Seven Types of Retention in Businesses Briefly Explained

 

What is retention? 

  In simple terms, retention refers to the act of retaining, meaning to keep or hold something in one’s possession or under one’s control. Retention can also refer to the situation of being retained.   

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The origin and evolution of the term retention 

  The term retention originates from the Latin verb ‘retinere,’ a combination of re (meaning again) and teneo (meaning to keep or hold something).    Initially, retention referred to holding something back, like restraining something.    By the late 1500s, the term was used to describe keeping memories or knowledge within oneself.    By 1775, retention was used in a legal context, indicating the securing of possession or ownership of property after payment had been made.    Nowadays, the term retention is used in different scenarios. For example, in medical terms, retention refers to the ‘abnormal retaining of a fluid or secretion in a body cavity,’ according to Merriam-Webster Dictionary. In education, the term refers to the ability of an institution (such as a university) to retain a student from admission to the institution through graduation.     In the business world, the term is used in numerous ways, of which the following seven will be briefly discussed in alphabetical order: complete retention, customer retention, dividend retention, employee retention, retention bonus, retention in construction, and retention ratio.      

Seven types of retention 

 

1. Complete retention

  Complete retention refers to a type of risk management applied by a business to absorb or accept any and all potential losses regarding a specific risk or risks, instead of transferring the risk to an insurer or other party.    Complete retention is considered an aggressive form of self-insurance, where risks that are not transferred are considered to be ‘retained.’    Typically, complete retention evades or mitigates the costs involved with insurance. However, it can prove catastrophic if an unforeseen extreme event happens that is uninsured.     A business can use a few strategies to handle risk in risk management. For instance: 

• Avoidance, meaning to change plans to eliminate risks. 
• Mitigation is applied when a business limits the impact of a risk. Hence, if a problem occurs, it will be easier to handle and fix it. Hedging strategies are common ways of risk mitigation. 
• Exploitation: Not all risks are necessarily bad. For example, it is considered a good risk if a product of a business is so popular that there are not enough personnel to manage all the sales. In this case, the risk can be exploited by increasing the number of sales personnel. 

 

2. Customer retention 

  Customer retention refers to the ability of a business to keep customers loyal to its products and/or services over a long period of time.    IBM defines customer retention as ‘a company’s ability to turn first-time customers into repeat buyers and prevent them from switching to a competitor. It indicates the quality of a product or service and the degree of customer loyalty.’ (Accentuation by the article writer.)    Simply put, customer retention is an indication of how many customers keep returning to use a product or service of a business over time.    IBM lists the following as the four major benefits of customer retention: 

• Customer loyalty implies that current customers already trust the brand of a business, making it easier to keep them as customers. 
• Brand ambassadorship means that loyal customers recommend the brand of a business via word-of-mouth marketing and via social media. 
• Cost savings allow a business to cut on advertising and marketing costs, because repeat customers trust the brand of a business. 
• Improved profitability is described as follows by IBM. ‘Satisfying new and repeat customers sustains loyalty and increases the bottom line. In fact, happy customers are prone to make repeat purchases over a longer period of time.’ 

 

3. Dividend retention

  Dividend retention occurs when a company decides to keep its profits within the company instead of distributing the profits among its shareholders (members) via dividends.    This strategy can be applied to accumulate the retained earnings of the company to serve as a buffer during economic downturns.     Also, retaining dividends can be applied for various other reasons, such as expanding business operations, investing in new projects, or making strategic investments.    See the subject ‘Retention ratio’ below for more information about the retention of dividends.   

4. Employee retention

  Employee retention refers to the ability of a business or organisation to retain (keep) quality employees. Put differently, it is the concerted efforts of a business or organisation to prevent or minimise employee turnover in order to grow and succeed as a business.    The employee retention rate is often expressed as a percentage of the employees that remain in a business (organisation) for a fixed period of time, for instance, a quarter or a year.    The formula to calculate the employee retention rate is:  Employee retention rate = ((Total number of employees - Total number of employees that left)/Total number of employees) x 100    For example, Company AAA has 200 employees, while 15 employees have left the company during the past year.  The employee retention rate of company AAA will look as follows:  ((200 - 15)/200) x 100  = (185/200) x 100  = 0.925 X 100  = 92.5%   

• Various reasons why it is important for a business or organisation to retain its employees.  

There are numerous reasons why it is essential for a business to have a high employee retention rate, meaning to retain as many employees as possible. For example:   

• Add value to the business 

Committed and professional employees who are employed for long periods in a business add significant value to the business. They share the vision of the business and understand what to do to fulfil their role in this regard.   Employees with strong work ethics and important skills will effectively manage tasks on a daily basis, contributing to the growth and success of the business.   

• Reducing costs 

Searching, recruiting, and appointing new skilled and dependable employees are expensive and time-consuming. Hence, retaining skilled and dependable employees enables businesses (organisations) to reduce employee turnover costs and to invest more money in projects that will grow the business.   

• Reduced training time 

Contrary to highly trained and confident long-term employees, new employees need training and enough time to reach a certain standard set by a business and to adapt to a new working environment.    

• Morale and loyalty of employees 

A low employee retention ratio can negatively affect the loyalty and morale of employees. Hence, it is important for a business to create an environment that motivates and encourages employees to feel good about their jobs and the business, helping them to stay loyal to the business (organisation).   

• Ways to retain employees 

Businesses can maintain and improve their employee retention rate by applying strategies such as:    

• Transparency 

A business which follows a policy of transparency communicates in a clear manner with its employees, allowing them to understand and share the vision and goals of the business.   Employees are allowed to share new ideas and concerns with the management without fear of being disciplined.  Transparency also includes sharing important information with employees about pay-raise schemes and job tasks, to name a few.   

• Competitive salary and benefits 

An employee must be convinced that his/her compensation package (salary and benefits) equals or is above the average compensation for a specific job or industry. An employee is more likely to stay with a business that pays a good salary (based on outstanding performance), offers regular and competitive pay raises, and provides opportunities for bonuses.    

• Provide a pleasant working environment 

Typically, the office of an organisation or business is viewed by most employees as their ‘second home.’  A pleasant working environment can be created by offering free or cheap meals and/or snacks, along with other benefits to make life easier at the office.    Team-building activities can also help to improve healthy relationships at the office.   

• Training opportunities 

Opportunities to acquire more knowledge and to improve skills are excellent methods to keep employee retention at an acceptable high rate. Employees can acquire new knowledge and improve their skills by attending seminars and training courses.    

• Recognise and reward employees 

Appreciation by management for excellence by employees will help to build loyalty. When the excellent work and achievements of employees are recognised and rewarded, employees will feel that their work and efforts are valued.   

5. Retention bonus 

  A retention bonus, also referred to as a retention package or retention pay, is a lump sum of money paid by a business to an employee to retain the employee during a particularly crucial period in the business, for instance, a merger or acquisition, or a crucial production period.    It is usually a one-time payment of a sizeable amount, ranging from 10 percent to 25 percent of the basic salary of the employee.    

6. Retention in construction 

  Retention in construction ‘can be described as a percentage of amounts that are certified as due to the contractor on an interim certificate, that is, deducted from the amount due and retained by the client in construction-related works,’ according to CivilJungle.     The purpose of this type of retention is to ensure that the specific contractor completes the construction and/or activities as per the agreement.     The money withheld can be used to rectify defects in a particular construction project.   

7. Retention ratio 

  The retention ratio, also called the plowback ratio or the net income retention ratio, indicates the percentage of a company’s earnings that are reinvested into the company to grow the company, rather than being paid out as dividends to shareholders.    There are different formulas to calculate the retention ratio of a company:   

• Simple formula 

Retention ratio = Retained earnings/Net income  Where, 

• Retained earnings - which are the amount of a company’s profit that is available after paying income taxes and dividends to shareholders - can be found in the shareholders’ equity section of the balance sheet. 
• Net income is listed at the bottom of the company’s income statement. 
• Alternative formula 

  Retention ratio = (Net income – Dividends)/Net income  Where,  

• The amount of dividends can either be obtained from the shareholders’ equity section of the balance sheet or from the financing section of the cash flow statement of the company. 
• On a per-share basis 

  Retention ratio = (Earnings per share - Dividends per share)/Earnings per share  The retention ratio is the opposite of the dividend pay-out ratio (simply called pay-out ratio), which calculates the percentage of a company’s profit distributed to shareholders as dividends.    The formula for the dividend payout ratio (DPR) is:  DPR = Total dividends/Net income  Some aspects to consider when interpreting the retention ratio are, amongst others: 

• When a company distributes all of its retained earnings as dividends to shareholders, its earnings growth might suffer. 
• The retention ratio allows shareholders and other investors to determine the reinvestment rate of a company. 
• A retention ratio does not measure how the funds are invested in the company, or if any investment back into the company was executed effectively. 
• As with other financial ratios, it is also important to compare the company’s retention ratio with those of other companies operating in the same industry.  
• A high retention ratio may not necessarily be an indication of the financial health of a company. To obtain a better understanding of the retention ratio, we must understand the nature of the company for which the retention ratio is calculated. 

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