What is the Attrition Rate?
The Attrition Rate measures the employee turnover within a company, i.e. the number of individuals that leave their positions over a specified time frame.
Tracking the employee attrition rate — often used interchangeably with the term “employee turnover rate” — is a crucial step for all companies seeking to ensure that their current organizational structure is functioning properly with no (or very limited) internal problems.
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Why the Employee Attrition Rate Matters
The attrition rate measures the rate at which employees have left a company — either voluntarily or involuntarily — within a specified period.
Employee retention is critical to a company’s long-term success, and the attrition rate provides insight into how effectively current employees are retained.
A high employee attrition rate suggests that a company’s employees are quitting frequently, whereas a low rate means the company’s employees remain on board for a longer duration.
- High Employee Attrition → A high attrition rate implies that there are problems within the company that need to be identified and fixed promptly.
- Low Employee Attrition → On the other hand, a low attrition rate — what most companies strive to achieve — is most often perceived positively and reflects that current employees have an incentive to remain with the company rather than pursuing different roles elsewhere.
Generally speaking, most companies with low employee turnover have a better organizational system and practices in tact for retaining employees over the long run — which often coincides with outperformance relative to competitors, not just in revenue and profitability but also in attracting more qualified, higher-tier of talent in their pool of potential candidates.
In contrast, a high employee turnover can be time-consuming, as resumes and cover letters must be reviewed, new candidates must undergo screening (i.e. background checks), and interviews must be conducted, before the onboarding and new employee training can even start.
Causes of High Attrition Rates
The following internal issues often contribute to higher employee churn:
- Toxic Workplace Environment
- Lack of Communication (and Leadership in Hierarchy)
- No Structure in Organizational Hierarchy, i.e. Ineffective Task Allocation Process (“Bottlenecks”)
- Employee Burnout from Physical Fatigue and the Accumulated Toll on Mental Health
- Low Company-Wide Morale, i.e. Poor Culture and No Incentive for Employees to Outperform
- Below-Market Compensation Relative to Competitors
- Sub-Par New Employee Training and Onboarding Process
- No “Open Door Policy” or Closed-Door Meetings for Discussion (i.e. Feedback for Improvements)
How to Calculate the Attrition Rate
The amount of time allocated to recruiting activities can directly impede a company’s productivity since it detracts the attention away from the core business, and can also be a costly process that weighs down on a company’s profit margins.
The process of calculating the attrition rate is straightforward and can be broken into four steps.
- Establish the Specific Time Parameters for Measurement
- Count the Number of Churned Employees
- Calculate the Average Number of Employees
- Divide the Churned Employees by the Average Number of Employees
In order to express the attrition rate in percentage form, the resulting figure must be multiplied by 100.
Attrition Rate Formula
The formula for calculating the attrition rate is as follows.
Employee Attrition Rate Formula
- Attrition Rate = Number of Churned Employees ÷ Average Number of Employees
For example, let’s say that a company began the month of June with a total of 100 employees, of which 10 left throughout the month.
The number of churned employees in June is 10, which we’ll divide by the average between the beginning and end of period employee headcount, i.e. 100 and 90.
- Employee Attrition Rate = 10 ÷ 95 = 10.5%
Attrition Rate vs. Employee Turnover
The terms attrition and employee turnover are essentially synonymous, yet formally, there is a subtle distinction.
While high rates of attrition and employee turnover signify potential “red flags”, attrition is more of a concern because employee turnover could be considered an inevitable part of an industry’s business model. e.g. investment banks are well-known for their high employee turnover, especially at the analyst level, where a one-to-two year stint is considered the norm.
The high employee churn in such cases might be sub-optimal, but it can also simply be how the business model works in certain industries, like in investment banking where analysts are expected to leave for the buy-side or seek other roles such as corporate development after spending time in banking.
However, a high attrition rate stems more from vacated positions that result in lost opportunities (i.e. the opportunity cost of time), reduction in the quality of talent, lower productivity, etc. — but to reiterate, this difference is negligible to the human resources (HR) departments within certain companies.
Types of Employee Attrition
There are four primary types of employee attrition:
|Types of Attrition|
Another type of attrition is referred to as “normal attrition”, which is employee churn related to retirement, wherein the employee has reached a certain age where employment is no longer an option (e.g. due to physical constraints) or a “natural” decision after reaching a certain age — which would be categorized as voluntary attrition.
Employee Attrition vs. Retention
Employee attrition is the inverse of employee retention.
- Attrition → Percentage of Lost Employees in Period
- Retention → Percentage of Retained Employees in Period
A higher attrition rate corresponds to a lower retention rate (and vice versa).
Attrition Rate Calculator — Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Attrition Rate Example Calculation
Suppose we’re estimating the attrition rate of a company in its latest fiscal year, 2021.
The beginning number of employees at the start of Q1-21 is 100,000 and from there, the following set of assumptions will drive our model.
|Quarterly Turnover Rate||12.0%||9.5%||7.0%||4.5%|
|New Hiring Rate||8.0%||6.0%||4.0%||2.0%|
For our two model drivers — the quarterly turnover rate and new hiring rate — the percentage assumption will first be multiplied by the beginning number of employees.
- Churned Employees = – (Quarterly Turnover Rate × Beginning Number of Employees)
- New Hires = New Hiring Rate × Beginning Number of Employees)
Upon entering those assumptions into our formula and linking them to our employee roll-forward schedule, we are left with the following figures.
|Employee Roll-Forward Schedule||Q1-21||Q2-21||Q3-21||Q4-21|
|Beginning Number of Employees||100k||96k||93k||90k|
|Less: Churned Employees||(12k)||(9k)||(6k)||(4k)|
|Plus: New Hires||8k||6k||4k||2k|
|Ending Number of Employees||96k||93k||90k||88k|
The final step is to take the number of churned employees in each quarter and divide it by the average number of employees for the period.
- Churned Employees = 12k
- Average Number of Employees = 98k
- Quarterly Attrition = 12.2%
- Churned Employees = 9k
- Average Number of Employees = 94k
- Quarterly Attrition = 9.7%
- Churned Employees = 6k
- Average Number of Employees = 91k
- Quarterly Attrition = 7.1%
- Churned Employees = 4k
- Average Number of Employees = 89k
- Quarterly Attrition = 4.6%
Therefore, we can derive that our hypothetical company improved its employee retention rate over time, since the attrition rate declined from 12.2% in Q1-22 to 4.6% in Q2-22.
The total number of employees may have fallen from 96k to 88k, yet the retained employees are likely more productive and the reduction in the new hiring rate implies the company’s current capacity can still sufficiently handle its output requirements.