Attrition Rate

How to Calculate Attrition Rate

The attrition rate measures the rate at which employees have left their positions at a company—voluntarily or involuntarily—within a specified time frame.

Employee retention is critical to a company’s long-term success, and the attrition rate provides insight into how effectively current employees are retained.

The amount of time allocated to recruiting activities can directly impede a company’s productivity since such efforts detract resources, such as time and attention, away from the core business.

Furthermore, the constant necessity to hire and train new employees to be productive can be costly, weighing down on a company’s profit margins (and reducing output).

Therefore, the attrition rate reflects the pace of employee turnover, expressed as a percentage, which serves as a key performance indicator (KPI) for a company’s organization structure and is thus closely monitored by the human resources (HR) department.

The step-by-step process of calculating the attrition rate is relatively straightforward and can be broken into four steps.

• Step 1 ➝ Establish the Specific Time Parameters for Measurement
• Step 2 ➝ Count the Number of Churned Employees
• Step 3 ➝ Calculate the Average Number of Employees
• Step 4 ➝ Divide the Churned Employees by the Average Number of Employees

Attrition Rate Formula

The formula for calculating the employee attrition rate divides the number of churned employees by the average number of employees.

Where:

• Number of Churned Employees = Churn Rate × Beginning Number of Employees
• Average Number of Employees = (Beginning + Ending Number of Employees) ÷ 2

To express the attrition rate in percentage form rather than decimal notation, the resulting figure must be multiplied by 100.

For example, suppose a SaaS company began the month of June 2024 with 100 employees in total, of which 10 churned over the course of the month.

The number of churned employees in June 2024 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%

What is a Good Attrition Rate?

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 longer.

• High Employee Attrition ➝ A high attrition rate implies that problems within the company need to be identified and fixed promptly.
• Low Employee Attrition ➝ On the other hand, a low attrition rate—the outcome most companies strive to achieve—is often perceived positively and reflects that current employees are incentivized 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 intact 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 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.

What Causes High Employee Attrition?

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)

Attrition Rate vs. Employee Turnover: What is the Difference?

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 suboptimal. Still, it can also simply be how the business model works in specific industries, like 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.

Employee attrition is the inverse of employee retention. Therefore, a higher attrition rate corresponds to a lower retention rate (and vice versa), as one would reasonably assume.

• Attrition Rate ➝ Percentage of Lost Employees in Period
• Retention Rate ➝ Percentage of Retained Employees in Period

What are the Different Types of Attrition?

There are four primary types of employee attrition (or “churn”), as outlined in the following table:

Attrition Rate Calculator — Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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1. Employee Turnover Rate and New Hiring Rate Assumptions

Suppose we’re estimating the attrition rate of a company in its latest fiscal year, 2021.

The number of employees at the beginning of Q1-21 is 100,000; from there, the following assumptions will drive our model.

2. Churn and New Hires Forecast

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.

The number of churned employees is determined by multiplying the quarterly turnover rate by the beginning number of employees.

On the other hand, the number of new hires in the coinciding period equals the new hiring rate multiplied by the beginning number of employees.

3. Employee Roll-Forward Schedule Build

We are left with the following figures upon inserting those assumptions into our formula and linking them to our employee roll-forward schedule.

4. Attrition Rate Calculation Example

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.

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; thereby, the reduction in the new hiring rate implies the company’s current capacity can still sufficiently handle its output requirements.