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Explaining the Attrition Rate and Why It Matters

Explaining the Attrition Rate and Why It Matters

Explaining the Attrition Rate and Why It Matters

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The only HR Software without Limitations

It’s a common business trope to say that “our people are our greatest asset”. And while that may sound trite to some, it could not be more accurate. Regardless of what industry you’re in, the ability to attract top talent is one of the most important components of growing a thriving business. But your job doesn’t stop at recruiting. You also need to retain those employees.

Retaining employees all comes down to your employee satisfaction and your corporate culture. Career development, coworker and customer relationships, and your benefits package are just a few components that make up your corporate culture.

Employee turnover is a growing concern for companies everywhere. That’s why it’s essential to understand your employee attrition rate and how it impacts your business. We think it is one of the most critical human resources metrics to keep an eye on.

However many businesses focus their attention on recruitment and not the retention of employees once they’ve brought them into the organization. This leads to a higher attrition rate and works out to be more expensive in the long run.

In this article, you’ll find out how to calculate your company’s attrition rate, which factors influence it, and what steps you can take to reduce it.

What Is the Attrition Rate?

Simply put, the attrition rate (also known as churn rate) refers to the percentage of your staff that leave your organization over a specified period of time. You might hear this referred to as staff turnover or your employee turnover rate.

A high attrition rate means that employees are leaving your company and not being replaced. A low attrition rate, on the other hand, means that your employees are staying for longer. It is an indication of a high retention rate.

The formula for calculating attrition rate is simple. You simply take the number of people (team members) that have left the business and divide it by the average number of employees over that same time period. You then multiply it by 100 to get a percentage.

Formula for calculating attrition rate

For example, let’s say your company had an average of 200 employees in a given year. In that same year, 30 employees left the company. To calculate the annual attrition rate, you would take the total number of employees who left (30) and divide it by the average number of employees in the company (200). So your annual attrition rate would be (30/200) x 100 = 15%.

Attrition rates vary depending on company size, industry, and even city. In any case, you’ll want to keep your employee attrition rate as low as possible because that shows that your employees are happy and believe in the company’s vision. A high attrition rate, on the other hand, indicates issues within the work environment and company culture. And finding and training new hires to replace leavers can have a significant impact on your bottom line.

It’s a shame when one employee leaves the company for another opportunity. But when employees start leaving the company all at once, it’s a significant cause for concern. When the rate of attrition starts to rise, it can be a sign of something going wrong internally. Employees might be having bad experiences with management, your company culture might not be engaging enough, or staff might not feel heard on an individual level.

All that being said, be wary of oversimplifying things. There are a number of factors that can influence the attrition rate, and you’ll have to identify them in order to make any sense of the figure.

What’s the Difference Between Attrition and Employee Turnover?

These terms are often used interchangeably, but there is a slight difference that is worth noting. In simple terms, employee attrition is a long-term concept, while turnover refers to more of a short-term issue.

HR teams usually handle turnover by quickly finding replacements for outgoing employees. Attrition is more of a long-term issue that affects the entire company.

For example, if a company loses five salespeople in one quarter but hires five or more during the same period, this would be considered turnover. However, if that same company only hires one or two replacements, essentially downsizing the sales team, this would be attrition.

- Attrition is when an employer does not seek a replacement or removes a position entirely.
- Turnover is when new hires are brought in to replace employees who are leaving.

What Influences Your Attrition Rate?

There are a number of different things that can influence whether you have a higher employee attrition rate. Some of the more common factors include:

  • Voluntary resignations: There are two types of employee attrition: voluntary and involuntary. Voluntary attrition refers to employees who choose to leave the organization for their own reasons. They might be unhappy in their role or not aligned with the company vision, or they may just have been offered a better position somewhere else. Each case will be different here, so you’ll need to use your exit interview carefully to identify the personal reasons for each member of staff, so you can look for more significant trends if there are any. But if you notice a high number of voluntary resignations, that can be cause for concern.
  • Necessary layoffs: Sometimes, as a business, you will need to fire employees for a variety of reasons, and this will play into your company's involuntary attrition rate. Whether it is layoffs due to a budget issue or one based on performance or behavior, it is hard to let an employee go. No one likes to do it, and it can be a long and challenging decision for managers. This step should, of course, always be a last resort after trying various other means of reconciliation, but sometimes it just needs to be done.
  • Redundancy: As a business grows and technology advances, you’re likely to see specific tasks and roles lose their relevancy over time. This is especially pertinent in modern times as more jobs are automated and companies attempt to cut costs due to rising inflation. When an employee becomes redundant, and they are either moved internally or leave the company altogether, that will affect the employee attrition rate. Companies don’t make employees redundant without reason, and a high attrition rate due to redundancy is often a sign of a much larger issue within an organization.
  • Retirement: Employees reaching retirement age and leaving the company is inevitable. Depending on your company’s demographics, it is unlikely to have too much impact on your attrition rate. As long as you are able to hire replacements and ensure that retiring employees pass on their experience and knowledge to younger members of staff, retirement should not cause any major issues.
  • Internal attrition: This is an attrition factor that can actually be a positive. While it does technically factor into your attrition, moving employees around internally can often be for the better. Restructuring due to layoffs is one thing, but internal attrition due to promotions is a great sign. Internal recruitment gives employees an incentive to work harder and makes them feel appreciated.

Some of these factors that can play into your attrition rate are a cause for concern, and others are just natural trends that occur within any organization. But how do you know when to be concerned or take action about your attrition rate?

When Should You Worry About Your Attrition Rate?

Employees will come and go; that is just a fact. But if it becomes a trend, that is when you should start looking into your workplace environment. Ultimately, some reasons for employee turnover are a cause for concern when they happen en masse, while others are simply part of doing business. Employees switch jobs, retire, and are occasionally laid off — all of this is normal.

It’s when you notice a significant uptick in voluntary resignations, layoffs, or redundancy restructuring that you should begin to pay attention and try to get to the root cause of the issue. Voluntary turnover is the main factor you should be looking at when examining your attrition rate. Unlike retirement or layoffs, voluntary resignations signal that, at some level, your employee was not happy at the company.

There are, of course, natural factors such as relocation, having children, or switching career paths that you simply cannot control. But employees who consciously leave your company for a similar role at another company are always an opportunity for introspection.

Were they leaving because they were offered a better salary elsewhere? Perhaps you should check that your salary is competitive with the rest of your industry. Were they leaving because another company offered them better benefits? It might be time to rethink your benefits package.

Either way, you should treat employees' voluntary resignations as learning opportunities. One employee leaving can give you the chance to closely inspect your offerings and make sure that they are competitive before more employees leave for the same reason.

Another essential factor to consider when inspecting your attrition rate is demographics. If you see an uptick in your attrition rate, try to narrow it down to the demographics leaving the organization the most. For example, you might find that millennials voluntarily resign the most often. And by surveying your staff, you might find that young employees feel overshadowed or not valued compared to the more senior employees.

49% of millennials plan to leave their current jobs in the next two years.
Source: Deloitte (2019), Global Millennial Survey

One specific demographic leaving the organization at an alarming rate is undoubtedly cause for concern. It could be an indicator of a workplace culture that is not inclusive enough and makes certain employees feel unhappy and disengaged. This calls for diversity training and perhaps even a rethink of your company culture and code of conduct.

On the other hand, is a high attrition rate always a bad thing? It depends on how you look at it and if your company is undergoing large-scale organizational change. Restructuring may be necessary for some companies to stay competitive, and it can even revitalize the business. Indeed, some companies with extremely low attrition rates risk becoming ‘set in their ways’ and stagnating. While retaining high-performing employees should be a priority, new hires can also bring fresh perspectives that help the company innovate and grow.

It’s essential to strike a balance between experienced, long-serving members of staff and promising new talent. Your business needs to be able to change and adapt, while avoiding the ‘revolving door’ that high turnover brings.

Employee attrition can be a challenge

Let’s talk more about why your attrition rate matters and when you should take action to improve it.

Why Your Attrition Rate Matters

What does your attrition rate tell you about your company? All of the employee satisfaction surveys in the world can’t tell you as much about your company as your attrition rate can. It is a clear indicator of your success as an organization and how happy employees are (or aren’t) working there.

Holding on to your best employees will not only ensure you have an experienced team, but it will also save you money. With the cost of hiring a new employee being so high, turnover can impact your bottom line. That cost adds up fast if you have a lot of turnover.

Another primary reason employee turnover hurts companies is that no matter how good the transition process is when an employee leaves the company, some of their wealth of knowledge about the company goes with them. It’s not easy to train a new employee to learn all about the company, and it takes years to become a complete expert on the ins and outs of a business.

That is invaluable information that you lose when an employee leaves, and it will hurt not just the company but that employee's team and closest coworkers. They’ll be forced to pick up the slack while the new person is trained, and that can be stressful for everyone if it happens too often. Overburdening employees is a significant factor in employee turnover. In that way, one employee leaving can cause a ripple effect as other close coworkers decide to leave too.

That’s why it’s vital to be aware of your attrition rate. Whether your attrition rate is high or low, you need to track that number to ensure your company’s growth and overall success. So, what can you do to bring down your annual churn rate as an organization? Let’s talk about it.

How To Improve Your Attrition Rate

Employees spend a considerable chunk of their lives at work, so it is crucial to cultivate an environment that they enjoy being in every day. Whether remote or in person, everyone wants their employees to be as happy and productive as possible while working. So what do you do if you notice your employee attrition rate is rising? Or if you use an attrition rate calculator and find that you’re losing employees faster than you can replace them?

The only sustainable way to reduce your annual churn rate is to improve the working conditions for your employees to keep them satisfied. But that is easier said than done. In the same way that you improve your customer experience to keep your customer churn rate low, a great employee experience can help reduce attrition.

Did you know that employees are the most likely to leave within their first year at their job? That highlights the importance of a smooth and effective employee onboarding process that makes your new hires feel appreciated and at home right away.

With record inflation, wage rises are the main reason for employees seeking new jobs. But that’s only part of the picture, with career advancement, remote-work flexibility, and employee well-being programs also playing a considerable role.

35% of employees say that a salary increase is their main motivation behind seeking a new job.
Source: EY (2022), Work Reimagined Survey

Your employees will work harder and stay longer when they have a defined career path and a set time period for advancements and raises. It's all about clear communication and transparent leadership.

Over an extended time period, employees are ultimately going to stay because they enjoy working there and believe in what the company is trying to achieve. This, combined with increased support and communication from management, can make all the difference in your employee’s happiness.

Here are some other ideas for improving your company culture and your employee’s overall experience:

  • Give them a mission to believe in: Employees need to feel like they are part of something bigger than themselves. The company mission increases employee engagement and employee retention since it helps employees bond and gives them the motivation to push through times when work is demanding, long, or uninspiring. One of the best ways to retain top talent is to continually communicate this mission and how each person’s job contributes to those goals. And you have to ensure that leadership buys into the company goals as well. People can tell when others are uninspired, and it can be contagious.
  • Be responsive to feedback: As a company, you should be taking your employees’ feedback seriously and acting when needed. Employee satisfaction is crucial, and if employees feel like they aren’t being heard, they may feel irrelevant to the company and are more likely to leave. By listening to your employees and doing whatever you can to make their working conditions as pleasant as possible, you can keep your employee attrition rate low. You shouldn’t wait for employees to come to you with feedback; you should actively seek it out. With flair's performance review feature, you and your team will be able to exchange feedback easily.
  • Work on your company management: We’ve all heard the saying, “people don’t leave jobs; they leave bosses.” Now, of course, that doesn’t always mean that the only cause of your employee attrition rate increasing is the managers, but they can be a significant factor in employee satisfaction. Bad management can destroy a company from within and force good employees out. In your efforts to improve employee retention, consider holding workshops or hiring experts to do management training with your management team. It may be an invaluable experience that vastly improves your company’s culture.
  • Give bonuses and wage increases when earned: Employees want their reward (monetary or otherwise) to be tied to their efforts so that they can see the benefits of working hard for the company. When this isn’t the case, and remuneration feels arbitrary, employees are more likely to seek other options. So, give bonuses when it makes sense, and carefully give raises to those who deserve them. Yearly raises are traditionally expected but make sure that these raises are clearly tied to performance, and that performance metrics are clearly communicated with employees consistently.
  • Promote from within: Promoting employees goes along with giving financial incentives. Career development is an important factor for employees who decide to stay with a company. If they can see themselves growing and being promoted within the company, they are more likely to stay and work harder to earn those promotions. Hiring externally for specialized positions will, of course, be necessary occasionally. But whenever possible, promote from within, and you will be impressed at how it improves workplace performance and morale.
  • Keep employees busy and engaged: No one wants to do the same thing day after day without novelty. The more variety you can inject into your workplace, the lower your employee attrition rate will be. Just by breaking things up every now and then with something fun to keep morale high, you can stave off the monotony that can creep into work if you’re not careful.
  • Encourage a healthy work-life balance: Make sure you foster an environment where employees feel comfortable taking time off when they need it. Burnout is real and can impact your employees’ work and overall outlook on their job. Work-life balance has become a buzzword in the HR industry, and it is a hard thing to get right. One of the best things you can do as an HR team member or manager is to model a healthy work-life balance for your employees, so they feel comfortable asking for time off and taking mental health breaks.
  • Consider offering flexible work-from-home options: More and more jobs are going remote, and more employees are interested in finding jobs that allow them the flexibility to work from home, at least part-time. Not every job can offer these possibilities, but if your company has that flexibility, it can significantly benefit employees. Consider asking your employees how they would feel about a hybrid or full-time remote work schedule. This can also save you lots of money on office maintenance and supplies if you have a physical location.

Those are just some examples of what you can do to keep employees satisfied – but all of this needs to be informed by real data you’re collecting from those employees who are leaving.

Use Exit Interviews to Your Benefit

The infamous exit interview. HR professionals can use these meetings to pick the brains of their most recent employees who are leaving the organization. Exit interviews are the best time to ask the right questions about employee wellness and satisfaction. This will be your last chance to get their honest opinion before they are gone.

Ask them what has impacted their decision to leave the company and listen to their responses closely. This is your best hint at how you can improve your work environment. As such, it’s imperative that you offer each employee a proper exit interview to ascertain why they are leaving and whether that points to other things within your organization that can be improved.

Approximately 75% of companies use exit interviews

Here are some examples of questions that you can ask employees to gauge their overall happiness with the company before they leave their position.

  • Why did you start looking for a new job?
  • When did you start looking for something new?
  • Did you enjoy the work you did on a daily basis?
  • What ultimately led you to accept the new position?
  • Did you feel that you were well supported by management in your time here?
  • How would you describe our company culture?
  • Are there any benefits to your new position that we don’t currently offer?

They might not always tell you the whole story, but make sure to be clear that you are just looking for input and that your response to their feedback is encouraging and positive. If they aren’t willing to share much, don’t worry.

On the flip side, you might find that employees become more honest and open during their exit interview now that they aren’t planning on being with the company any longer. This information can be your roadmap to improving employee morale and satisfaction. Use it wisely.

Higher Retention Can Make All the Difference

Reducing your annual attrition rate can improve your business and your company culture. By now, you have all the information and tools you need to determine your attrition rate, get to the root cause of your employee turnover, and improve employee retention.

To reduce your attrition rate, you can adjust your company culture, raise salaries, and take small steps to improve your employee experience. But sometimes, you have to go way beyond that and make significant structural changes for the good of your organization.

Turn Employee Turnover Into Employee Retention

Download your free employee turnover guide

Follow our step-by-step guide to reduce staff turnover and retain your best employees in the long term.

As we’ve learned recently, company culture is more than snacks in the break room and a dog-friendly workplace. Employees love perks, but you have to work harder than that to keep the good ones around. Clear communication and good management practices can help you retain employees longer and foster a productive and happy work environment.

Suppose you can get a handle on some of the principles above, improving career development and creating a working environment that employees love to be a part of. In that case, you’ll be able to lower your employee attrition rate and improve stability within your organization. Your employees and managers will thank you, and your business will run smoother and more efficiently. You’ll likely see a direct link between lowering your attrition rate and rising sales and success within your company.

It might just be the secret recipe that takes your company to the next level.


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