Reducing Staff Turnover: the Ultimate Employee Retention Guide for SMEs

It costs a business an average of more than £30,000 to replace an employee.

That figure can be broken into:

• £25,000 in lost productivity
• £3,600 to recruit temporary workers to cover the role before the new hire starts
• £750 in managerial time spent interviewing candidates
• £450 in recruitment agency fees
• £400 in advertising the job role
• £200 in HR time spent on admin tasks related to the hiring process

Of course, these figures will vary significantly depending on the role you're hiring for, the sector your business operates in, and the nature of the recruitment process - but the point still stands: replacing an employee has a significant cost.

It's in your best interest to keep your staff turnover rate as low as possible. Losing 15% of your employees a year is considered a healthy turnover rate, and anything below that is a bonus. In industries like hospitality and retail, 25% may be a more realistic figure to aim for.

However, tackling staff turnover isn't easy for many SMEs (small to medium enterprises and businesses), which face many barriers, including:

• The relative importance of a single staff member. Losing one employee in a company of 200 isn't a big deal. If you lose one employee out of the five you currently have, their loss will greatly impact day-to-day operations.
• Lack of promotion opportunities. Your employees may only have the chance to gain promotion once a year, instead of every couple of months. Again, it's all about the numbers - if there's only one senior role of a certain type available in your entire company, juniors won't get many opportunities for promotion.
• Time and cash flow restraints. You might not even have an HR professional in your business, so you'll need to handle the admin associated with recruitment by offloading the tasks onto other staff. Cashflow will always be at the back of your mind, too - any delays caused by the recruitment processes could scupper your business.
• Limited employee benefits. You don't have the bargaining power of large companies to secure incredible perks for your employees, so you have to find other ways to keep employees onboard.
• Uncertainty. SMEs don't have the luxury of millions of pounds of assets in the bank to help them through hard times. Investing money in training and employee perks is a significant risk.

Push and Pull Factors

Start thinking about employee retention in terms of push and pull factors.

Push factors drive your employees away from your business to look for work elsewhere.

Examples of push factors include:

• Poor management
• Bullying, discrimination or unfair treatment
• Lack of communication
• Small (or non-existent) pay rises
• Excessive workload or lack of work-life balance

Pull factors are external influences that tempt an employee to apply for work elsewhere.

Here are some examples of pull factors:

• An offer with a higher salary or improved benefits
• The opportunity to gain skills or land a dream job
• Family obligations - spouse gets a new job, the need to move house, ageing relatives etc.
• The desire to start a new career

As you've no doubt noticed, pull factors are largely out of your control. You can attempt to 'pull back' with counter-offers or the promise of new perks, but they're unlikely to be effective.

Push factors certainly are within your control.

If you don't already, carry out exit interviews with departing employees. Use them to identify the combination of push and pull factors that contributed to their decision to resign. You can even implement stay interviews for those still in the business for some insight into areas of improvement.

With this information, you'll be able to address specific push factors and reduce (or eliminate) their future influence. Your retention strategy immediately gains focus!

The Foundations of Employee Retention

Perks, benefits, personal development plans, and flexible working arrangements won't mean a thing if you can't get the basics right.

Firstly, pay. If your employees don't feel they're being paid fairly for the work they're doing, they'll look elsewhere.

Of course, your business might not be in a position to offer wages at the market rate - but most businesses can't get away with offering anything lower than 10-15% below the average. If you can't offer that sort of salary, consider hiring a part-time worker instead.

Otherwise, don't expect your staff to stick around for long.

Next, employees must feel safe at work. Some businesses continue to cut corners in an attempt to reduce costs. Don't be surprised if your turnover rate is sky-high if you knowingly ignore health and safety regulations and fail to provide employees with a suitable working environment.

With these foundations in place, you'll avoid catastrophic turnover levels and can start building a more thorough retention strategy.

Five Pillars of Employee Retention

It might help to split your retention efforts into several different areas:

1. Recruitment. How can you change your hiring process to secure higher retention rates in the future?
2. Personal development. How can you offer extra opportunities to your employees?
3. Working environment. What improvements can be made to the working environment - physically, its atmosphere, and culture?
4. Engagement. What changes will keep employees engaged at work?
5. Perks and pay. Can you offer more generous pay rises and perks to employees?

Review feedback from current employees and exit interviews to determine which of these factors you need to focus on.

Part One: Recruitment

Many employee retention strategies ignore the effects of recruitment on turnover rates.

Don't make this mistake.

The recruitment process shouldn't be about finding the best candidate on paper. Instead, look for the candidate who can excel in the role and, critically, the candidate who will best fit your organisation.

Where you can afford to, hire for the long term not the short term. This will give you more return on your initial investment (the hiring and onboarding process) while delaying the costs associated with an employee's voluntary resignation.

Obviously, you still need to hire a candidate who has the skills and experience for the job, but recruitment should be as much about attitude as aptitude.

Recruitment on a budget

Many SMEs can't afford prolonged hiring processes, with many opting to hire quickly instead to cut costs.

However, look for the middle ground.

For example, you could do a two-stage interview process, including an initial video interview stage.

There are two types of video interviews: live two-way interviews or pre-recorded one-way interviews.

Live two-way interviews are typically held over Zoom or Google Meet, and give you a thorough impression of a candidate while cutting travel costs for both parties.

One-way interviews could save you even more time. Employers submit a series of questions to the candidate (usually through specialist software), who must then record and submit their answers within an allotted timeframe. Employers can review answers in their own time.

Following the video interviews, choose three to five of the best candidates and invite them in for a second interview.

Referrals

Reconsider how you find candidates. Employee referrals can be a bountiful source of candidates who are both well-qualified and a good fit for the role in question.

Employee referral programmes work.

Referrals are five times more likely to be hired than the typical candidate. Referrals have the highest retention rates after a year (46%) compared with hires from job websites at 33%.

46% of new hires at top-performing firms are referrals.

Even if you offer employees a cash incentive for referrals, the costs will be nothing compared with agency fees and other hiring costs, making referrals a low-cost recruitment option for many SMEs.

However, implementing an employee referral program that gets results isn't as straightforward as it seems. Here's what you should consider:

• Do your current employees actually enjoy working for the company? If they don't, they won't recommend your company to their friends.
• Is software necessary? Larger companies have systems to manage referrals, but many SMEs may prefer a different approach.
• Are current employees aware of current vacancies and the skills and qualifications required to fill them?
• How will you make it easy for employees to refer someone?
• Once the initial enthusiasm has died down, how will you encourage staff to continue to take part in the referral program?

How will you structure rewards? You could offer additional rewards for hard-to-fill positions or small rewards for leads and larger rewards for hires.

Recruitment: key points

Use video interviews to cut the cost and length of the recruitment process.

Place more emphasis on employee 'fit' instead of qualifications and experience alone.

Consider building or improving an employee referral programme to source a significant percentage of employees.

Part Two: Personal Development

Now that you've recruited a cohort of bright-eyed, enthusiastic employees, you need to sustain that enthusiasm.

If you don't work quickly to extend it, the honeymoon period will soon be over and new staff will start looking more critically at the company.

Personal development at work usually means providing employees with opportunities to gain new skills, knowledge and responsibilities. In practice, it means promotions, training, and mentoring.

Large businesses have the resources to formalise these processes and produce thorough personal development plans for every employee.

Smaller businesses are rarely able to dedicate such time and effort to talent development. You might not have an HR team, and it hardly seems worthwhile to shift these tasks onto another employee.

Instead, you need to take a different approach to personal development as an SME.

Low-cost, focused personal development

Training is often regarded as a needless expense that may not even generate a return.

However, if you can offer the right training programs to your staff, they'll work more productively. They'll appreciate that you gave them the opportunity to gain new skills.

Training is a no-brainer from an employee engagement and job satisfaction perspective, but many SMEs balk at the cost - both in terms of cash and time.

The same issue applies to many personal development initiatives: they sound great in theory, but the cost and cash flow hit in practice don't make them worthwhile.

Here's how to keep personal development low-cost with minimal disruption to your business:

• Look online. Massive open online courses (MOOCs) are often free or low-cost and cover almost every subject imaginable. Check sites such edX, Khan Academy and FutureLearn to start.
• Mentoring. For one afternoon a week, have employees team up with a mentor to learn new skills and processes.
• Shadowing and job rotation. Many employees appreciate the chance to gain experience in fields entirely unrelated to their usual territory. Implement work shadowing or job rotation initiatives to encourage employees to diversify their skill sets.
• Think strategically. Which skills will your company be lacking in the future? Can you identify well-placed employees who can learn these skills? Strategic thinking adds focus to personal development efforts.
• Create ultra-concise personal development plans. Personal development plans tend to be wordy and buzzword-filled. Try making them as concise as possible. Perhaps ask staff to list three skills they'd like to gain over the next year and a brief suggestion of how they might work towards them.
• Build online and offline libraries of resources. Encourage staff to contribute their own resources and purchase your own, then let staff borrow from the library at any time.
• Conference attendance days. Allow your staff to attend some industry events and conferences throughout the year.

Okay, so you'll have to spend a little time managing each of these initiatives, but they'll cost you little (or nothing!) upfront.

Regardless of how you approach personal development at work, you must follow one rule:

Employees must be made aware of the various personal development opportunities available to them.

It's no good maintaining a library of resources if employees don't know where to find it, and there's little point in finding a selection of excellent MOOCs if you don't periodically inform staff about any available courses.

Additionally, leaders in your company must be 100% behind the training and development opportunities you offer employees. They must encourage staff to take advantage of the various courses and mentoring schemes available - without complaining about the cost or disruption!

One final tip is to check in with staff every quarter to review their personal development. An annual review isn't enough.

Personal development: key points

• Low-cost training opportunities do exist!
• Communication is key - don't leave it until an annual review to find out about the skills an employee would like to gain.
• Don't see training as a cost, but an investment.

Part Three: Working Environment

The Googles and Facebooks of this world spend millions on new offices. The slides, ball pits, sleep pods and gyms in these offices have become one of the hallmarks of Silicon Valley.

These kinds of office 'perks' rarely make it to the real world, but it's important that SMEs understand why the tech giants deck out their offices with such crazy features.

First: it's the impact. Amazing offices impress corporate visitors. They catch the interest of jobseekers. They get featured in the press.

Second: the designs reinforce company culture. Tech companies might say that the crazy office environments represent their creativity or their desire to innovate.

Third: they're a pleasure to work in. Employee productivity is high and the number of facilities available means that employees can practically live at work if they like (but we don't recommend this).

So, how does this translate to SMEs?

Your office is an integral part of your business and has an impact on visitors and your employees. To keep productivity high, you need to give employees a working environment that is pleasant to work in.

Although this sounds rather straightforward, employees don't all thrive in the same working environment. Open offices are great for extroverts who love to collaborate, but introverts may prefer an environment with less noise and more privacy.

It's not possible to cater to the whims of every individual, but there are some general office design ideas that all employees will appreciate:

• Space. An office should never feel cramped.
• Maximise natural light. Move workspaces near windows. Use artificial light to keep other areas well-lit where natural light doesn't reach.
• Allow employees to customise their workspace. In office-based businesses, encourage staff to personalise their desk with family photos, plants, and other personal items.
• Ensure employees have the tools they need to complete their work. This one's a no-brainer, but some employers count on their employees 'getting by' with substandard technology and tools to reduce costs. Sometimes cheap doesn't cut it.
• Set aside space for collaboration. If your office size and layout allow, dedicate a room (or the corner of a room) to an informal collaboration area for impromptu teamwork or less formal meetings.
• Plants. Greenery brightens up the office and cleans the air, too. Choose plants with low levels of pollen if there are any hay fever sufferers in the office.

The physical nature of an office environment is only one aspect of it - the office atmosphere and culture are just as important.

Your employees create the office culture.

Is it collaborative and noisy?

Is it supportive or competitive?

Is teamwork the norm, or is most work completed individually?

How do bosses interact with their juniors?

Although office culture is maintained largely by employees, employers can influence it to some extent.

Recruitment clearly plays a part, as do your disciplinary procedures.

How do you deal with toxic employees? Think about how your working environment alters working habits. For example, is the layout of desks conducive to collaboration, or does it encourage staff to work alone? There's no right or wrong answer here - it depends on the nature of your business and the environment you want to foster.

Working Environment: key points

• You can't please everyone with your office layout, but there are improvements you can make to benefit all employees.
• A toxic culture can be just as off-putting as a cramped, dirty, outdated office.
• Managers play a key role in shaping office culture, but employees are crucial, too.

Part Four: Engagement and Job Satisfaction

We wrote our practical guide to employee engagement back in 2016, but it's still as relevant today. Head to that article if you'd like the long version - but here's a summary.

Employee engagement isn't well defined, so here's our shot at a definition:

Employee engagement is when an employee believes in the company’s values and goals to such an extent that they are highly motivated (and productive) at work.

If employees care about the work they're doing, they'll work harder.

So, if you think lack of engagement is at the core of your retention problems, tackle the following areas:

• Define and communicate company values
• Improve communication and feedback with staff
• Find ways to vary the workload of employees who have repetitive roles
• Treat employees fairly (and not necessarily equally)
• Improve financial transparency
• Make leaders more visible
• Thank employees (both in front of their peers and privately)
• Offer other forms of recognition such as annual awards or small gifts

Engagement: key points

• You'll need to define employee engagement and set your own targets before you can start making improvements!
• Recognition, trust and communication are essential for employee engagement.
• Consider using employee engagement surveys to identify workplace problems (and solutions).

Part Five: Perks and Pay

Increasingly, employees expect employers to offer staff a range of perks - particularly if the salary isn't at the market rate.

Here we'll explain how to use perks and pay to improve employee retention.

Choosing the right perks

First, consider which perks are viable and desirable for your business.

If you work in a remote business park, free fruit - or even free lunch - is certainly a desirable perk. Employees won't have to rely on a vending machine, lunches brought from home, or wasting their precious lunch hour hiking 15 minutes to the nearest shop.

Here's another example: If your office is close to a network of cycle lanes, cycling-related perks will be a hit with employees (and potential employees).

Similarly, there's little point in buying gym equipment for the office if you don't have the room to dedicate to it.

Once you've narrowed down your list of viable perks, you need to think of costs and benefits - both direct and indirect.

For example, offering free fruit to staff might cost you £20 a week, and you might lose half an hour of productive time finding a provider and setting up recurring orders.

In return, you'll receive several indirect benefits: happier staff, slightly healthier staff, and a selling point to aid you in future recruitment rounds.

Clearly, it's difficult (if not impossible) to place a figure on these benefits, but that doesn't mean you should ignore them.

As we've mentioned above, employees expect to be paid close to the market rate for their role and experience. They also expect to receive some form of pay rise each year unless the company is in dire straits.

Regardless of the generosity of the perks you offer staff, they're no substitute for a reasonable level of pay and regular pay increases.

However, it's important to understand that financial compensation alone won't keep employees loyal to a company.

If an employee isn't engaged at work, doesn't like the workplace or isn't receiving the development opportunities they're after, a pay rise is only going to persuade them to stay on for another few months. It's clear that in the long term, they'll look for work elsewhere.

Perks and pay: key points

• All the perks in the world won't make up for a minuscule salary.
• No perk works for every company. Draw up a list of viable perks that depend on your circumstances.
• Carry out a basic cost-benefit analysis for each perk you're considering implementing.

Wrap-up

Many elements contribute to staff retention.

By holding exit interviews and understanding the push factors contributing to an employee's decision to leave your company, you can quickly understand the source of your turnover problems.

Whether recruitment, engagement, pay, personal development or the working environment is letting you down, you can make significant changes and quickly improve retention rates.

However, tackling employee turnover requires a mindset change, not just a short-term push. If employees don't see sustained changes in the long term, you won't see any significant movement in retention.

In your business, which changes have made the biggest improvement to staff retention rates? Let us know in the comments below.

Editor's Note: This post was originally published in June 2016 and updated for accuracy in November 2024.