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HR can better figure out how well the organization keeps quality talent and where the problem areas are by knowing how to calculate employee retention and turnover rates.
Being knowledgeable about retention and turnover gives HR a leadership role in the business that can be quantified in dollars and cents.
"With unemployment continuing to drop, recruiting is getting tougher and organizations cannot afford to just go hire someone else—companies need to understand why employees stay and what causes them to leave," said Sharlyn Lauby, president of ITM Group Inc., a consulting firm in South Florida that helps companies improve employee engagement and retention.
"Turnover rates have always been the rudder that steers the HR ship," said Paul Falcone, author and HR executive based in Los Angeles. "The organization's turnover rate gives HR so many opportunities to realign structure and processes, but more importantly to strengthen the muscle of front-line leadership. And in doing so, HR has the greatest opportunities to partner with its line-manager clients to make substantial cultural change."
After figuring in the replacement cost for departed talent and the time to get new hires up to speed, HR can calculate real cost savings, Falcone said. "Lowering turnover from 25 percent to 22 percent has a real benefit to the organization, and just like losing weight, once you can see the needle start to move, it encourages all leaders to get on board."
Retention and Turnover Work Together
Retention and turnover rates measure complementary—but different—things, and HR will be better able to engage in workforce planning, present a recruiting strategy or correct workplace culture issues by calculating both metrics.
"I think of turnover as the rate people are leaving the organization and retention as the rate people are staying," Lauby said. "The reason they're not the same number is because it's possible to have positions within the organization that are a proverbial revolving door. Those positions will impact the turnover number but they don't impact the retention number."
Essentially, both rates measure an organization's stability. High turnover and low retention likely indicate employee morale issues that must be addressed.
In addition to turnover, Falcone focuses on the percentage of internal promotions to backfill open positions. "All else being equal, healthy internal promo rates, coupled with low turnover, basically tell you that the organization as a whole should be functioning smoothly and efficiently," he said. "If a company discovers that it's not particularly successful at filling internal positions using its own bench or talent pipeline, then a key organizational focus may be on strengthening both the technical and soft skills of its front-line individual contributors. The two metrics are also an excellent indicator of a healthy culture in pre-deal due diligence when a merger or acquisition may be at hand."
According to the Society for Human Resource Management (SHRM), the basic formula for calculating retention is the number of individual employees who remained employed for the entire measurement period (such as a year, or a quarter) divided by the number of employees at the start of the measurement period, multiplied by 100.
[SHRM members-only Q&A: How do I calculate retention? Is retention related to turnover?]
Be sure to only include workers who were employed throughout the entire period being measured, from the first day to the last. People hired during the measurement period should not be counted. The retention rate is often calculated on an annual basis, but more-targeted measurement periods and worker groups can be tracked for narrower results. HR should calculate the rate for each department in addition to the entire company.
"Organizations will want to choose a measurement period that makes sense for their business," Lauby said. "They will also want to decide how to define the employee population. For example, a company might want to specifically know manager retention, or the overall retention at a particular location. In organizations with a large employee population who all hold the same job title, such as customer service representative, it might make sense to calculate retention by title."
The data can help zero in on what types of workers an employer is likely to retain.
By figuring out the turnover rate, it will complement the retention rate by showing the percentage of voluntary separations during the same measurement period. Terminations and layoffs should not be counted.
[SHRM members-only how-to guide: How to Determine Turnover Rate]
SHRM's formula for calculating turnover is the number of separations during the measurement period divided by the average number of employees during the measurement period, multiplied by 100.
"Like retention, organizations will want to define positions and time frames," Lauby said. "One additional thing to consider is when organizations have a large on-call, seasonal or contingent workforce, there needs to be a discussion about how to calculate turnover for those employees. If the company doesn't draw a distinction, then the numbers will be skewed when those seasonal workers leave."
Using the Metrics
Once retention and turnover rates are figured, it's time to analyze the results before presenting the data on the connection between retention, turnover and cost; designing an improvement plan; or recognizing areas of the business that seem to be keeping employees happy.
Watching for trends is important, Lauby said. "I once worked for a company that noticed a spike in turnover in the second quarter every year. After investigating, we realized it coincided with the payment of annual bonuses. The company could address the matter and eliminate the turnover spike."
Working from retention and turnover rates can also lead HR into valuable partnerships with other front-line leaders, Falcone said. "In fact, collaboration between HR and front-line clients focused on lowering turnover can drive an HR team's key performance goals for years."
Beneficial takeaways that can come from such partnerships include recrafting the interview process to find better cultural fits, creating and maintaining onboarding and mentoring programs, and devising career growth and professional development opportunities.
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