April 4, 2022

Attrition Rate In Business: What Is It, And Why It Should Matter To You

Employees leaving their jobs is not uncommon in the world of work. In fact, the United States is currently undergoing Great Resignation which shows no sign of slowing down. Just in February, the U.S saw 4.4 million Americans quitting their jobs with an average of more than 3.98 million workers quitting each month since last year. That’s more than the whole population of Wales!

Nonetheless, resignation should not come as a surprise. You've seen colleagues leave their jobs at any company you've worked for, or perhaps you yourself have resigned from certain jobs. According to the Pew Research Center, the top three reasons why U.S. workers left a job in 2021 were low pay, no advancement opportunities, and feeling disrespected at work. What were your reasons?

While Profile Resourcing, a UK-based recruitment company said the top 10 reasons employees leave their jobs are:

  • Better opportunities
  • Seeking more flexibility
  • Feeling under-appreciated
  • Lack of feedback
  • Negative work culture
  • Unsuitable job
  • Physical work environment
  • Lack of stability
  • Lack of growth
  • Seeking a new challenge

Although it’s completely normal for companies to have employees leave them for a variety of reasons each year, what happens if the situation becomes out of control? For example, when a large number of employees leave at the same time, as is the case in the United States, it's nearly impossible to fill all of the vacancies.

A high rate of employees leaving may also cost the company could cost the company in terms of decreased productivity, lost sales, and increased recruitment costs. On the other hand, some businesses may decide not to hire new workers to reduce their workforce and expenses. This brings us to one of the most contentious issues in the workplace: Company attrition.

What Is Attrition?

If we look at the meaning of 'attrition' on The Britannica Dictionary, it’s defined as “a reduction in the number of employees or participants that occurs when people leave because they resign, retire, etc., and are not replaced.”

This term is frequently confused with turnover, which refers to "the rate at which employees leave a company and are replaced by new employees." While both of these terms relate to employees leaving a company, they’re not the same.

The key to determining whether employees leaving is due to attrition or turnover can be based to the company's decision afterwards. If the company decides not to fill the position, this is considered attrition. When a company decides to replace employees who have left, this is referred to as turnover.

It’s crucial for companies to understand the distinctions between attrition and turnover to keep their business finance intact. Particularly when it can be costly to replace certain designations.

What Are The Different Types Of Attrition?

Knowing the different types of attrition can help businesses understand why they're losing employees, the implications for the company, and the steps that need to be taken. Employee attrition can occur as a result of:

  • Retirement – Employees who've reached a certain age or have worked for a long time are more likely to retire. It does, however, depend on the industry and type of business. “Normal attrition" or "natural attrition" are other terms used to describe this process.
  • Voluntary – Employees decide to quit the company freely, which is similar to voluntary turnover. Employees may resign for personal reasons, such as relocating with their spouse or continuing their education.
  • Involuntary – Employees are terminated by the company for specific reasons. This usually happens when the position is no longer required. It’s a common method used by businesses to keep costs under control.
  • Internal – Employees remain with the company but move to a different position. Hence, the term internal attrition. For example, they could be transferred to a new department or receive a promotion.
  • Demographic-specific – Employees from a single demographic group decide to quit the organisation. Millennials, women, ethnic minorities, and senior management are just a few examples.
Attrition TypeMeaning
Attrition due to retirementWhen an employee retires
Voluntary attritionWhen an employee decides to resign
Involuntary attritionWhen an employee is dismissed (i.e., fired)
Internal attritionWhen an employee moves within the company
Demographic-specific attritionWhen a certain group (age, gender, or ethnicity) quit

Why Is This Term So Important For Companies To Take Note Of?

Attrition allows companies to gain insight into why employees leave and develop retention strategies based on real obtained data, namely the attrition rate. This rate, also known as 'churn rate', calculates the number of employees who leave a company in a given period, typically in percentage form (%).

A thorough understanding of the attrition rate is vital for companies as it assists them in identifying any issues that need to be addressed within the workplace. If attrition is high, it may indicate that companies are not providing adequate benefits, or the best work environment to retain top-performing employees.

At the same time, companies can also use attrition to their advantage. It could be an opportunity for them to reduce labour costs by implementing a hiring freeze in which no new employees are hired to replace those who retire or resign. Companies will be able to save money if they need to.

How To Calculate Attrition Rate?

The calculation is fairly simple. The rate's duration is determined by whether companies want to measure attrition on an annual, quarterly, monthly, or daily basis.

The following is the step-by-step for calculating a company’s attrition rate (%):

  1. Identify the number of employees at the start of the time period you're measuring.
  2. Subtract the number of employees who left during that time period from the starting number.
  3. Add the total number of employees after departures to the number of employees hired during that time period.
  4. Add the number of employees at the start and end of the time period. Then, divide the total by two to get the average number of employees for that time period.
  5. Divide the number of employees who left during that time period by the average number of employees obtained.
  6. Multiply the answer by 100 to get the percentage of attrition.

The formula looks like this:

For a calculation example, let's take a look at the two scenarios below.

Scenario 1

  • Period: Q4
  • No. of Employees at the beginning = 500
  • No. of Employees left = 50
  • No. of Employees hired = 30

Step 1: 500

Step 2: 500 – 50 = 450

Step 3: 450 + 30 = 480

Step 4: (500 + 480) ÷ 2 = 490 - The average number of employees for Q4

Step 5: (50 ÷ 490) = 0.102

Step 6: 0.102 x 100 = 10.2%

The attrition rate for Q4 is 10.2%

Scenario 2

  • Period: H2
  • No. of Employees at the beginning = 1350
  • No. of Employees left = 235
  • No. of Employees hired = 310

Step 1: 1,350

Step 2: 1,350 – 235 = 1,115

Step 3: 1,115 + 310 = 1,425

Step 4: (1,350 + 1,425) ÷ 2 = 1,387.5 - The average number of employees for H2

Step 5: (235 ÷ 1,387.5) = 0.169

Step 6: 0.169 x 100 = 16.9%

The attrition rate for H2 is 16.9%

NOTE: There’s no defining what is a “good” attrition rate. Although companies should aim for an attrition rate of 10% or less in general, what constitutes a good or bad rate depends on the nature of the business and industry.

What Are The Pros And Cons Of Using An Attrition Rate?

Most people believe that attrition is a bad thing for a company because it’s associated with employees leaving their jobs. The truth is that attrition can be beneficial or detrimental. Companies will need to examine not only the actual attrition rate, but also the factors that contribute to it. Only then can businesses determine whether there's a positive or negative impact on their operations; it could very well be both!

1) Pros of attrition

The main advantage has always been cost savings. This is especially true for companies that have employees who've been with the company the longest, and are already at the top of the pay scale. When such senior employees leave, the company can choose not to fill the position, resulting in salary budget savings.

The company may also decide to hire after employees leave to bring in new talent who can contribute new ideas to the company. If the employees who left were stagnant in their growth and no longer productive, hiring new workers could mean bringing in fresh people who are more eager to work.

Similar to losing employees who no longer contribute to the company, the attrition process could be used by a company to get rid of negative people. They could be the ones who are constantly committing disciplinary violations or simply can’t fit into the organisation's culture.

2) Cons of attrition

Some of the most common ways that attrition can be detrimental to a company include losing key employees, increasing costs to hire and train new employees, and squandering investment in internal and external training. All of these factors can have serious financial consequences for a company.

Furthermore, businesses may be losing an old employee who knows the company inside and out. When new people arrive, it's likely that things won't be the same, which could have an impact on specific tasks or ongoing projects. This is also true when companies are confronted with the situation of employees quitting on short notice or going MIA.

Companies should also be aware of their brand image, as a high attrition rate can lead to a negative perception among the general public, existing staff, and potential employees. This is risky because it has the potential to negatively impact and reduce business sales and service.

1) Cost savings
2) Improving talent pool
3) Enhanced performance
4) Minimising negative influence
5) Remove poor job and culture fit
1) Increased business costs
2) Reduced productivity or performance
3) Losing valued employees
4) Sudden resignations or MIAs
5) Facing a negative perception  

Where Does The Company’s Attrition Come From?

Employee turnover, or the number of people who have left the company, accounts for the company's attrition. Remember the attrition rate formula described earlier? If you recall, the formula requires the number of people who left during the specified time period (i.e., employee turnover).

Essentially, companies will be able to determine their attrition rate by knowing what their employee turnover is.

Lower Attrition Rate Means Satisfied Employees

When it comes to dealing with and managing employees, businesses face numerous challenges and must consider many factors, like in the case of dealing with employees who are leaving their jobs. The majority of companies would prefer to retain their employees so they don't have to spend money on hiring and training new ones.

That’s why most employers would strive for a low attrition rate. By obtaining that low rate, they demonstrate that they’re able to retain employees who are satisfied with their job and environment and will not leave the company. Here are 5 easy ways to improve and lower attrition rates:

  1. Hire the right people who are a good fit for the job roles and can fit in with the company's culture and organisation.
  2. Employees appreciate good perks, so provide more valuable benefits as well as a competitive compensation policy.
  3. Make employees happy and satisfied by providing a fun workplace and encouraging positive engagement.
  4. Be concerned about employee advancement and provide ongoing opportunities for them to improve their skills and knowledge to advance.
  5. Recognise employees' efforts and accomplishments by praising or rewarding them.

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