsibilities, required skills, work environment — anddeveloping afine-tuned job description that attracts appropriate candidates.
Once an organization has chosen a new hire, orientation and onboarding are key to making themfeel welcome. A well-planned and organized onboarding program has been shown to increaseemployee retention, engagement and commitment. In addition, competitive compensation andemployee benefits are important not only for recruiting the best and brightest, but also forkeeping them. So are competitive bonuses, paid time off, health benefits and retirementplans.
Finally, employees value meaningful work that makes good use of their skills and abilities.Career development and growth opportunities are other critical aspects of employeeretention, as is recognition for their contributions.
Measuring & Monitoring Employee Retention
Measuring employee retention starts with tracking turnover and annual retention rates. Butthe most successful employee retention programs collect and analyze a wide range of data,including employee satisfaction and engagement, more nuanced retention and turnoverinformation, and other issues like absenteeism. These measures offer a more detailedunderstanding of employee retention, which can be used to inform recruiting and hiringstrategies, address cultural and management issues, and improve employee satisfaction andengagement. Examining these retention metrics from a variety of angles also enables thebusiness to focus its retention efforts on top talent.
Some organizations that experience large, expected fluctuations in departures — forexample,those with significant seasonal or contingent workforces — may make adjustments totheirretention calculations in order to account for those expected employee exoduses. As withretention rates, HR and business leaders can also analyze specific characteristics of theirturnover rates, calculating figures by manager, longevity and high and low performers, forexample.
Improving Employee Retention with HR Software
Human capital management (HCM) software, such as NetSuite SuitePeople,plays a critical role in an effective employee retention strategy. HCM software is usefulfor collecting and analyzing key employee retention metrics. It also helps manageoverarching goals for employee retention programs and correlates metrics to overall businessperformance.
In addition, HCM software can provide analytics that streamline the creation and presentationof reports, helping HR leaders highlight the strategic impact of investments that increaseemployee retention. This is becoming even more important given the constant changes inworkforce needs, economic pressures and market fluctuations.
An effective employee retention strategy is a crucial component of a comprehensive humancapital management practice in all industries. Focusing on improving employee retention andaddressing preventable involuntary turnover pays dividends across the organization.
Creating a successful employee retention approach takes significant effort, executiveoversight and targeted investment. Organizations that fail to focus on employee retentioncan suffer significant costs related to finding, recruiting and training replacements, aswell as reduced productivity, lost knowledge and lower morale.
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Employee Retention FAQ
What is the meaning of employee retention?
Employee retention isdefined as an organization’s ability to hold on to its employees. It refers to thestrategies an organization develops to mitigate employee turnover risks and the processes itputs in place to increase retention of top talent.
How do you increase staff retention?
Improving employee retentionbegins with hiring the right person. From there, strategic onboarding practices have beenshown to increase employee retention, engagement and commitment. Competitive salaries,bonuses and health benefits also contribute to retention, as does meaningful work.
What contributes to employee retention?
Employees remain atorganizations for a variety of reasons, including meaningful work that leverages theirskills and abilities, career development and growth opportunities. Competitive salaries andbenefits are other reasons that workers stick around.
What are the five main drivers of retention?
The reasons employees stayon the job vary, but many commonalities exist. They include being treated with respect, faircompensation, feeling trusted and empowered, job security and the ability to use theirskills and abilities to do their best work.
