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HR Party of One is brought to you by BerniePortal.
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Today, we're tackling a question that many HR professionals ask:
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What is the ideal retention rate? Spoiler alert: it’s a bit more complicated
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than a single number. But by the end of this episode, you’ll have a good understanding of
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what factors into an ideal retention rate and how to set goals that align with your
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company’s industry, culture, and size. In this episode, we’ll discuss:
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What Retention Rate is, Why It’s Important,
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And How To Determine An Ideal Retention Rate For Your Company,
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Let’s get started!
Understanding Retention Rate
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Understanding Retention Rate.
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First, let’s start with the basics. Retention rate measures the percentage of employees
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who stay with a company over a specific period. It’s the inverse of turnover rate,
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which tells us how many employees leave. Retention rate is usually calculated annually
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and is a helpful metric for understanding employee engagement, job satisfaction, and company culture.
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To calculate retention rate, subtract the number of employees who left during
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a period from the number of employees at the start of the period, Then,
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divide that number by the number of employees at the start of the period, and multiply by 100.
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Suppose a company starts the year with 200 employees. During the year, 30 employees leave.
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Subtract the number of employees who left from the number at the start:
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200−30=170 Divide that number by the number of
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employees at the start of the period: 170/200 = 0.85
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Then multiply by 100 to get the retention rate: 0.85×100=85%
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In this example, the company’s retention rate for the period
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is 85%, meaning that 85% of the employees remained with the company during the year.
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What’s Considered an ‘Ideal’ Retention Rate? Now, onto the big question—what is the
What’s Considered an ‘Ideal’ Retention Rate?
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'ideal' retention rate? There’s no one-size-fits-all answer. What’s
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considered “good” varies greatly across industries, company sizes, and role types.
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Industries like hospitality and retail often see higher turnover rates and lower retention rates
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ranging from 55 to 63% due to the nature of the work, which is often seasonal. On the other hand,
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industries like finance and tech aim for higher retention rates,
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where around 85-90% is often considered healthy. But even within these industries,
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factors such as company size and specific role types influence what retention rate is ideal.
How to Determine an Ideal Retention Rate for Your Organization
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How to Determine an Ideal Retention Rate for Your Organization.
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Determining an ideal retention rate involves analyzing both internal and
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external factors. Here’s a step-by-step approach:
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Step 1: Analyze Industry Benchmarks and Competitors.
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Start by researching the average retention rates in your industry. This helps set realistic
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targets and reveals how your organization compares to competitors. For example,
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if your industry has a typical retention rate of 70%, setting a target above that
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benchmark can give you a competitive edge in attracting and retaining talent.
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Step 2: Assess the Impact of Company Size on Retention Rate.
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Retention rates are often shaped by the unique dynamics of company size:
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In small companies with fewer than 20 employees, each departure significantly
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impacts retention. Imagine a marketing firm with 15 employees; if two leave,
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the retention rate drops by over 13%. In small teams, each individual plays a critical role,
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so even a few exits can disrupt morale, workloads, and company culture.
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In larger organizations, turnover may be more predictable at the macro level,
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but numbers still matter. For example, if a company with 1,000 employees sees 100 exits,
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that's a 10% turnover rate, which may not seem disruptive overall. However, specific
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departments can feel the impact more deeply. If 10 members leave a 25-person tech team, the retention
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rate for that team alone drops by 40%, disrupting timelines and collaboration. When assessing your
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ideal rate, keep in mind the ripple effects of turnover within individual teams or departments.
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Step 3: Evaluate the Role Types and Their Impact on Retention Rate.
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Certain roles naturally come with higher turnover due to job nature:
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-Sales roles, for instance, often see high turnover because of performance
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demands and variable compensation. Many companies anticipate this and set lower
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retention targets for sales roles than, say, for accounting or operations roles,
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where expertise and continuity are especially valuable.
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Customer service roles also tend to have high turnover. Many employees see these
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positions as stepping stones, leading to a more realistic annual retention target of 50-60%.
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Project management and technical roles, however, typically require more continuity,
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with ideal retention rates around 85-90% to support long-term goals. Even small drops in
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retention within these roles can disrupt projects and innovation. Companies often
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invest heavily in upskilling and mentorship to retain talent in these critical roles.
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Step 4: Evaluate Your Company’s Mission and Culture.
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Reflect on your company’s mission, values, and culture. Companies with strong cultural
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alignment often enjoy higher retention rates. If your organization’s purpose is
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particularly resonant—such as a non-profit with a powerful mission—consider setting a
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higher retention target, as employees may stay out of loyalty to the cause.
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Step 5: Assess Employee Development and Career Path Opportunities.
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Evaluate your company’s commitment to employee development, which often correlates with
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higher retention. If you offer robust training, mentorship, and clear career paths, set a higher
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retention target to reflect this investment in growth. Companies that foster continuous
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learning tend to experience higher retention as employees see long-term potential in staying.
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Step 6: Consider Work-Life Balance and Flexibility.
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Policies around work-life balance and flexibility play an increasingly crucial role in retention.
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Organizations that support flexible hours or generous paid time off often see higher
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retention due to the satisfaction these benefits bring. If you offer these or other similar perks,
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consider a higher retention target that aligns with employee satisfaction.
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Step 7: Reassess Regularly and Track Key Metrics.
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Setting an ideal retention rate is not a one-time task. Regularly reviewing your
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retention goals ensures they remain relevant to your organization’s evolving needs.
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Monitor Retention by Role and Department: Track rates across different teams to spot
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any patterns that may require specific retention strategies. Departments with
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high turnover may need targeted support or adjustments to your retention goals.
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-Use Engagement Surveys and Exit Interviews: These tools provide valuable insights into employee
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satisfaction and reasons for leaving. Engagement surveys reveal early signs of potential turnover,
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while exit interviews help identify trends. Use this feedback to refine your retention
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strategies. Using the performance management feature of an all-in-one HRIS like BerniePortal,
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you can easily distribute pulse surveys to collect employee feedback and assess engagement.
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Benchmark Against Industry Standards: Annually compare your retention rate
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to industry benchmarks to maintain competitive goals. Staying informed on industry norms allows
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you to adapt to any shifts and ensures your targets reflect current standards.
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By consistently monitoring these metrics, you’ll be able to adjust
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your retention goals proactively. For a deeper dive into retention strategies,
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check out our BernieU course on Retention Essentials. I’ll link
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it in the description. Remember—your role is as strategic as you make it!
