What is a Healthy Retention Rate?

As W. Edwards Deming argues in Out of the Crisis, a number doesn't tell you much until you understand the system behind it.

That's why the question "What is a healthy retention rate?" rarely gets a straightforward answer.

You may bring an industry benchmark number into the boardroom only to have it fall apart under the scrutiny of a few questions.

Does it reflect your company's history?

Does it account for your culture, goals and hiring challenges?

Probably not.

As an HR leader, you'll need to look beyond the headline number to understand who's leaving, why they're leaving, and what that turnover is costing you.

In other words, you'll need to get your hands a little bit dirty by crunching your own data, to spend a few hours in Excel, and to go through the numbers to determine whether your retention rate is actually healthy.

In this article, we'll discuss the cost of employee turnover, how to analyze your retention rate, and what a good retention rate might look like for your organization.

What is the cost of employee turnover?

As an HR leader, you understand that there are hidden costs associated with employee turnover. This understanding helps you understand the financial impact of turnover and the strategic direction needed to improve employee retention.

Cost to hire

The most obvious cost related to turnover is the cost to hire. This includes the cost of advertising the job through various platforms, such as job boards, social media, and the company website. You may also need to pay external recruitment agencies to help you source and screen potential candidates.

In addition, your own internal resources are invested in the hiring process. Your HR team and hiring managers spend time sorting through resumes, conducting interviews, finalizing hires, and onboarding.

You'll also need to invest time in training your new hire to get them up to speed with their role and the company's culture. This training, whether formal or informal, costs your organization resources.

In large organizations where hiring is a frequent event, these costs can add up.

Lost productivity

The next cost is less obvious, but it can be significant. This is the cost of lost productivity. When an experienced employee leaves, their replacement, no matter how qualified, will take time to reach the same level of productivity.

This is especially noticeable if the employee who left was a high performer or they played a specialized role. While the new employee is getting up to speed, the company may experience a slowdown in its ability to complete projects, deliver services, or respond to customers.

In addition, the remaining team members may have to temporarily take on additional responsibilities, leading to overwork or burnout.

Loss of knowledge

Another significant cost of employee turnover is the loss of knowledge. Each time an employee leaves, the organization loses an irreplaceable amount of specific know-how and insights they've stored over their time with the organization. This knowledge is deeply embedded in their experience with the organization, and it likely includes a nuanced understanding of its business processes, client relationships, and team dynamics.

While knowledge management practices can help capture some of this information, much of it is tacit or 'know-how' that isn't easily transferred. So when an experienced employee leaves, they take this institutional memory with them, creating a challenging void.

Analyze your turnover rate

Any HR leader can tell you that turnover is expensive.

But to reduce turnover effectively, you need more than just a general understanding of the costs of turnover. You need to understand your organization's turnover rate at a granular level.

What do we mean by this?

Well, it's not enough to simply know your turnover percentage. You need to analyze the types of employees that are leaving, the reasons they're leaving, and when they're leaving.

Who leaves and who stays

The first thing you need to do is understand who your organization's turnover impacts.

Is the person leaving an employee who you'll truly miss?

You need to differentiate between regretted and unregretted turnover.

Regretted turnover is when a star player leaves and your team suffers as a result.

On the other hand, unregretted turnover is when an underperforming or disruptive employee leaves and the team's performance improves.

Identifying and understanding the difference is important. It allows you to focus your retention efforts where they're needed.

Why do they leave

Turnover is a complicated issue, and the reasons for turnover vary.

New employees may leave due to a mismatch between their expectations and the reality of the job or because they've received a more appealing offer elsewhere.

Tenured employees may leave due to a lack of growth in their role, unrealized career progression expectations, or dissatisfaction with their compensation or work-life balance.

Exit interviews are one way to uncover these reasons.

When do they leave

The final piece of your turnover rate analysis is understanding when employees leave.

Do you have a high turnover rate at certain times of the year? Are you able to spot any correlations between your turnover rate and company events or periods of high workload?

If you notice employees tend to leave in batches after bonuses are paid or equity vests, it may be a sign that these financial incentives are the main things tying people to your organization.

If you notice an uptick in turnover following high workload periods, it may be a sign that you have deeper issues related to burnout, work-life balance, and job design.

Understanding these patterns allows you to address these issues proactively, develop prevention strategies, and create a culture that encourages retention.

In general, analyzing your turnover rate - who leaves, why, and when - gives you the insights you need to mitigate turnover.

This process allows you to spot trends, understand issues, and develop targeted interventions.

What is a good retention rate?

Determining what a "good" retention rate is can be difficult due to the many factors involved.

Nonetheless, if you're an HR leader, this is something you need a grasp of to understand whether your retention efforts are working. While industry benchmarks are a nice starting point, you also need to understand what kind of turnover your organization experiences (e.g. regretted vs unregretted turnover) to make things comparable.

Compare with your industry

The most useful thing you can do to understand the health of your organization's retention rates is to compare it to your industry's average retention rates.

Turnover and retention rates tend to follow industry patterns due to factors like the nature of the jobs, the individuals working in those jobs, and the competitiveness of the market.

Understanding where you stand can help you determine whether your retention efforts are successful or whether there's room for improvement.

According to LinkedIn's figures, the turnover rate is roughly the same across industries, but there are some differences:

Regretted vs unregretted turnover

As we mentioned earlier, turnover isn't always a bad thing.

When top performers leave, this is known as "regretted turnover", and it can negatively impact your organization.

On the other hand, "unregretted turnover" occurs when poor performers or problematic employees leave, potentially improving team dynamics and overall performance.

It's worth noting that some companies like Amazon, Twitter, and Tesla deliberately aim to generate some amount of turnover by demanding high performance and introducing changes that make the workplace more competitive.

While this can drive business results, this kind of strategy can also impact employee morale and engagement, contributing to higher turnover rates.

How to use employee surveys to reduce turnover

Now that we've shed light on the costs associated with turnover, dissected its analysis, and considered the elements of a 'healthy' retention rate, let's focus on a practical tool in your arsenal for combating high turnover: employee surveys.

These are far from just rudimentary questionnaires; if leveraged correctly, employee surveys serve as a rich wellspring of insight into your team's sentiments, experiences, and desires.

Use frequent pulse surveys

Among the variety of employee surveys, pulse surveys stand out as an incredibly useful tool. By conducting these short, focused surveys on a regular basis, you can keep your finger on the pulse of your organization, hence their name.

Pulse surveys give you a real-time glimpse into the state of employee morale, job satisfaction, and perceived productivity, helping you pinpoint strengths and identify areas in need of attention. For instance, solutions like Sparkbay can be invaluable in facilitating these surveys, given their user-friendly interface and robust analytics capabilities.

By creating a cycle of regular check-ins, you ensure that minor issues aren't left unattended until they escalate into significant problems causing regretted turnover.

Act on feedback

Gathering feedback from employees, while important, is only the first step in a longer journey. The power of these surveys lies in the actions they precipitate. Thus, converting this feedback into tangible change is paramount.

Simply generating colorful reports for management presentations won't suffice. Your role as an HR leader involves dissecting this feedback, extracting valuable insights, and translating them into concrete actions that address employee concerns and enhance their experience.

Platforms like Sparkbay not only simplify the survey process but also provide intuitive tools for data analysis and visualization, enabling you to better interpret and act on feedback.

When employees see their feedback leading to meaningful changes, it validates their contributions, instills a sense of being valued, and encourages further engagement. This not only enhances job satisfaction but can also significantly reduce regretted turnover, leading to a healthier retention rate.

Ultimately, the effective use of employee surveys, facilitated by platforms like Sparkbay, can be an essential part of your strategy to reduce turnover.

Final thoughts

What is a "healthy" turnover rate? As you can see, it's a complicated question that depends on your organization.

But by understanding the costs of turnover, analyzing your turnover, benchmarking against industry norms, and actively using employee feedback, you can make informed decisions as an HR leader.

This balanced approach, which values both business performance and employee satisfaction, can help you create an environment where your employees feel valued, leading to a lower turnover rate and a healthier organization.

Understanding and managing turnover is complex.

As an HR leader, you need to understand the costs, analyze your turnover, benchmark, and act on employee feedback to make real improvements.

A balanced approach that values both business performance and employee engagement is key to creating a work environment that values and retains its employees.

If you're interested in learning how Sparkbay can help you build a more engaged workforce, you can click here for a demo.

If you're interested in learning how Sparkbay can help you build a more engaged workforce, you can click here for a demo.