Employee Retention Theories – Analysis & Implementation

Employee Retention Theories

It has been long recognized that employee retention is one of the most effective ways of ensuring the presence of hard-working and deserving employees. It is also remarkable in maintaining the productivity of a company. It saves the company thousands of dollars in employee turnover costs and makes sure that employee morale does not sway. While there are a ton of objectives to achieve through employee retention strategies, the most important are:

  1. To reduce turnover hassles, including turnover costs, and
  2. Boost company morale.

Thus, the organisations employ different kinds of employee retention theories to understand why employees leave, so as to prevent turnovers.

The high rates of employee turnover are a growing concern for organisational performance. This is because it carries huge losses related to the financial and social capital of a company. It is not only detrimental to the organisation, but also to the individuals, and causes huge setbacks and loss of resources. Thus, business scholars are in constant search to find employee retention theories that will help keep both the parties, i.e., the employer and the employee, satisfied. So far, the major theories include:

  1. The Theory of Organizational Equilibrium (TOE)
  2. The Social Exchange Theory
  3. The Job Embeddedness Theory
  4. Herzberg’s Two-Factor Motivation-Hygiene Theory
  5. The Resource-Based View
  6. The Equity Theory
  7. The Human Capital Theory

These theories have been put forward keeping in mind that the causes of employee turnover are vast and subjective. Most of these causes stem from issues of job dissatisfaction, lack of prospective future job growth, and misplaced hiring.  Moreover, it is imperative to understand that the causes have internal factors (e.g., team dynamics), as well as external ones (e.g., job market). To harvest employee retention benefits, it becomes important that companies put different theories into practice, to understand what works best for them. A combination of such theories, if applied correctly, is sure to increase job satisfaction and company productivity.

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While some amount of turnover is good for a company, undesired and unexpected turnovers can be extremely harmful. It becomes a challenge to retain talented and skilled current employees for most businesses. Scholars in retention have thus advanced various employee retention programs and theories to help organisations keep their employees through human resource practices. This is achieved through human resource practices. These are developed with the goal of evolving the best practices through which companies can retain their employees. Some classic theories, including behavioural theories, are listed below:

1. The Theory of Organisational Equilibrium (TOE)

The Barnard-Simon Theory of Organisational Equilibrium is considered as the first formal theory on turnover retention and gives a wide understanding of the employee retention importance. This theory postulates that an individual will continue in an organisation as long as their perceived contribution in an organisation, and the organisation’s perceived contribution to their life, is at par. According to TOE, job satisfaction depends on the following factors:

  1. Compatibility with one’s various roles at the company
  2. Predictability of one’s relationships in the office, and
  3. Conformity of one’s self image with their job

Thus, as long as the work-related goals, and personal goals of an individual are non-competing, employee retention rates will be satisfactory.

2. The Social Exchange Theory

The Social Exchange Theory argues that employees leave when there is a breach in the terms of exchange. These are either explicit or implicit and are agreed upon by the employer and the employee. The attributes of goods exchanged can be physical (such as money for service) or quality attributes like trust, loyalty, commitment, etc.

Therefore, when a set of negotiated rules of obligation is not upheld by the employer, it leads to a lowered job performance. This employee retention theory also focuses on how strong social ties within an organisation encourages people to stay longer and grants more satisfied employees.

So, a simple way to avoid undesired turnover in such cases would be to activate management to respect and uphold rules that are agreed upon. It would also be wise to encourage healthy and productive team dynamics that extend beyond the office.

Social Exchange Theory

3. The Job Embeddedness Theory

Employee retention benefits can be seen when motivated employees who feel connected to the social and professional space within the organisation, show a lesser tendency to leave. The Job Embeddedness Theory postulates that as long as employees feel embedded in the communities that they belong to, they will continue as valuable members of the organisation.

Community integration often depends on the following factors:

  • Linkages such as colleagues, relatives, and friends
  • Individual factors, such as personal values and aspirations, knowledge, skills, etc
  • Organisational factors, mostly job requirement and company culture, and
  • Other factors, such as entertainment activities, climate, etc.

Thus, employee retention strategies should focus on enhancing these parameters and maintain the sense of embeddedness in employees.

4. Herzberg’s Two-Factor Motivation-Hygiene Theory

Proposed by Frederick Herzberg in 1959, this theory postulates that there are two different sets of factors that are responsible for employee motivation and employee satisfaction. These factors are:

Motivational factors: These are factors that encourage an employee to work harder. They include:

  • promotion opportunities
  • opportunities for personal growth
  • achievements
  • recognition, etc

Hygiene Factors: While these won’t incentivise employees to work harder, their absence causes employee dissatisfaction. These include:

  • quality of supervision
  • pay
  • company policies
  • physical working conditions, etc

Retention strategies would thus involve taking care of both sets of factors, so that talented employees receive the recognition they deserve, and are rewarded for their efforts. A positive relationship with management, as well as liking of the leadership style are also important factors.

5. The Resource-Based View

A company has an edge over its competitors when it has resources that are rare, valuable, and costly to imitate. Being part of such organisations mean that the employees can satisfy customers better while having superior profits. One of a major employee retention theory, the Resource-Based theory argues that when employees are able to be more useful to their clients, it makes them feel good about their position, and their company.

Employee retention Resource Based View

Studies on employees has shown that as long as their contribution is regarded as special and valuable, employees are not likely to leave. As such, retention issues can be solved by ensuring that employees feel their skills are valuable and add to the company.


6. The Equity Theory

The Equity Theory is based on the notion that employees expect equity in rewards, for the amount of effort they put in. They have a sense of being wronged if the outcome of their effort is less than satisfactory. This sense is strengthened if reference groups such as colleagues and relatives are privy to such positive reinforcements. This theory also moves to argue that employers tend to act for the restoration of inequity.

Thus, if an employee feels undervalued and a sense of inequity, he or she will act towards its restoration by working less. Therefore, efforts to maintain an inequitable work environment can be the retention strategy employed in such cases.

7. The Human Capital Theory

The Human Capital Theory focuses on the individual education, training, and development of employees. It postulates that advancements in these fields are incremental in increasing the productivity of an individual, leading to increased productivity in the company.

Thus, investment in the future studies and training of employees would lead to a form of Return on Investment (ROI) that would be beneficial to both the parties, i.e., the employer and the employee.

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Books on Employee Retention that you could try:


It must be kept in mind that the employee retention theories explained above are subject to individual needs and expectations. Depending on how long the employee has been part of the organisation, their potential, and other factors such as supervision level, their needs will vary. It is up to management to acknowledge credit where it is due and refuse it when it is arbitrary. An honest, open conversation about both parties’ requirements would go a long way in retaining employees with the help of such theories.

Merin is an HR professional with an MBA in Human Resource. She likes doing a lot of research and study in the field of Human Resource and can't help but share her knowledge on the same in this platform. She is also a great cook and during her free times she keeps experimenting with new dishes. Know more about Merin by clicking here.
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