Talent management | Why measuring employee retention & turnover matters

Why measuring employee retention & turnover matters

Effective recruitment is vital for organisational success, as hiring the right individuals is crucial. However, retention is equally important to avoid high costs and low productivity. HR uses turnover and retention rates to assess performance and gain insights into employee satisfaction. This article explores the significance of measuring these metrics and clarifies the difference between turnover and retention.

Two critical tools in HR's arsenal for analysing their performance as a workplace are employee turnover and retention rates. Often used in conjunction (and sometimes interchanged), turnover and retention are vital metrics that help to shine a light on crucial aspects of how an organisation is performing as an employer.

In this article, we will look at why measuring these two metrics are so important. But first, we need to understand the difference between them.

This difference between turnover and retention

Put simply, employee turnover looks at people leaving an organisation, while employee retention refers to how long people stay.

But there's more nuance and detail to understand the importance of both metrics truly.

Employee turnover helps HR teams measure employees' movement, including new hires and can include voluntary and involuntary turnover.

To calculate the turnover rate, SHRM recommends dividing the number of separations (employees who left) by the number of employees still in place - x100 for a percentage.

So, for example, three voluntary leavers and one involuntary in December amongst a workforce of 125 employees would work out as 4 / 125 = 0.032 x100 = 3.2% for that month.

Retention looks at the rate at which people stay loyal to an organisation and are typically calculated over a more extended period of time for a better, macro view of organisational performance as an employer. For accuracy, this only considers in-situ employees and not new starters.

The calculation is based on a given measurement period, which can be an entire year or, for the largest organisations, a quarter. It includes the number of employees who remained during that period, divided by the number of employees who were in situ at the start. Remember that retention doesn't include new hires who arrive within that measurement window.

If you have 255 employees in April 2023 compared to 275 in April 2022, but five of the current employees are new starters, then your calculation would be 250 / 270 = 0.91 x100 = 91% (with a little rounding up).

Why turnover and retention matter

Turnover and retention matter because of their direct consequences for a business and what they tell an organisation about its performance as an employer.

For an organisation that enjoys low turnover and high retention, it can presume that:

  • It has highly engaged and loyal workers

  • Workers are happy and feel fulfilled

  • Workers feel that they have a good work/life balance and a positive wellbeing

  • The organisation won't need to allocate more budget to recruitment

  • Pay and benefits are competitive

  • Employees are given opportunities for progression

  • Management are doing a great job

  • The organisation is working as one to pull towards a shared goal

For an organisation with high turnover and low retention, it can begin to understand that:

  • Staff may be stressed by current workloads or not challenged enough

  • Management might not be listening to staff concerns or feedback

  • Employees are disengaged or have 'quiet quit' (more on that later)

  • Pay and benefits aren't commensurable with the going rate

  • Recruitment processes might not accurately reflect company needs and values

  • Recruitment costs are higher than would otherwise be liked

Only by measuring these types of metrics that HR and organisations at large can paint an accurate picture of what's going on within the workforce.

Aspects like engagement, for example, which is critical for overall performance and profitability, directly contribute to positive or negative retention rates.

The ideal for any business is low turnover and high retention. However, sky-high retention rates aren't always a good thing.

Read more: What is 'Quiet Quitting', and how can employers combat this latest trend?

New data has suggested that as many as two in three UK professionals have 'quiet quit' their jobs and only put in the minimum required effort. Therefore, The challenge for employers is to determine whether high retention equates to a settled, engaged and highly motivated workforce.

Putting HR tech to work

You can't improve what you don't measure, and without the right HR tech in place, it's hard for organisations to measure anything people-related.

HCM systems are constantly evolving to meet the rising demands and new challenges that HR professionals face daily. Understanding how employees feel and, in terms of turnover, why they might be voting with their feet and leaving the organisation are critical data points that HR analytics play a key role in calculating.

Readily-available data can be more easily analysed and understood, helping HR teams to spot problems and find solutions sooner.

And this forms part of a broader toolset that modern HR teams need to meet an organisation's people-based objectives, on top of excellent recruitment, engagement, feedback and payroll systems.

If turnover and retention are critical points on your HR agenda right now, but you don't have the tools to calculate either measure quickly, then it might be time to reassess your HR technology stack.

At Phase 3, we help organisations like yours to understand what they need from their HR and payroll software, find the perfect solution and then help them onboard their new platform too.

All the benefits of market-leading software solutions… without the research and implementation headaches.

Learn more about how our award-winning teams can support your system selection process here.

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