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Understanding Your Company's Attrition Rate: The Cost of Employee Turnover

Learn about employee attrition rate, how to calculate it, and steps you can take to decrease turnover and boost your organization's efficiency.

The reality of running a business is that your number of employees will undergo constant change—through hiring, retirement, layoffs, or growth. By understanding employee attrition rate and taking steps to boost the employee experience, you’ll be able to improve employee turnover in the long run.

What is attrition?

Employee attrition is a metric that measures the number of employees a business loses over time. Turnover can take place for a multitude of reasons such as employees retiring, finding other job opportunities, or leaving due to unhappiness within the company.

Why is it important to understand attrition?

Understanding attrition can help you retain productive employees and loyal customers. By tracking attrition rates over time, you can see whether departures are increasing or decreasing and even anticipate potential problems. It can also have a positive impact on employee satisfaction as well as the costs of recruitment and training.

What is the average attrition rate?

According to a report prepared by LinkedIn, the national average attrition rate for the 12 months ending in June 2022 was 11%. Keep in mind that those 12 months included many people returning to work after the COVID-19 pandemic, so the numbers may be lower than usual.

However, it's important to understand that labor statistics are very different depending on the type of company and a national average is only a starting point. A business employing teenagers in their first part-time job is likely to have a high employee turnover rate compared to a university with tenured faculty.

Low employee turnover is something most organizations strive for. However, you should also recognize the reality of your industry and aim for a turnover rate that makes sense.

What is a healthy employee turnover rate?

There's no one-size-fits-all level for a good employee turnover rate. But unless your business is in an industry like hospitality—where attrition is usually higher—aiming for a turnover rate of 10% or less is a good target.

Types of employee turnover

Employees leave companies for many reasons, so not all attrition is bad or undesirable. Read on to learn about the different types of employee turnover.

Voluntary turnover

When an employee chooses to leave a job, this is known as voluntary turnover, and it can have major financial impacts. According to job-search site Zippia, in 2022 voluntary employee turnover cost businesses more than $1 trillion.

Desirable turnover

Employees often experience life changes that lead to their decision to quit.

  • Retirement: Employees who retire usually leave on good terms with the company and their colleagues, boosting overall employee morale. Retirement attrition can also create opportunities for internal promotion and career advancement for others.
  • Personal reasons: An employee may leave to focus on family or because they're relocating out of the area.

Undesirable turnover

Undesirable voluntary turnover happens when employees choose to leave a company for a new role. It is typically more expensive for businesses because it can often involve the loss of high-performing employees.

  • Quitting: Having talented and productive employees who decide to quit is never good. Voluntary attrition is a reality of every business. Taking a look at the number of employees who leave and why they decide to quit will give you valuable data.
  • Recruited by a competitor: When a company loses a talented employee to a rival business, the employee may take with them important knowledge, skills, ideas, and contacts that could benefit the competitor and harm your company. There may also be a loss of productivity, quality, and innovation due to the disruption in the team and the workflow caused by the employee’s departure.

Involuntary turnover

Involuntary turnover occurs when an employer chooses to terminate an employee. It can have negative impacts on the organization, such as increased costs, decreased morale, lower productivity, and a higher risk of lawsuits. Therefore, it is important to monitor and manage involuntary turnover effectively.

Desirable turnover

Not every employee will be great, so it's a reality of human resources management that employees occasionally need to be let go because of poor performance.

  • Termination for cause: Occasionally employees engage in misconduct, such as dishonesty, theft, violence, fraud, breach of fiduciary duty, or violation of law or company policy.
  • Termination for cause can help the employer maintain high standards of quality and integrity as well as avoid legal risks or reputational damage. The employer can also improve the morale and productivity of the remaining employees by removing a bad influence or a low performer.
  • Poor fit for the company: An employee who lacks motivation, relevant skills, or the ability to do quality work can negatively affect the company. By leaving, they create an opportunity for another employee to take over their role. This can enhance the morale and engagement of the remaining employees and even save the company time and resources.

Undesirable turnover

In many cases, employee turnover may be undesirable for both the employee and the company.

  • Layoffs: Companies may be forced to lay off employees for many reasons, including cost reduction, staffing redundancies, relocation, or merger/buyout.
  • Reduction in force: Sometimes a company chooses to permanently eliminate positions. This may happen for various reasons, such as reorganization, lack of work, or shortage of funds.
  • Forced retirement: In some industries, older workers are terminated due to their age or other factors beyond their control. Forced retirement can be illegal, but there are exceptions for certain occupations that may require certain standards of physical fitness or can affect public safety, such as military personnel or airline pilots. Some employers may offer severance packages or early retirement incentives to older workers to encourage them to leave voluntarily.

Internal attrition

Internal attrition happens when an employee moves from one department to another. This can be a result of promotion, lateral transfer, reassignment, or reorganization, which can indicate that the company offers good opportunities for career growth and development for its employees. It can also help the company retain talent and reduce turnover costs.

Demographic-specific attrition

Occasionally, certain demographic groups will leave an organization at a higher rate than other groups. This group can be defined by age, gender, ethnicity, sexual orientation, disability, or any other demographic characteristic. Demographic-specific attrition may indicate that the organization has a problem with diversity, inclusion, equity, or culture.

Causes of high attrition rates

While not all attrition is bad, an attrition rate that's too high or that includes too much undesirable turnover can have different causes.

Bad hiring practices

Employees who are hired based on misleading or inaccurate job descriptions may experience a mismatch between their expectations and the reality of the position. They may find that their roles are different from what they applied for or that their responsibilities are not aligned with their interests or strengths.

Poor management

Employees who have unsupportive, inconsistent, or abusive managers may experience low morale, low engagement, or high stress. They may also feel undervalued, unappreciated, or unrecognized for their contributions, thus affecting overall satisfaction and performance.

Inadequate training

Employees who receive inadequate or ineffective training may feel unprepared, frustrated, or demotivated to perform their tasks. They may also lack the skills or knowledge to meet the expectations of their managers or customers.

Lack of work-life balance

Working long hours and sacrificing well-being for their job can cause employees increased stress, reduced productivity, and disruption to family life. Poor work-life balance can also lead to employee burnout and job dissatisfaction.

Low compensation

If an employee's salary is low enough that they struggle to meet their financial needs or goals, they may consider other employers who offer better pay and benefits.

Little feedback or recognition

Employees want to know whether they're doing a good job or if they have room for improvement. A study conducted by online management platform Officevibe reported that companies see a 14.9% lower attrition rate when they give regular and effective employee feedback.

Negative company culture

A toxic, hostile, or unhealthy work environment may include harassment, discrimination, bullying, conflict, or violence. These issues can affect well-being and performance, creating a harmful company culture that can easily affect other employees or customers.

Few opportunities for advancement

When employees can't envision a clear career path or they lack the opportunity to learn new skills or take on new challenges, they may feel that their potential is not being rewarded by the company. They may look for other jobs that offer more growth and development possibilities.

The financial effects of high turnover

There are a number of ways in which high employee attrition rates can negatively affect your business costs and bottom line.

Recruiting replacements

When seeking qualified employees, recruitment costs include advertising for job vacancies, background checks, drug tests, and the time you pay your staff to screen resumes and conduct interviews.

In addition, it may be necessary to pay for temporary workers or independent contractors to fill positions until permanent replacements can be found.

Training new employees

Not only do companies need to pay for new-employee training, but they should also keep their opportunity cost in mind. This is the indirect cost of losing potential revenue or productivity that could have been generated if the new employee or trainer were doing their regular work instead of training.

Reduced operational capacity

Open job positions may result in a decrease in productivity and a backlog of work that lasts even after new hires are in place.

Other effects of high turnover

Not all the effects of a high attrition rate have a direct effect on your bottom line. But anything that makes your company less efficient and effective is bad for business.

Employee morale

High employee attrition can create a sense of uncertainty and insecurity among the remaining employees, decreasing employee engagement. It can also increase workload and stress as employees are asked to take on extra work or responsibilities. This burden may fall on your most talented employees, which can increase their level of burnout and frustration.

Loss of institutional knowledge

When employees leave, they take with them unique skills, experience, insights, and relationships that are valuable to your organization. This gap in the knowledge base may affect the quality and efficiency of work processes, products, or services.

Loss of industry reputation

A high employee turnover rate can damage your brand's image within your industry. It can also signal to potential candidates, investors, and partners that the company is not a good place to work or do business with or that it doesn't value its skilled employees.

Unsatisfied customers

Your customers expect quality and consistency in your products or services. Disrupting the relationships and trust that you've built with your customers can lead to dissatisfaction, complaints, or loss of business.

How to calculate employee turnover

Follow the steps below to learn how to calculate attrition rates, then apply the formula to your business.

The attrition rate formula

To calculate attrition for any time period, start by dividing your company's number of attritions by the average number of employees, then multiplying by 100. Here are the specific steps:

Step 1: Time period

Decide which time period you want to examine. A year is a common option unless a shorter time period makes sense for your organization.

Step 2: Number of attritions

Count the number of employees who left the organization during your chosen time period. You may want to know your total attrition rate, or you may want to focus on specific types like voluntary turnover.

Step 3: Average number of employees

Find out how many employees were working at your organization at the beginning and end of the time period. Add both of these numbers and divide them by 2. This is your average number of employees.

Step 4: Apply the formula

Divide the number of attritions by the average number of employees and multiply by 100 to get the attrition rate percentage.

Attrition rate calculation examples

Look at the following examples of how to calculate attrition rates for these different companies.

Monthly turnover rate

A restaurant in a tourist area employs many seasonal workers, which will naturally result in a high turnover rate. In this case, calculating monthly turnover rates might be more useful. Suppose the restaurant had 30 employees at the beginning of July, and 35 at the end of July. Also, during that month, 7 employees left. To calculate the monthly attrition rate for July:

  1. Find the average number of employees for the month by adding the beginning and ending numbers and dividing by 2: (30 + 35) / 2 = 32.5
  2. Plug the numbers into the attrition rate formula: (7 / 32.5) x 100 = 21.54
  3. The monthly attrition rate for this scenario is 21.54%

Annual turnover rate

A financial services institution employs many people who build their careers at the company over several years. In this case, the annual attrition rate might be more helpful.

Suppose the business had 500 employees at the beginning of the year and 520 at the end. Also during the year, 18 employees left. To calculate the annual attrition rate:

  1. First, find the average number of employees for the year by adding the beginning and ending numbers and dividing by 2: (500 + 520) / 2 = 510
  2. Next, plug the numbers into the formula: (18 / 510) x 100 = 3.53
  3. The annual attrition rate for this scenario is 3.53%.

Ten tips to improve employee retention

If you discover that your attrition rate is higher than you would like, there are some things you can do to reduce employee turnover.

1. Examine your company's attrition patterns

First ask yourself who is leaving. Rather than looking just at your overall attrition rate, break it down by factors like length of service, seniority in the company, or demographics. More specific information may help you identify a particular group that has a high turnover rate.

Then ask yourself why these people are leaving. Anytime an employee leaves, make sure you understand why. Being curious about employee experiences and the reasons for your company's turnover rate will help you improve employee retention.

2. Prioritize your recruitment strategy

Focus on hiring the right people for your company and the role. Use clear and specific job descriptions, assess each candidate's skills and values, and provide realistic expectations of the work environment and culture.

3. Design a strategic onboarding program

Once you've brought new hires on board, give them the best start possible. Don't skimp on training, mentoring, and regular feedback.

4. Analyze your compensation structure

Offer competitive pay and benefits, keeping in mind that compensation includes more than just an employee's annual salary. Consider offering flexible work arrangements, health insurance, retirement plans, bonuses, and other incentives that can motivate your employees to stay.

5. Foster a culture of employee feedback

Employees who know that their concerns will be addressed promptly and respectfully are less likely to quit. In addition, providing feedback to your employees can help everyone—from new hires to senior management—make sure they're on the right path, which helps boost company culture.

Feedback should be frequent, timely, specific, constructive, and actionable. Make sure your managers receive training in giving and receiving feedback effectively.

6. Prevent burnout

Of course you want your most talented employees to work hard. But employees who burn out at their jobs are less efficient and more likely to leave the company. If you put programs in place to keep employees from overdoing it, you can keep everyone energized and focused.

7. Ensure a good work-life balance

Make sure your employees feel like they can manage their work duties and other responsibilities like family, health, and free time.

8. Welcome boomerang employees

Even after an employee has left, they may not be gone forever. Former employees who return to a previous employer—known as boomerang employees—can offer benefits to the company. These same employees may have lower hiring costs, higher loyalty, and valuable insights from their experiences outside the company.

9. Encourage employee development

The cost of providing education, training, and development may be less than the cost of replacing employees who feel their chances to learn and grow are slim.

10. Offer career advancement opportunities

Along with providing development opportunities, make sure your employees have a chance to apply new skills in meaningful projects and advance in their roles. This also saves some of the costs of bringing on new employees.

How to manage unavoidable attrition

An unavoidable part of running a business is accepting a certain amount of employee turnover. Managing it well can help smooth the transition for everyone and give you valuable insight into how to improve your business.

Institute an extremely rigorous handover process

Plan ahead for knowledge transfer and succession planning. Identify the key skills and responsibilities of the departing employees and document them for future reference. Train and mentor the existing or new employees who will take over their roles and ensure they have the necessary resources and support to succeed.

Support your Human Resources department

The LinkedIn report mentioned above points out that HR professionals have an attrition rate that's 35% higher than average! Make sure you help these valuable employees manage employee departures and replacements as easily as possible. Be realistic about the amount of time it takes to manage the process well and look into resources like training opportunities and HR software programs that can help support your business objectives.

Take exit interviews seriously

Conduct employee exit interviews to understand why employees leave and what you can do to improve your retention strategies. Ask these employees for honest feedback on their experience working for your company, their reasons for leaving, and their suggestions for improvement.

It's more important than ever to focus on employee retention, especially in a tight job market. But when you calculate and understand attrition rates, you can minimize voluntary attrition, manage involuntary attrition, and keep more employees happy, productive, and with you for the long run!

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