How to accurately calculate your employee retention rate

Losing great team members is never easy, and for growing companies, it can be especially tough.

Suddenly, you're stuck in a cycle of recruiting, training, and saying goodbye to valuable team members – all while trying to keep your business running smoothly.

That’s why tracking your employee retention rate is so important. It gives you a clear picture of how well your team is sticking around and whether your company culture, onboarding, and development strategies are actually working.

In this blog, we’ll walk you through:

• How to calculate employee retention rate
  
  
• What your retention rate says about your company
  
  
• What to do next, especially if the numbers aren’t where you want them to be

Let’s start by breaking down why this one metric can give you powerful insights into your business’s health

Why employee retention rate matters

Think of employee retention as the window into the soul of your business. 

Ok, that seems dramatic, but when appropriately measured and taken in context, it reveals how healthy your company culture is, the effectiveness of your management practices, and overall team wellbeing and longevity. 

We should acknowledge that some level of employee turnover is inevitable, but it has been trending upwards in recent years. 

According to recent research, the average employee turnover rate in the UK is a staggering 34%. Over a third of employees are waving goodbye to their jobs every single year. 

Let’s take a look at the impacts:

The high price of saying goodbye

Losing an employee is notoriously expensive, costing anywhere from half to twice their annual salary. So, at £50,000 per year, the worst-case scenario is a £100,000 hit if they leave. 

It seems high, but in addition to the cost of hiring, onboarding, training, etc, high turnover dents your productivity. It can take months to years to get up to speed and maximise output.

And if your company starts getting a reputation as a revolving door? Attracting top talent definitely becomes tougher. 

An important engagement signal

If your retention rate is rock-solid and people love making careers with your business, it reflects positively on the business. Here’s what Gallup found in their most recent global workplace study:

• Companies with engaged employees see 17% higher productivity and 21% higher profits.
• Happy teams lead to happy customers - companies with engaged workers enjoy 10% higher customer ratings.
• Teams that are feeling engaged have 41% lower absenteeism and 59% lower turnover.

Conversely, if your retention rate is dragging along, it’s a red flag that something's not right. 

Root causes range from external (e.g., trends affecting your entire industry) to internal (stress, burnout, toxic culture), but the raw retention figure can nearly always be improved.

Employee retention rate formula

Alright, now that we've covered why employee retention rate is so important, let's dive into how to calculate it.

The formula is surprisingly simple:

Employee retention rate = (Number of employees who stayed for the whole measurement period ÷ Number of employees at the start of the measurement period) x 100 

However, there are a few steps you’ll need to run through to make it work:

Step 1: Define your measurement period

First things first: decide on the time frame you want to measure. Are you going to calculate your retention rate monthly, quarterly, or annually? There's no right or wrong answer – it all depends on what makes sense for your business.

If you're in an industry with high turnover (like retail or hospitality), you might want to be more proactive and measure retention monthly.

Step 2: Gather your data

Next, it's time to round up your employee data. You'll need:

• The number of employees you had at the start of your measurement period
• The number of employees who stayed with your company throughout the entire period

If you're using HR software, this should be a breeze. But if you're still using spreadsheets or a filing cabinet, it might take a bit more work.

Step 3: Crunch the numbers

Plug your numbers into the retention rate formula: (Number of employees who stayed ÷ Number of employees at the start) x 100 = Your retention rate

Here’s an example. Say you're the proud owner of a booming startup with 50 employees at the beginning of the year. Over the course of the year, five employees bid you adieu for greener pastures.

To calculate your retention rate, the formula would look like this:

(45 staying employees ÷ 50 total employees) x 100 = 90% retention rate. 

The resulting retention rate of 90% or turnover rate of 10% would be far better than the UK average of 30 %+ (when calculated annually). 

However, in reality, the result is highly dependent on your business and industry. So, to interpret your number, you need to see how it stacks up against the competition. 

What's a good retention rate for your industry?

The truth is, there's no one-size-fits-all answer. What's considered a "good" retention rate can vary wildly depending on your industry, company size, location, and other factors.

Here’s how retention rates (from CIPD) compare to median tenure (from the Vestd 2024 Employee Retention Report). Together, these figures show retention and how long people tend to stay at the job on average.

For more juicy insights on how your industry stacks up in terms of retention, be sure to check out our full Employee Retention Report. It's full of data and actionable takeaways on how to retain and engage your team. 

What's next after calculating your retention rate?

If you're consistently outperforming your industry benchmark, it’s a great sign. 

But don't get too comfortable, there’s always room to make your workplace even more attractive to top talent.

If you're falling behind, don't despair. It could simply mean that parts of your employee experience need a little attention, like your onboarding process, career development paths, or even how recognised and rewarded your team feels.

The good news? There are plenty of practical ways to turn things around.

We’ve rounded up proven strategies that growing SMEs can use to boost retention, from fostering a culture of feedback to offering equity and ownership through share schemes. 

Share schemes, in particular, are a powerful way to increase commitment and motivation. When employees have skin in the game, they’re more likely to stay invested—literally and emotionally—in the business.

That’s where Vestd comes in. We make it easy for SMEs, no matter your company size, to set up and manage employee share schemes without the jargon or hassle. If you’re thinking about rewarding your team with ownership, we’ve got the tools and support to help you do it right.

Learn more about how Vestd can help →

Wrapping up

Understanding how to calculate your employee retention rate is more than just a numbers game; it’s about getting a clear picture of how well your business is supporting and retaining its people. 

By regularly tracking this metric, you can spot patterns, identify challenges early, and make informed decisions to create a workplace where great people want to stay. 

The formula is simple, but the insights it brings are powerful.

So, whether you're a founder, SME business owner, HR manager, or MD, make retention a key part of your strategy, not just for the sake of the numbers, but for the long-term success of your company.

Ready to take the next step? Start measuring your retention rate today and use it as a guide to build a happier, more engaged team.

And if you need ideas on how to boost your retention, check out our practical tips for improving employee retention.