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Knowledge Base » Business » What is Employee Retention?

What is Employee Retention?

Last updated on 3rd May 2023

Hiring and retaining top talent are probably two of the main challenges for organisations. Employers surveyed in research conducted by Ipsos MORI for the British Business Bank discovered that recruiting and retaining skilled staff was considered “likely to be an issue” by 77% of respondents and a “significant obstacle” by 6% of respondents. With record low unemployment rates in the UK, this concern is heightening.

At a time of spiralling inflation and escalating costs, staff turnover is an expense a lot of employers can’t afford to spare. So, employee retention becomes a top priority for many employers across all sectors, especially as competition to attract highly qualified candidates grows fierce.

The UK average employee turnover rate is approximately 15% a year, and the average cost and time to hire are approximately:

  • £12,780 recruiting costs and upwards of ten weeks’ time to hire for director level.
  • £3,945 recruiting costs and upwards of six weeks’ time to hire for management level.
  • £2,158 recruiting costs and upwards of four weeks’ time to hire for staff below management level.

Specialist staff recruiting costs may be between 20% and 30% of the offered salary and it often takes upwards of 12 weeks to recruit.

These costs do not include the “hidden additional costs” to the business. For example:

  • The cost of the hiring manager’s and/or HR’s time spent on recruitment activities.
  • The average amount of time it takes for an employee to become fully productive is around 28 weeks as they settle in and “learn the ropes”.
  • The constant need to hire and train new employees can have a negative effect on established employee productivity, morale and motivation.
  • Onboarding and training costs.
  • Changes in staff can negatively impact customer and/or service user relationships.

It is essential for employers to retain positive and motivated employees because high employee turnover increases expenses whilst also having a negative effect on the organisation as a whole.

Employee Retention

What is employee retention?

Employee retention refers to the ability of an employer to manage and avert unwanted employee turnover. Employers invest a lot of time and money into recruiting the best people, so employee retention is about implementing strategies for retaining existing staff and keeping the best employees on board in order to succeed as a business.

The ideal turnover rate for any specific employer (that is the number of employees who have left an organisation during a certain period of time), and the ideal retention rate (that is the number of employees who have stayed at an organisation during a certain period of time), is going to depend on individual factors such as:

  • The industry sector that the organisation operates in.
  • Historical turnover rates.
  • Opportunities for internal promotion.
  • Organisational expansion and/or retraction.

So, to more accurately assess how an employer is handling their own employee turnover and retention, they need to consider each of these factors, rather than relying on rates listed on national surveys, as these may provide them with an inaccurate view of how successfully their organisation is retaining employees.

Industry sectors with the highest retention rates include government, finance, insurance and education, while the lowest retention rates are in the food, retail and hospitality industries.

Does employee retention matter?

For some employers in various sectors of industry, employee retention is not a business priority as they base their business strategy on employing a transient workforce. However, these employers are in the minority. For most employers, their strategy is to attract and retain a skilled workforce.

An employer’s ability to retain their employees is beneficial for many reasons:

  • Employers with high employee loyalty that leads to high retention levels have more engaged employees, and when employees are engaged with their employer and the work that they are doing, they are generally more productive and motivated. A low retention rate can have a demotivating effect on the workplace which causes other employees to question whether they want to remain with the employer or to look for a new opportunity. High levels of employee retention have the effect of encouraging retention.
  • Each time an employee leaves, this affects productivity. It takes time for a new employee to reach proficiency and optimal productivity. In addition, the change situation can also affect the productivity of established staff, as they may have to take on additional tasks, leading to lower quality output.
  • The longer that an employee has worked for an organisation, the more knowledgeable, skilful and experienced they are in general. They have developed positive and valuable working relationships with work colleagues, customers and/or service users, so the loss of valuable and experienced employees often can result in some form of financial loss to the organisation in the value that that employee may have delivered.
  • As we have seen previously, the process of sourcing, recruiting and training a new employee can be an expensive and time-consuming activity. Employers with lower retention rates are often unable to invest more funds into other aspects of the business as finite budgets are directed to replacing lost talent.
  • Employee retention is not only about making savings on recruitment, as it can also increase revenue and make savings in other areas of an organisation. Experienced talent is generally more productive in an organisation, providing a better customer/service user experience which can generate customer/service user loyalty, support organisational development and minimise complaint levels.
  • High levels of employee retention help to develop the organisational culture in which employees have built effective communication channels with their managers, colleagues and external contacts. They understand the organisation’s vision at a deep level and know how to fulfil their roles’ expectations.
  • Staying in the same organisation does not always mean staying in the same job. Retaining these essential people by providing them with opportunities for movement (upwards or sideways) is not only beneficial to the employee’s career development but also for the organisation in terms of knowledge, experience and organisational memory.

When does employee retention become problematic?

Whilst employee retention holds a lot of advantages, there are several drawbacks as well. Organisations may be retaining less qualified, less motivated or less productive employees with good employee retention. Not all employees are ready to grow and develop along with the organisation, so these employees may become more of a liability than an asset for the organisation as they cannot add much value and may even adversely affect the organisational performance or reputation.

Retaining key staff, while maintaining a healthy turnover, is important for efficiency. No employer wants to lose skilled and experienced staff; however, new people can bring a fresh perspective, new ideas and ways of working, and additional expertise to the workplace.

Organisations can develop negative organisational cultures over time by retaining employees that do not positively contribute to the organisation. In worse-case scenarios a “toxic workplace” develops. Often this causes new employees to reconsider their employment with the organisation and leave, usually within their first year. So, whilst employee retention is seen as a positive, there are instances when employee turnover can actually bring benefits to an organisation.

Another problem that can occur with employee retention is when an employee or employees become dissatisfied with their renumeration and the organisation is unable to meet their demand, as it exceeds the budget of the organisation and the employee(s) is not willing to compromise. The organisation needs to balance the interests of that employee with those of the rest of the workforce. The salaries of the individuals working at the same level should be more or less similar to avoid major disputes amongst employees. The employer may just have to concede that it can not retain this (these) employee(s).

Trying to retain employees who have become bored in a role that they initially found really interesting can be a problem. Employers will find it difficult to convince the employee to stay in such cases, and it may even be advantageous to agree with their decision to leave as they may, in time, become disruptive.

Retaining Employees

Why do people leave organisations?

A fifth of workers plan to quit their jobs in 2022 according to the Price Waterhouse Coopers (PWC) Hopes and Fears Survey. The survey of 2,086 UK workers found that only 45% of respondents are not likely to look for a new role in the next year, which means that the remainder (55%) are weighing up whether they should make a move.

54% of employees surveyed are very or moderately satisfied with their current role. With only 5% stating that they are very dissatisfied, the research suggests other significant factors beyond job satisfaction are weighing on the minds of employees.

The reasons for employees leaving their current positions are numerous, but as an employer, trying to get a better understanding of why employees might be leaving the organisation will help to develop an employee retention strategy to address some of these reasons before key employees hand in their resignations.

Here are some reasons why employees leave or consider leaving their jobs:

  • Work-life balance – A good work-life balance is essential to staying happy and focused at work. Recruitment consultancy Randstad’s 2022 Employer Brand Research (REBR), based on an independent survey of over 163,000 respondents and 5,944 companies in 34 countries, revealed that work-life balance was the most important driver when it comes to choosing a new employer. 65% of respondents listed this as the number one priority, even over salary. Employees who are unhappy with their work-life balance will likely look for a new job.
  • Salary and benefits – Salary is one of the key reasons why employees are looking for new jobs. If employees are not happy with their pay and benefits, then they will be open to new job offers that are more lucrative than their current position, particularly in the current cost of living crisis.
  • Flexibility – The COVID work from home policy has shown many workers that remote or hybrid working is a real option, saving them both time and money used commuting. As organisations move back to workplace working, some employees are considering whether they actually want to commute. A lack of workplace flexibility could encompass anything from restricting employees from taking certain time off, the absence of part-time working options, or not having the option to work from home when necessary.
  • Lack of job security – This goes hand in hand with salary and benefits; part of having job security is receiving a salary that covers at the very least the cost of living. But also, employees want to know whether their jobs are safe or not. If they are unsure about their job security, they will start exhibiting job-changing behaviours to find employment where they know they will not face termination at any time.
  • Career opportunities – Many employees begin to feel stale in their roles after a time and need new challenges. Others cannot see opportunities for progression or advancement in their careers or even development in the role that they hold. Others may be simply bored, lack responsibility or feel that they are simply going through the motions.
  • Negative working environment – The number one issue in any negative work environment is distraction. Distractions can negatively affect every part of the job, from the quality of the work produced to employees’ stress levels. Amongst other issues with negative working environments are poor working conditions, poor equipment, health and safety concerns and lack of resources.
  • Toxic working environment – This can include a poor organisational culture, silo working, poor management practices, bullying and harassment, discrimination, feelings of being overworked and under-appreciated and lack of respect.
  • Workplace stress – The reasons that workers become stressed vary but some of the common themes are long working hours, unrealistic expectations, unmanageable workloads which can lead to burnout, lack of support, understaffing and encountering stressful situations in the workplace.
  • Ill health – When employers are either unable or unwilling to make reasonable adjustments for employees with health conditions, employees may be left with no other option but to leave.

Although these appear to be the main reasons for employees leaving, 79% of UK employees admitted to staying in a job they weren’t happy in for up to two years, due to a lack of confidence (15%), lack of time (14%) or a fear that they don’t have enough experience (14%). Another common reason is that although they are unhappy, they get along well with their colleagues and team. (Source William Kent Executive Search)

How to improve employee retention

Improving employee retention is so much easier and cheaper to deliver than new recruitment, and it minimises business interruption, training costs, and the loss of productivity. The starting point is to get feedback from employees about how they view the organisation, their jobs and the workplace to establish what the organisation can do to improve retention. One way to gather feedback is through employee engagement surveys, although employers need to ensure that the feedback is listened to. Employees do their best work when they feel valued and heard. The feedback will inform the changes an employer might want to make to the business, and it is important to build a culture that makes employees want to stay.

Many employers take feedback through exit interviews, and exit interviews are great, but they present a problem when it comes to improving employee retention as they are just an indication of what an employee thinks after they have decided to leave. Ideally, employers should be constantly gathering feedback from employees who are still committed to the organisation. That is not to say that the data gathered from exit interviews is not valuable, but analysing data from both sources will give a picture of what changes could be made to the workplace in order to improve employee retention and formulate an employee retention strategy.

Part of the challenge of employee retention is understanding the extent that different people value very different things, but also how that might change as their circumstances change over time. Whilst every employer will have a retention strategy goal or goals that are specific to them, there are many themes common to all employers:

  • Hiring – Getting hiring right in the first place can be a very fundamental aspect of retaining employees. Ensure that job adverts and job and person specs give an accurate description of the job role so that new employee expectations are met.
  • Remuneration package – Right now, there is a significant focus on money, against a backdrop of high inflation, and organisations are taking various approaches to target their salary budgets in key areas, particularly at the lower end of the pay scale. However, employees are judging the remuneration packages they get from their employers on a broader range of measures including pensions, holiday allowance and other benefits.
  • Flexibility – Hours of work and where people work are clearly important considerations. Accommodating such initiatives as flexible hours, hybrid working and working from home can give employees more control over their roles and improve their work-life balance.
  • Developmental opportunities – Giving employees the opportunity to develop their skills and experience will not only benefit their careers but will also bring enhanced skills and knowledge to the organisation. Development is more than just training courses. Increasing an employee’s levels of responsibility or widening the scope of the role can be very developmental.
  • Health and wellbeing – Health and safety at work is as much about people’s mental health and wellbeing as it is about their physical health and wellbeing. It is important to put strategies in place to deal with workplace stress, toxic environments, bullying and harassment etc. and give employees a voice to be able to raise concerns before they become issues. Holding regular staff meetings is one of the most important ways to build a positive work environment, providing a vehicle for employers to become aware of the needs of their employees.
  • Communication – Communication is critical in any working environment but it is essential in a positive one. When there are misunderstandings or false expectations, it can lead to frustration and anger. Employees are less likely to feel frustrated when they know what is happening in the organisation. Communication should also be a two-way street; regular performance reviews and employee surveys give employees the opportunity to give feedback about how they feel about their job and about the organisation.
  • Recognition – Recognising work done well, not only through reward but also through positive feedback, goes a long way to developing a positive working culture. It is important to make sure that each employee feels empowered to give recognition to others, not just the managers and team leaders.
  • Equality, diversity and inclusion – Make sure that opportunities for training, incentives and promotion are open to all staff. Encourage diversity in the organisation, as this can have a positive effect, highlighting that differences are embraced and welcomed and that no one is discriminated against.

How to measure your employee retention

An employee retention rate measures the retention of employees over a specific period of time. To measure your employee retention rate there are several different formulas that can be used, but the basic formula is:

The total number of employees at the end of a set period of time divided by the total number of employees at the start of a set period of time multiplied by 100 equals the retention rate percentage.

When calculating the employee retention rate, it is important to outline a timeframe to measure in order to easily compare it to future data of the same timeframe. Most organisations use 6 or 12 months.

Generally, employee retention rates of 90% or higher are considered good; however, a very high retention rate may not always be good either as it prevents getting “new blood” into the organisation.

There is also a stability rate which indicates the retention rate of experienced employees, and the formula used to calculate this is:

The total number of employees with service of one year or more multiplied by 100, divided by the total number of employees in post one year ago.

Final thoughts

Employee retention has become a top priority because today’s labour market is so competitive and finding skilled, experienced, qualified workers is becoming more and more challenging for employers. While losing some employees is unavoidable for most employers, staying mindful of the principal issues that can improve employee retention can go a long way towards employee satisfaction and enable employers to keep their most valuable people so that their businesses can continue to develop and grow.

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About the author

Megan Huziej

Megan Huziej

Megan has worked with CPD Online College since August 2020, she is in charge of content production, as well as planning, managing and delegating tasks. Megan works closely with our writers, voice artists, companies and individuals to create the most appropriate and relevant content as well as also using and managing SEO. She gained her Business Administration Level 3 qualification over the duration of being at CPD Online College as well. Outside of work Megan loves to venture to different places and eateries as well as spending quality time with friends and family.

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