What is Attrition Rate, and Why Does It Matter?

Employees Around Table Having Discussion

Has the Great Resignation hit your employee attrition rate? If your business is losing good employees and struggling to replace them, you’re not alone. Millions of individuals across the United States, from front-line employees to senior executives, are quitting their jobs every month.

Over 4 million Americans just quit their jobs in May 2022 according to the U.S. Bureau of Labor Statistics. In fact, every month in 2022 has seen over 4 million Americans voluntarily leaving their jobs.

Knowing how to attract (and retain) skilled employees has always been important, but now it’s an even great challenge. To better manage talent, you need to understand your employee attrition rate (or churn rate).

But what does attrition rate mean, and why does it matter? How does your attrition rate relate to employee retention?

In this detailed guide to attrition rates, you will learn the answers to these questions and more, with information on:

  • attrition rate calculation
  • causes of high attrition rates
  • actionable tips to increase employee retention

So if you’re ready to improve your staff attrition and keep your best employees, read on.

Or if you’re eager to start filling some open positions ASAP, jump over to the Insight Global hiring page, and we’ll help you add team members right away.

What is Attrition Rate?

In simple terms, an employee attrition rate is the rate at which employees leave a company, usually expressed as a percentage. While that’s a straightforward definition of attrition rate, the significance to a business is more complicated.

Here is the Oxford Dictionary definition of attrition: “the action or process of gradually reducing the strength or effectiveness of someone or something through sustained attack or pressure.”

Good employees leaving your business – especially if you can’t easily replace them – reduces the strength or effectiveness of your company. The higher the attrition rate (or percentage), the more difficult it will be to keep up with business goals and objectives.

Before we fully explain the negative consequences of a high attrition rate, first let’s discuss the relationship between employee attrition and employee retention.

Attrition vs. Retention

As we know, there’s a difference between attrition and retention. Although the two sound very similar, they’re entirely different concepts that require very different approaches to measure, understand, and improve.

Attrition in the workplace occurs not just because employees leave, but when a business can’t replace them quickly. Employees leaving for any reason, voluntarily or involuntarily, contributes to attrition.

Employee retention is the opposite. Employee retention is when workers choose to stay with a company. The employee retention rate is a metric that evaluates the percentage of employees remaining at their workplace over a certain period of time.

To summarize:

  • Attrition rate is the percentage of employees you’ve lost over a certain amount of time.
  • Retention rate is the percentage of employees you’ve kept over a certain amount of time.

A high retention rate typically means that your company has a low attrition rate. While the numbers are often related, it’s still important to measure both to create a fuller picture of company health. That’s because they use slightly different data to calculate.

Key Differences

Attrition rate and retention rate both look at your employees. However, they don’t always include the same employees.

  • Attrition rate includes new hires. Retention rate only includes new hires after a certain period of time. (An exception is when looking specifically at new hire retention).
  • Attrition rate includes all lost employees, including those who left involuntarily. Retention rate usually excludes any employees lost through layoffs or termination.

Types of employee attrition

Now more than ever, employee attrition rate should be a top priority for employers and managers to track and improve.

But you need to know more than just your numbers. You also need to understand the why behind your attrition rate. While individuals will have their own unique motivation for leaving your company, they will generally fall into a specific type of attrition. Here are different types of attrition:

Voluntary attrition

Voluntary attrition occurs when employees choose to leave a company. Reasons for voluntary attrition can reflect problems at your company, or they can stem from personal reasons unrelated to your business. Some of these reasons are:

  • changing careers
  • moving to a new location for personal reasons
  • accepting a better job offer
  • resigning due to a toxic workplace
  • retiring

Attrition due to retirement

Attrition due to retirement is a specific type of voluntary attrition. In many industries, employees who have reached a certain age, or who have been employed by a company for a significant length of time, are more likely to retire. This type of attrition is also referred to as “normal attrition” or “natural attrition.” Usually retirement attrition is not a cause for concern, nor is it statistically significant for your overall attrition rate. However, take note if your company experiences an increase in early retirees. That could indicate an issue in the workplace.

Involuntary attrition

Involuntary attrition occurs when a company chooses to dismiss an employee. Typical reasons for involuntary attrition are:

  • elimination of position
  • layoffs
  • termination due to employee misconduct or poor performance

Internal attrition

Internal attrition occurs when an employee changes roles within a company. This could be the result of a promotion or a lateral move to a new department. Internal attrition is usually a good thing, a sign of opportunities for career development. However, if a single department has a large internal attrition rate, it’s important to find out why.

Demographic-specific attrition

Demographic-specific attrition occurs when a significant number of people from a single group — women, people of color, veterans, etc. — leave during a short timeframe. This could be a sign of harassment or other forms of discrimination in your workplace. Diversity training is one solution to improve demographic-specific attrition.

Why Attrition is Important to Your Business’s Success

Attrition is one of the most under-discussed yet essential concepts in business. First of all, a high attrition rate itself can negatively impact your company, primarily in three ways:

  • loss in institutional knowledge
  • drop in productivity
  • increase in hiring and training costs

In addition, a high attrition rate can also indicate problems with your company.

While attrition occurs when employees leave for any reason, including layoffs or termination, the overall concern is when employees choose to leave your company.

The trick with employee attrition is understanding who leaves your company and why they leave.

Employees often leave their job because they:

  • don’t like their boss/manager
  • are unhappy in their current role
  • received a job offer with a higher salary at another company
  • want more opportunities to advance their career
  • lack a good work-life balance
  • don’t receive enough coaching or feedback

When you understand who is leaving your company and why, you can begin implementing changes to decrease your attrition rate.

The Cost of High Attrition Rates

According to a recent Gallup study, replacing an employee can cost companies one-half to two times the employee’s annual salary. That’s a lot!

The cost of hiring and training new employees aren’t the only way attrition hurts your bottom line. The loss of institutional knowledge and any drops in productivity also hurt company profits.

If your company’s attrition rate increases, you’ll likely see a decrease in customers acquired annually. This is because your company is losing valuable employees who likely knew how to effectively market and sell your product/service to potential customers.

If you make the effort to improve employee turnover, you can reduce costs associated with replacing employees while simultaneously increasing revenue by developing your team to become more effective.

Now that you understand why attrition rate is important, let’s jump into calculating attrition rate.

How to Calculate Employee Attrition Rate

Learning how to calculate an attrition rate is really quite simple, even if the attrition rate formula looks complicated at first. Take the number of employees who left (also called separations) during a certain timeframe. Divide by the average number of employees during that same timeframe. Multiply by 100.

Attrition rate = number of separations / average number of employees x100

It’s also easy to calculate the average number of employees during a specific time period. Take the number of employees at both the beginning and the end. Add those numbers together. Divide by 2.

Infographic explaining employee attrition rate definition and attrition rate formula. Find the same information within the attrition rate blog post. Discover if your company has a high attrition rate.

Here’s an example of measuring quarterly attrition rate.

At the beginning of Q2 you had 496 employees. During this time, 49 employees left, and you hired 18 employees. At the end of Q2 you had 465 employees.

496 + 465 = 961

961 / 2 = 480.5

During Q2, you had an average of 480.5 employees. Now you take the number of separations and the average number of employees to calculate the attrition rate.

49 / 480.5 = 0.102

0.102 x 100 = 10.2

Your attrition rate for Q2 is 10.2%

This attrition rate formula works to calculate any attrition rate. As long as you’re careful about counting separations and calculating the average number of employees for the same time period, you can easily find the annual attrition rate, quarterly attrition rate, or monthly attrition rate.

What is a Good Attrition Rate?

While it’s difficult to define a “good” attrition rate, businesses should generally aim for an attrition rate of 10% or lower.

Keep in mind, however, that this number will vary from company to company and industry to industry, depending on the circumstances.

For example, the hospitality industry has a high attrition rate as companies hire temporary employees for peak seasons. On the other side of the spectrum, the finance industry has a lower attrition rate. That means a good attrition rate in the hospitality industry will be higher than a good attrition rate in the finance industry.

A good attrition is relative to the size and type of your company, so it’s hard to give a genuinely objective number. For this reason, when you first start tracking attrition rates, you might want to consider looking at different time periods within a year. For some industries, a quarterly attrition rate might provide more valuable insight than an annual attrition rate.

Just remember that as long as your attrition rate goes down over time, you’re on the right track.

Causes of High Attrition Rate

Whatever your average turnover rate may be, the most important thing is to recognize the why.

Sometimes, as we mentioned earlier, attrition can be natural.

But when your attrition rate is high, it’s key to focus on voluntary attrition because it can give you perspective on areas within your company that you can improve to create a better corporate culture and to reduce staff turnover.

Here are some common causes of high attrition rates:

Insufficient Recognition

Simply put – people want to be recognized. If there’s a lack of employee recognition at your company, your team members may start to feel unappreciated and undervalued.

When employees feel like they aren’t making meaningful contributions to the company, they lose their motivation. They stop fully engaging with their work. They put in the bare minimum required. And they start looking for a better job.

While it may be difficult to give feedback to every employee, regularly check in with your team members to ask how they’re doing. Find out what’s working well, and see if there are any areas for improvement.

Stagnant Career Growth

When employees don’t see any career advancement opportunities, they’ll eventually start looking elsewhere for a place that appreciates their talent.

To avoid this, invest in your employees. Offer them mentoring. Provide additional training or education. Create clear guidelines for promotions so employees know what to expect. Promote from within whenever possible. There are multiple ways to let employees know that you care about their careers.

Inadequate Compensation

Have you asked your employees to do more work, but without offering more pay? They’re going to notice.

Are you offering raises that barely keep up with inflation? Your employees won’t be happy.

If you aren’t paying your employees market rates, eventually they will look for jobs that pay appropriately.

To prevent this from happening, keep an eye on pay rates at comparable companies in your geographic region. What are they paying for similar job roles and responsibilities?

The worst thing you can do is to risk losing your team members by not paying them what they deserve.

Poor Company Culture

If your company has an official list of core values but it doesn’t seem to be translated into actions, your employees are going to notice.

They’ll see that while your company is communicating certain values, it’s not actually practicing anything.

This will take away from the organization’s reputation and make it feel less credible.

If you want your employees to buy into your company’s mission, vision, and core values, they need to see that you practice what you preach.

No Work-Life Balance

Let’s face it, there will always be days when you get pulled into work and can’t make it home in time for dinner with the family.

But when your team members are constantly having to skip plans, work weekends, and come in on holidays just to catch up on their workload, they’re going to feel like they’ve lost their personal lives.

It’s important for your employees to maintain a healthy balance between work and play. Encourage them to use their vacation days. Don’t send non-urgent texts or emails outside of working hours. Lead by example with your own work-life balance.

How to Improve Employee Attrition Rate

Employee retention is one of the most important goals of managers and company owners. After all, it costs about twice as much to find a new employee as it does to keep an existing one.

So how do you improve employee attrition?

Improve recruitment methods

As Benjamin Franklin once wrote, “An ounce of prevention is worth a pound of cure.” Improve employee retention by hiring the right employees from the very beginning. By implementing a strategic hiring process, you attract better talent for your company.

Hiring good employees is only the first step of prevention, though. A 2018 study found that almost 30% of workers quit a job in the first 90 days. Their top reasons were:

  • their day-to-day role was not what they expected
  • a bad experience drove them away
  • company culture was bad

Clear expectations, an inclusive workplace, and a good company culture can minimize new hire turnover. A good onboarding process sets up employees for success.

Design a strategic onboarding program

During onboarding, new employees learn about your company, receive initial training, set up their work computer, and generally get to know their role and their team. Research indicates that a good onboarding program can improve new hire retention by 82%. However, the first 90 days isn’t the only time when you should be monitoring employee satisfaction and gathering feedback.

Maintain open, honest communication

Communication is a two-way street. Give your employees ample opportunity to provide feedback. Implement an open-door policy. Employees need to know that they can come to you with problems or concerns without the fear of retaliation. Make sure they understand that their opinions are valued and that you are approachable.

If your current employees don’t feel comfortable sharing constructive criticism, ask for anonymous feedback through a company survey.

Asking for feedback is only the first step. How you handle that feedback also matters.

Resolve issues

Once you’re aware of a problem, fix it. If the issue takes considerable time to resolve, maintain constant communication with your employees. Acknowledge the problem, share the steps you’re currently taking, ask for input on solutions, and provide progress updates.

Create a fair pay structure

A recent survey found that 63% of workers who quit a job in 2021 did so either primarily or partially due to low pay. Prevent this cause of attrition by creating an equitable, transparent pay structure. Employees want to know where they stand. A clear organization chart with set pay ranges, and clear benchmarks for raises and bonuses, allow employees to know what to expect with their compensation. However, salary and benefits aren’t the only option for rewarding employees.

Evaluate incentives

Employees are more than happy to accept raises and bonuses for their hard work, but those are usually awarded annually. What incentives do you offer high-performing employees the rest of the year? While we have an entire article devoted to benefits and perks for employees, consider implementing a few of these popular incentives.

  • an extra day of PTO
  • catered lunch for an entire team
  • company swag
  • gift cards

Sometimes team rewards will be most appropriate. Other times you should acknowledge specific employees who go above and beyond. For individual recognition, communicate clear expectations so everyone has a fair shot at success.

Create an inclusive environment

When employees don’t feel comfortable in the workplace, they look for a way out. If your company doesn’t have clear policies on Diversity, Equity, and Inclusion, create them. But policies aren’t enough if you don’t follow through. It’s important to get all of leadership on-board as you implement changes to promote an inclusive workplace. You can also offer DE&I trainings and workshops as part of employee development.

Encourage employee development

At Insight Global, our purpose is to develop our people personally, professionally, and financially; so they can be the light to the world around them.

Our employees aren’t the only ones who want to learn. A 2019 study found that a whopping 94% of employees would stay at a company longer if it invested in their learning and development. When you offer employees the opportunity to learn and grow, you also equip them to advance within your organization.

If you don’t know what your employees want, ask!

Do they want additional responsibilities? A chance to work on special projects? A chance to work more closely with management?

Communicate with your employees so you are aware of their goals and motivations.

Provide opportunities to advance

CEO Bert Bean started his career at Insight Global as an entry-level recruiter. After five years of promotions, he became a Vice-President, and five years after that, a President, before finally taking on the role of CEO in 2018.

While not everyone will climb the company ranks quite like that, they want the chance to move up in your organization. 63% of workers who quit a job in 2021 did so either primarily or partially due to no opportunities for advancement.

Some employees may not have the courage to ask or volunteer for new opportunities. If you think an employee would be great at handling new tasks, approach them with an opportunity to grow in their role.

Develop your talent. Promote your talent. Retain your talent.

Design a warm offboarding program

Even when you do everything right, you will lose some employees. For example, an employee might need to relocate for family reasons, or even temporarily leave the workforce entirely. No matter why an employee chooses to leave, you can allow them to leave on good terms. Thank them for their contributions to your company. Offer them genuine well wishes for their next step in life. Finally, set up an exit interview.

Conduct exit interviews

Exit interviews are a valuable opportunity to collect candid feedback. Even if you have tried to foster an open and honest environment, not all current employees will feel comfortable sharing constructive criticism. Departing employees are more likely to be forthcoming. During an exit interview, you can discover any positives and negatives about the current workplace culture. Finally, you might find out the real reason your employee is leaving. All of this valuable insight will help you implement changes that should lower your employee attrition rate.

Welcome boomerang employees

It hurts to lose good talent, but when they leave on good terms, they might come back. There are multiple benefits to hiring a boomerang employee, so don’t be afraid to keep that door open.

Remain flexible and open-minded

If your company has a high attrition rate, it will take time to improve it. Creating a positive workplace culture takes time and effort. Keep an open mind as you collect feedback and implement new policies. Be creative and flexible as you find solutions to workplace problems.

Conclusion

The Great Resignation has impacted business all over the country and has forced companies to put a bigger emphasis on attrition rate in a post-pandemic world.

Now more than ever, business need to know:

  • how to define employee attrition rate
  • why attrition rate matters
  • how to calculate attrition rates
  • how to improve employee retention

Failure to understand employee attrition could lead to a decrease in revenue, customers, and sales for your company.

And worst of all – you wouldn’t know the reasons why employees are leaving and what you can do to keep them.

If you read through this post, you should be well-equipped to improve your attrition rate and to keep your best employees.

If you need some help filling some open positions, check out the Insight Global hiring page and we’ll instantly connect you with top talent.