I would just like to add, perhaps emphasize, that while I am strongly in favor of allowing retreat, it should be strategic retreat.
I would rather have no retreating at all than a retreat button that ends combat, and an RNG decides which units get away and which don't, and how much damage they take in the process.
I really think retreating should work very much like it does in Total War. Troops that make it to the border of the combat map should successfully get away. I should be able to choose which units to send into a retreat, and whichever units make it make it, and the ones that are killed in the process die, obviously. Retreating units are more vulnerable because their backs are turned to the combat and they are focused on getting away, not defending themselves. Routed units will break and run, out of the player's control. But this allows to me to decide which units are important enough to me to retreat from a lost cause (probably including any heroes involved), and which units I'm ready to sacrifice in order for those units to get away.
Whether all retreated units end up on the same spot on the strategic map or not, I'm less concerned about. Regardless, you can either have retreated units automatically move as far away from the attacker as they can, or you can give the player the opportunity to decide where a retreated army should retreat to (obviously within their available movement). If a city or other defensive structure is located within range, perhaps they can automatically go there. If it turns out that people can retreat ad nauseum, then implement penalties or limits where appropriate.
Like others have mentioned, guerilla tactics and harrying skirmishes would add an enormous amount of strategy and tactics and excitement to the game. It's easier to pull off in continuous turns or real time combat, but if you could somehow work that into the combat in Elemental it would be amazing. To do that, though, you would need to give the player control over where retreating units move to on the strategic map, or offer multiple modes of combat, for example:
You could give the attacker some choices when they initiate combat: regular combat, or guerilla combat. Choosing guerilla combat, battle could be initiated on a smaller map and movement speed, attack speed and stealth/ambushing skills/abilities could be emphasized. You'd go into this sort of combat with the intention of slowing down the enemy and/or whittling down their numbers, and then retreating. The combat wouldn't end with a victory or defeat screen, it would simply display the results and leave it up to the attacker and defender to decide what the outcome means to them. Obviously, when up against a larger, superior force a harrying attacker would not want the battle to drag on - they would be overwhelmed. The attacker would want to rush in, do some damage, and then run away before being overwhelmed. Clearly, going into guerilla combat with slow, conspicuous troops probably wouldn't end well. Going in with a raiding party of light cavalry, or nimble ranged troops, or stealthy units would be much more successful. I'm not entirely sure how to accomplish this in terms of mechanics, though.
The ability to engage in guerilla warfare could even be a skill. Only units with that skill (possibly implementable as something like the "scout pack" or something) could engage in guerilla tactics, or a force led by a hero who has that skill could also even if some of the units don't have it - though those units without it probably wouldn't be very effective in guerilla combat, anyway).
Something to think about, anyway.
EDIT:
Another nice thing about this is:
The larger force would pretty much always have the opportunity to annihilate the smaller one in standard combat the next turn, or, if they decide not to, the guerilla would be free to harass the larger army next turn, too. This poses both players with options - guerilla warfare would be risky not only because your troops could lose the skirmish, but also because they could be easily hunted down the next turn (depending on movement and stealth, etc); and the larger army could choose between hunting down the guerilla force, removing the thorn from its side or it could march on, knowing that it'd have to fight off harrying attacks every turn but arriving at its primary destination faster.
It's exactly what guerilla warfare is supposed to achieve, really.
