7 Reasons Why Employee Retention is Important

Workplace Organization
March 25, 2024

Few aspects of the workplace are as crucial as employee retention. HR professionals think of it like walking a tightrope. Too many exits weaken a company's foundation, while too few signal a lack of fresh perspectives. 

For example, consider a scenario where employees frequently quit. In doing so, they leave knowledge gaps, reduce morale, and increase recruitment costs. In contrast, imagine a workforce where faces rarely change, leading to stagnation and preventing diverse ideas from flowing in.

Striking a balance is key. This article will provide you with information on how to achieve that balance. First, we'll dive into the question of why employees quit. We will explore some of the most recent statistics and studies that help shed light on this issue. Then, we will examine the importance of employee retention and how it impacts organizations. Lastly, we will explore some top-level frameworks that HR teams and leaders can use to approach employee retention more strategically. 

As a result, your efforts to reduce employee turnover will not be hasty band-aid strategies but rather well-thought-out, targeted solutions that address the root of your labor issues.

Why Employees Quit: 5 Common Reasons for Poor Retention

Lack of growth opportunities

Picture yourself in a role where each day feels like a replay of the last. There is little room for learning, growth, or change. Without clear pathways for growth or opportunities to hone their skills, employees can quickly feel stagnant and unfulfilled. 

A recent survey by the America's Psychological Association shows that 91% of people say it is somewhat or very important to have a job where they consistently have opportunities to learn. Yet, only 47% report that their workplace offers learning opportunities.

In other words, over half of businesses aren't making an effort to create any learning programs and initiatives for their employees. The desire for personal growth is a basic human need. When companies fail to encourage this ambition, they risk losing their top talent to competitors who offer more fertile ground for development. In the lack of such opportunities, it's only natural for them to look somewhere else for career development.

Lack of appreciation

Everyone wants to be recognized and appreciated. This is another basic human need. It's no wonder that one of the main reasons employees decide to quit is the absence of appreciation and recognition. Many workplace studies support this claim. 

For example, a 2021 report by McKinsey found that 54% of employees cited "not feeling valued by their organization" as a top reason for quitting. Another 2017 report by Gallup showed a lack of recognition as one of the most common reasons employees left an organization. It's interesting to note that talented employees tended to leave faster.

To be clear: recognition isn’t always about monetary rewards, although it can be. What we are referring to here is simple verbal appreciation from managers and leaders; the acknowledgment of your employee's hard work. Whenever employees feel undervalued and overlooked, their commitment to the organization fades, and they look for greener pastures. Appreciation isn't just a "nice to have." It's the cornerstone of employee engagement and retention.

Toxic work environment

Picture a workplace where tension, hostility, or passive-aggressiveness pervades the air. In such environments, employees may find themselves constantly fearing leaders, battling office politics, grappling with micromanagement, or contending with unfair treatment. Employees crave workplaces where they feel valued, supported, and empowered to bring their whole selves to work. When faced with toxicity, they often opt to seek out workplaces that prioritize their well-being and foster a culture of inclusivity, collaboration, and mutual respect.

For example, a recent study published by MIT Sloan Management showed toxic company culture was the top predictor of employee turnover, more than pay. 10X more, to be precise!

In other words, if your business is suffering from high turnover, you might have a toxic workplace culture or dysfunction issue on your hands. After all, in a world brimming with opportunities, why stay in a toxic environment that chips away at one's esteem and mental health?

Low Compensation

Poor compensation is also frequently reported as a reason why employees consider leaving a company—no surprise here. When employees perceive a gap between the effort and contributions they make and the reward they receive, it can quickly breed resentment. 

A 2022 SHRM study surveyed 1,516 HR professionals in the U.S. to know what they consider the top reasons for turnover at their organizations. The most common reason HR professionals cited for their employees leaving was inadequate total compensation.

In an era where the cost of living steadily rises, employees increasingly find themselves wrestling with the stark reality of making ends meet. When salary fails to align with the value of their contributions or fails to meet their financial needs, it's only natural for them to seek opportunities elsewhere that offer fair and equitable pay. 

Bad relationship with manager

Bad management is one of the most common causes of employee turnover. Nevertheless, this may be overlooked because employees tend not to give this feedback upon departure. Let’s look at some data that supports this idea. 

For instance, in a workplace survey by GoodHire, 82% of American workers said they would quit their jobs because of a bad manager. In another interesting survey by Real Estate Witch, over 1000 Americans were surveyed, and 75% reported feeling frustrated with their managers.

Employee frustration with leadership was attributed to the following reasons:

  • Unclear communication (31%)
  • Micromanagement (27%) 
  • Favoritism of other employees (27%)

The root of poor management often runs deep. It can start all the way at the top; cultural and systemic issues in the company can trickle down to middle management. Or it may be an issue of individual managers lacking proper interpersonal skills and training. Either way, there are standards around management that need to be addressed. By addressing these root factors, companies can create cultures where both managers and employees thrive.

7 Reasons Why Employee Retention Is Important for Businesses

1. Reduced hiring costs

The costs associated with hiring are high. Substantial steps are required to replace an employee, such as posting vacancies, conducting interviews, and training new employees. Each time an employee leaves and a replacement is needed, these costs recur. As a result, the company utilizes resources that could be spent elsewhere. High turnover rates can also negatively impact morale and the company culture, leading to a negative cycle of employee dissatisfaction and departure.

2. Enhanced productivity

Employees who've been in the game longer know the ropes better. They're familiar with the ins and outs of the company. Naturally, this means they're less likely to make mistakes and more likely to come up with clever ways to get things done. This expertise doesn't make them faster at their jobs; it also means they can help out new employees. Plus, when people feel like they're in it for the long run, they're more invested in the company's success. They put in that extra effort because what's good for the company is good for them, too. In short, focusing on keeping your team together means everyone's working smarter, not harder, making the whole organization more effective.

3. Improved employee morale

Employee retention does wonders for team spirit. It's all about trust and stability. The workplace starts to feel like a tight-knit family; everyone feels part of the team. This sense of belonging boosts morale because people know they're valued and not just another number. Plus, a stable team means strong friendships and deeper connections, making it easier for everyone to work together. People are more likely to go the extra mile for their team, share ideas freely, and support each other. This camaraderie doesn't just make coming to work more enjoyable; it actually drives everyone to do better because they're all in it together.

4. Better customer satisfaction

Long-term employees become really good at what they do. They know the products or services inside out, anticipate customer needs, and handle tricky situations with ease. This knowledge means customers receive excellent service every time. And when customers interact with the same friendly faces over time, trust builds. New customers become loyal patrons. This loyalty isn’t just about repeat business. Happy customers become advocates for the brand. In short, they spread the word to friends and family. So, investing in keeping your team together isn’t just good for morale—it’s a direct path to making clients happier and more loyal long-term.

5. Knowledge preservation

As people leave, they take all their knowledge with them, leaving gaps that can be difficult to fill. High turnover means you're playing catch-up. Your leaders are trying to transfer skills and information before they walk out the door. On the flip side, a stable team keeps this valuable knowledge in-house. It makes training new employees easier because there's always someone with the answers. To nail this, companies can encourage mentorship programs. They can also create internal wikis or databases where employees record what they know. This way, knowledge doesn't just live in people's heads—it's available to everyone.

6. Stronger employer brand

When a company is known for keeping its employees happy and engaged for the long term, word gets around. This reputation makes the company stand out as an employer of choice. As a result, it has a better chance of attracting talent looking for stable and rewarding careers. In today's job market, having a strong employer brand is like having a magnet that attracts the best candidates. This positive employer brand image helps companies fill positions quickly and with qualified staff eager to be part of a team. 

7. Increased ROI for training and development

Training new hires is costly. And if new employees leave too soon, that investment just walks out the door. However, when companies focus on keeping their people, they see the full benefits of their investment. Employees who stick around become more skilled and efficient, directly boosting the company's bottom line. When people feel their employer is invested in their growth, they're more likely to stay put. This creates a positive cycle: the company invests in training, employees feel valued and stay longer, and the company benefits from their improved skills and loyalty. 

How to Approach Employee Retention More Strategically

The benefit of employee retention is undeniable.

Yet, for many businesses, retention efforts tend to be reactive rather than proactive. Companies only consider them if there is a glaring problem, like high turnover or low morale. This is especially true if the leaders can place a price tag on that problem and see a clear ROI; otherwise, these issues tend to slip to the bottom of the priority list.

Even so, these retention solutions and programs are often hastily put in place. Leaders fail to explore the issue's root or question if their staff will benefit from them. In short, they copy/paste "trendy" HR ideas without first considering whether this initiative will be a good fit for their business and employees.

Being more deliberate and proactive about employee retention starts with analyzing what your businesses current offering and seeing how it stacks up aginst employers in your industry.

Auditing your company’s EVP

A company’s EVP, as defined by SHRM, is “everything of value that an employer provides to its employees—pay, benefits, training, career development opportunities and so on—and it is then “marketed” to the workforce.”

Documenting your EVP is the first step to approaching employee retention more strategically. 

  • Compensation: salary, pay raises, bonuses, profit sharing, reward programs.
  • Core Benefits: health insurance, vacation, time off. 
  • Work environment: Work-life balance, remote work, management style.
  • Career: Promotions, training, mentorship, learning opportunities.
  • Culture: Mission, prestige, social responsibility.

By auditing everything your employees perceive as valuable, you develop a good idea of where your business stands compared to other companies in your sector. Is your offering competitive? Are you presenting something unique that other businesses aren't? It will be easier to answer all these questions. Based on the gaps in this analysis, you can start developing your employee retention initiatives.

In the end, these initiatives will be more strategic because they will address weaknesses in your EVP. And most importantly, they will be tailored to the tastes and needs of your actual workforce.

Final Thoughts

The balance between turnover and stability in any workforce is delicate. Both extremes carry potential pitfalls for any organization. Striking a healthy balance is critical.

This goal can be achieved by figuring out why employees leave. In other words, digging down the root causes of employee turnover can help businesses understand how and where to start making improvements to foster greater retention. 

That said, understanding all the ways poor retention impacts businesses—from increased hiring costs to damaged employer brand—can help spur organizations to be more proactive about improving employee commitment. As we have explored, the path to effective employee retention is not merely reactive but requires a proactive, strategic approach. By investing in our employees' satisfaction and engagement, you not only mitigate the risks associated with high turnover but also unlock the full potential of your workforce.

Guest Author