In an increasingly competitive and fast-moving labor market, it is critical for businesses to understand why some employees go and others stay — not only for the bottom line, but also to retain top talent. Understanding what employees value, measuring the financial impact of retention and turnover, and managing and improving employee retention are all strategic advantages.
What Is Employee Retention?
Employee turnover — the loss of organizational talent over a period of time — is a significant issue for most organizations. More than 42 million U.S. workers(opens in new tab) left their jobs voluntarily in 2019. If that trend continues, more than one in three employees will voluntarily leave their positions by 2023.
Employee retention is defined as an organization’s ability to prevent employee turnover, or the number of people who leave their job in a certain period, either voluntarily or involuntarily. Increasing employee retention has a direct impact on business performance and success.
- Employee retention is a high priority for leading HR organizations today.
- The most effective employee retention strategies reduce overall turnover and keep high performers on board.
- A thoughtful and comprehensive employee retention strategy reduces the high costs associated with replacing lost employees.
- Employers that recognize the subtle signs that show an employee might leave have a better 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 of employee retention. Employee retention refers to the strategies an organization develops to mitigate employee turnover risks and the processes it puts in place to retain its critical talent. Employee retention is a leading challenge for organizations and HR departments today.
Individuals leave their jobs for many different reasons. Some are voluntary, such as taking another job, while others are involuntary, such as getting laid off. Employee retention strategies primarily focus on voluntary turnover that is detrimental to the organization, as opposed to the loss of a poor performer. It also focuses on turnover that is avoidable, such as 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 capital management programs. The numbers speak for themselves: It costs U.S. businesses more than $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 management intervention, also comes at the expense of revenue, productivity, employee experience and knowledge retention.
9 Benefits of Employee Retention
As businesses compete for top talent, employee retention is crucial. While some experts suggest that a 90% retention rate is a good goal, the reality is, it varies across different companies and industries. However, the ability to retain employees is universally beneficial for many reasons. Following are nine of the top benefits:
- Cost reduction. U.S. employers spend hundreds of millions of dollars every year recruiting and training new workers. Those costs are sunk if an employee leaves prematurely. Productivity, team cohesiveness and morale also take a hit — which also has a financial impact. Total replacement costs for each employee can range from 90% of a worker’s salary(opens in new tab) for an entry-level employee to 200% or more 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 can also be costly. If the employee leaves prematurely after being hired, that money is wasted.
- Increased productivity. Employee turnover sets back productivity because it takes time for a new worker to get up to speed and produce at a comparable level as their predecessor. It also takes a toll on remaining staff, who have to take on additional 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 more productive.
- Improved employee morale. Organizations with successful employee retention programs foster greater connectedness and engagement, which helps morale and, in turn, boosts retention. Conversely, a steady stream of departures has a dampening effect on workplace morale, with side effects that include a decrease in work quality and more workers who decide to leave.
- Experienced employees. It stands to reason that the longer employees remain at an organization, the more engaged, knowledgeable and skillful they are. They have also forged valuable relationships with customers and co-workers. When an employee departs, the company incurs an opportunity cost in the potential value the employee could have delivered.
- Better customer experience. Inexperienced and less adept new hires may be more prone to missteps that negatively impact a customer’s experience with the company. Satisfied, longer-term employees are often more skilled in dealing with customers and may have strong relationships with them. This is as true during all the stages leading to a signed contract as it is post-sales, when a customer might reach out to customer service. A better customer experience can also be a key brand differentiator.
- Improved employee satisfaction and experience. A symbiotic relationship exists between retention and both employee satisfaction — worker happiness and fulfillment — and employee engagement, the level of commitment workers bring to their roles. Satisfied and engaged employees are often more likely to stay in an organization, and organizations with high retention rates often experience greater employee satisfaction and engagement.
- Stronger corporate culture. Corporate culture develops over time, based on employees’ cumulative traits and interactions. When engaged employees who are aligned with an organization’s culture stay, they strengthen the organizational ethos. A strong corporate 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. Employers with better retention rates deliver a better customer and employee experience, hold on to experienced top talent and are more productive — each of which 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 beneficial as 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’ve invested 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 higher attrition must focus more attention on replacing talent and addressing issues related to lost productivity, burnout among employees who pick up the slack and decreased employee engagement. Those negative effects can lead to even greater turnover and hinder the company’s overall success.
What Causes High Employee Turnover?
What makes workers want to leave a company? The exact causes of employee turnover vary, but often fall into the following categories:
- Personal reasons. There are a number of reasons for leaving a job that have nothing to do with the employer, such as relocating for a spouse, family issues, a career change or health reasons.
- Work-life balance. Issues related to long hours or rigidity about work styles or location can drive employees to seek more flexible or less demanding alternatives.
- Incompatibility. Incompatibilities between employer and employee, which can often be traced back to poor hiring processes and decisions, are a common and largely avoidable reason for turnover.
- Work relationships. Individuals may have issues or conflict with their managers, 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 better mobility.
- Financial reasons. Better pay and benefits available elsewhere are always 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 job satisfaction. Rooted in psychology, these models have influenced HR’s approach to employee retention over the years. They include:
The Hierarchy of Needs. Although psychologist Abraham Maslow developed the Hierarchy of Needs to better understand the essential needs of humans and which must be met first, 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, include recognition, meaningful work and personal growth. Hygiene, also called job dissatisfiers, include salary, benefits and job security. Of note, proper management of hygiene factors can prevent employee dissatisfaction but are not considered sources of satisfaction or motivation.
Human Motivation Theory. In his 1961 book The Achieving Society, psychologist David McClelland built on Maslow’s work and identified three intrinsic human needs: achievement, power and affiliation. By understanding which needs an employee prioritizes, employers can increase their job satisfaction. Some employees, for example, may be embarrassed by public praise. Some work best with goal-oriented tasks.
Job Characteristics Model. Organizational psychologists Greg R. Oldham and J. Richard Hackman found the following job characteristics increase job satisfaction: skill variety, task identity, task significance, autonomy and feedback. Jobs created with these characteristics 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 a résumé left in view or an increase in extracurricular appointments. However, there are more subtle behaviors that signal someone may be thinking about leaving. They include:
- Decreased initiative or productivity. An individual thinking about leaving may no longer put in extra effort or may seem noticeably less interested in pleasing others.
- Shift in attitude. Negativity — about the job, a manager or co-workers — can be a sign an employee is ready to move on.
- Lack of commitment. Employees who are heading out the door may avoid long-term projects or put in shorter days.
- Dwindling enthusiasm. Individuals considering their options may seem noticeably disconnected from the organizational mission or less eager to work with clients 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 special projects. Employers can also benefit by conducting “stay interviews,” which are the inverse of exit interviews. Stay interviews examine key drivers of retention and what the company can do to meet an employee’s desires.
How to Improve Employee Retention
Improving employee retention begins with hiring the right person. This requires defining the job itself — responsibilities, required skills, work environment — and developing a fine-tuned job description that attracts appropriate candidates.
Once an organization has chosen a new hire, orientation and onboarding are key to making them feel welcome. A well-planned and organized onboarding program has been shown to increase employee retention, engagement and commitment. In addition, competitive compensation and employee benefits are important not only for recruiting the best and brightest, but also for keeping them. So are competitive bonuses, paid time off, health benefits and retirement plans.
Finally, employees value meaningful work that makes good use of their skills and abilities. Career development and growth opportunities are other critical aspects of employee retention, as is recognition for their contributions.
Measuring & Monitoring Employee Retention
Measuring employee retention starts with tracking turnover and annual retention rates. But the most successful employee retention programs collect and analyze a wide range of data, including employee satisfaction and engagement, more nuanced retention and turnover information, and other issues like absenteeism. These measures offer a more detailed understanding of employee retention, which can be used to inform recruiting and hiring strategies, address cultural and management issues, and improve employee satisfaction and engagement. Examining these retention metrics from a variety of angles also enables the business to focus its retention efforts on top talent.
Some organizations that experience large, expected fluctuations in departures — for example, those with significant seasonal or contingent workforces — may make adjustments to their retention calculations in order to account for those expected employee exoduses. As with retention rates, HR and business leaders can also analyze specific characteristics of their turnover rates, calculating figures by manager, longevity and high and low performers, for example.
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 useful for collecting and analyzing key employee retention metrics. It also helps manage overarching goals for employee retention programs and correlates metrics to overall business performance.
In addition, HCM software can provide analytics that streamline the creation and presentation of reports, helping HR leaders highlight the strategic impact of investments that increase employee retention. This is becoming even more important given the constant changes in workforce needs, economic pressures and market fluctuations.
An effective employee retention strategy is a crucial component of a comprehensive human capital management practice in all industries. Focusing on improving employee retention and addressing preventable involuntary turnover pays dividends across the organization.
Creating a successful employee retention approach takes significant effort, executive oversight and targeted investment. Organizations that fail to focus on employee retention can suffer significant costs related to finding, recruiting and training replacements, as well as reduced productivity, lost knowledge and lower morale.
Employee Retention FAQ
What is the meaning of employee retention?
Employee retention is defined as an organization’s ability to hold on to its employees. It refers to the strategies an organization develops to mitigate employee turnover risks and the processes it puts in place to increase retention of top talent.
How do you increase staff retention?
Improving employee retention begins with hiring the right person. From there, strategic onboarding practices have been shown 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 at organizations for a variety of reasons, including meaningful work that leverages their skills and abilities, career development and growth opportunities. Competitive salaries and benefits are other reasons that workers stick around.
What are the five main drivers of retention?
The reasons employees stay on the job vary, but many commonalities exist. They include being treated with respect, fair compensation, feeling trusted and empowered, job security and the ability to use their skills and abilities to do their best work.