Employee retention is the ability of a firm to convince its employees to remain with the business. It is often measured by the labour turnover of a business.

Labour turnover is defined as the proportion of a firm's workforce that leaves during the course of a year.

The formula for calculating labour turnover is shown below:

An example of using the formula is shown below:

It is important to remember that all businesses lose staff – for a variety of reasons:

  • Retirement / Maternity / Death / Long-term Illness
  • Unsuitability
  • Changes in strategy (e.g. closure of locations)

In terms of this part of the course, we are more concerned with the loss of staff for reasons other than above. You might call this voluntary staff turnover – employees who leave of their own accord.

It is important to remember that labour turnover levels vary between industries. Successive surveys of labour turnover show that the highest levels are typically found in retailing, hotels, catering and leisure, call centres and among other lower paid private sector services groups.

Labour turnover levels also vary from region to region. The highest rates are found where unemployment is lowest and where it is unproblematic for people to secure desirable alternative employment.

There are many reasons why a high labour turnover figure (poor employee retention) may cause problems for a firm:

  • Increases recruitment costs (e.g. advertising for replacement staff; employing temporary staff whilst the job vacancies are filled)
  • Reflects poor morale in workforce and so low productivity levels
  • Increases training costs of new workers
  • Loss of productivity while new worker settles in

However, there are some advantages of a firm experiencing labour turnover:

  • It gives the chance for new people to be brought into the business who may have fresh ideas and up to date market knowledge.
  • Workers with specialist knowledge or expertise can be employed rather than having to train up existing lower skilled employees.

A business can improve its employee retention by offering:

  • Financial incentives (e.g. bonus, salary rise)
  • Non-financial incentives (e.g. promotion, more decision making power)
  • Improving the effectiveness of its recruitment and selection processes so that fewer unsuitable employees are recruited in the first place
  • Conducting research to understand why employees are leaving (through exit interviews or surveys)

A business may also have to adopt more flexible working practices in order to retain staff and fit in with the changing trend in UK employment and working patterns. For instance, there is a greater emphasis currently being placed on "flexible hours contracts" and part-time working. This is mainly to allow for the growing number of women joining the workforce who have to juggle childcare and their working lives.

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