- Start with the right definitions
- Keep system impact in mind
Everyone knows that personnel retention is an important challenge for organizations. Organizations should invest in their good employees and expect this to be reflected in a longer period of time that these individuals continue to work for the company. In the current labor market, it must be a win-win relationship. In order to work towards this win-win situation, a company of any size must have the necessary reporting so that they can follow these developments. How many people have received training, on which projects are they active, what roles have they fulfilled, what is their satisfaction about the employer,…
The fact that this basic reporting is not easy has already been elaborated in a previous article. Balanced reporting on a topic consists of both leading and lagging indicators. The leading indicators have a predictive power : "if we take all these measures, and also follow them properly, we will probably achieve the strategic objective". In this article we take a closer look at the "lagging indicator" of these measurements: retention and tenure. A lagging indicator is rather a result of the decisions taken and confirms whether the measures taken actually lead to the desired result.
What is tenure?
To start, some definitions of tenure:
- “Tenure is the length of time an employee has worked for an organization”
- “Tenure is used to find out how long employees stay at a firm”
- “Tenure is a period of successive months in which a person received some earnings each month from the same employer”
As always definitions are too vague to build an indicator. To create a scorecard these definitions need to be more explicit, and that is the responsibility of the financial analyst. All these definitions have one thing in common: this indicator describes a period of time an employee is active in an organization. Employee tenure can be expressed as a duration in days, months, years (since hire date until today’s date or the date when the employee leaves the company).
In order to find out how long a group of employees stays at the organization, you will need to calculate the average tenure.
See following example:
In the above example, 10 employees are active and we obtain an average tenure of 12.2 months, a good year. This is correct as an average, because 5 colleagues have a year's tenure and the others are also averaged out to about 1 year.
The disadvantage of this calculation is that the tenure is negatively influenced by newcomers and also by people with a lot of seniority who leave the organization. Then it takes years before the tenure is back to the old level, even if no one else is leaving the organization in the meantime. Also, someone who retires and leaves the company in a good relationship will have a negative impact on the reported tenure for years to come.
What about retention as a KPI?
The retention rate calculates how many employees have stayed at your company during a certain period of time. The retention rate is calculated as the percentage of employees you have today relative to the number you had at the start of your period. New employees are not taken into account.
You need three sets of data to calculate employee retention :
- Number of employees at the end of a period (E)
- Number of new employees during that period (N)
- Number of employees at the start of that period (S)
We are interested in the number of employees remaining at the end of the period without counting the number of new employees. Remaining employees can be calculated by subtracting N from E. To calculate the percentage, we divide that number by the total number of employees at the start and multiply by 100.
The big disadvantage of this calculation is that the formula does not control the leavers. As a consequence starters who leave the company between the Start (S) and End (E) period are counted double and will negatively impact the retention.
Abstraction can be made from the leavers and newcomers by using following formula : S/E*100 only for the people already present at the starting point. And this retention can be calculated over several timeframes : by 6 months, 12 or 24 months…
All kinds of refinements in definitions are possible. For example, it is interesting to analyze retention per year layer : 'what percentage of the starters from year X are still there, and what percentage of the starters in year X + 1' ... This way you can more specifically follow up on the impact of the decisions compared to calculating one average for the entire population.
System impact: to keep in mind
If tenure or retention is to be reported in a group of companies, the employee should be the key in the dataset. If the employee changes from one company to another in the same group, the KPI should not be impacted negatively.
All changes need to be recorded on person level in a defined period of time. To report on these changes, the database or data warehouse should be built making use of slowly changing dimensions. Basic HR reporting from payroll administrators is not sufficient to report on these changes.
Only the calculation of ‘how long our people stay’ is not that evident. The Key Performance Indicators that are mentioned most are tenure and retention. There is an important difference between them and both have their advantages.
First of all, the indicators need to be well defined and afterwards the relevant data should be stored before calculating the outcome. Once defined, keep the calculation aligned over your organization and don't change over time so you can keep track of trends.
Tenure as such is not sufficient as a KPI. Combined with a well defined retention rate you will have a more elaborated view on the outcome of all your HR initiatives.