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<i>Dear Workforce</i> How Much Time Should We Spend Figuring Out Our Retention Rate

February 4, 2009
Dear Sweating the Details:

Calculating retention is easy. If you have 100 employees start work this month, and 10 of them leave before the end of that month, your retention rate is 90 percent. The retention-rate formula is:


No. of people employed on the first day of the month,
who remain in your employ on the last day of the month (100 – 10 = 90)

No. of employees who started the month (100)
Although calculating your retention rate is interesting, it can be misleading. Using the retention formula, it appears that you lost only 10 employees during the month. What happens if you hired 50 employees after the first day of the month and 40 of them left before the end of the month?
A better measure is turnover rate. There are many ways to compute a turnover rate. The simplest approach is:
No. of employees terminating during the month (10 + 40 = 50)

No. of employees who started the month (100)
Even though your retention rate is 90 percent, your turnover rate is 50 percent.

Although the turnover rate does reveal more than the retention rate by itself, neither tells the whole story. Using the turnover formula, it appears that you are in serious trouble. At this rate, you'll be all by yourself in a very short period of time. Adding in additional elements will provide you a better sense of what is really going on.

Examine voluntary versus involuntary turnover
If you want to reduce turnover, you really need to know how many people are leaving voluntarily. Of the 50 exiting employees in the example above, 39 left as a result of permanent layoffs and one was fired for insubordination. The remainder (10) left for jobs offering more money. The formula for voluntary turnover is:
No. of employees leaving voluntarily (50 – 39 – 1 = 10)

No. of employees who started the month (100)
While your turnover rate is still 50 percent, your voluntary rate is only 10 percent.

Analyze special characteristics
You can focus on specific characteristics to get even more value out of turnover statistics. Many organizations look at longevity, shift, employee succession planning status, protected class and other factors to find out what kind of employees they are losing. Companies also frequently monitor turnover by supervisor, a typical source of voluntary turnover, and departmental turnover.

Assume that of the 10 people who left voluntarily, five left in the first week of employment and two were considered high potentials for succession planning purposes.

You could easily determine the percentage of voluntary turnover attributable to employees who came and quickly left (within the first 30 days, for example) by using the formula below. In this example, five employees left within 30 days of hire, so the turnover rate would be 50 percent (5 short-term employees / 10 voluntary terminations).
No. of employees leaving with the selected attribute

No. of employees leaving voluntarily (10)

Alternatively, if you want to determine the percentage of turnover attributable to those considered high potentials from the above example, you would plug "2" into the numerator (the number of identified high potentials who left) and divide by 10 voluntary terminations, resulting in a 20 percent turnover rate of high potentials. You could use this same formula for many attributes and could easily modify it for involuntary termination analysis as well.

A finishing touch
While most will find these simple formulas good enough to give them the directional information they need, some want more precision. Many of the more sophisticated formulas compute turnover based upon "average headcount." To determine the average, add the number of employees at the beginning of the period to the number at the end of the period and divide by two. Some formulas go into even further detail.

It makes sense to focus your time, effort and resources on fixing what you can fix. Good turnover analysis will help you figure out where to begin to look for avoidable causes.

SOURCE: Richard D. Galbreath, SPHR, Performance Growth Partners Inc., Bloomington, Illinois, March 26, 2008.

LEARN MORE: You could also use your retention rate to measure hiring costs. Also of interest is Workforce.com's archive on retention.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.