Employee attrition refers to the shrinkage of a company's workforce due to employees leaving their jobs. Under normal circumstances, a firm will eventually replace workers who have separated so employee attrition is usually referred to in the context of employee turnover. Businesses incur significant costs when an employee departs from her position and this can have a big impact on profitability.

Keeping employee attrition to a minimum is thus in the best interest of a company, its management and its investors. Smart managers periodically calculate employee turnover so they can identify and address problems that have a negative effect on employee retention.

Employee Attrition Basics

Businesses inevitably experience employee attrition due to people leaving either voluntarily or involuntarily. The vacancies created must be filled by hiring replacements so there is always some turnover. Employee attrition or turnover is measured as the number of employees who leave during a specified time period, expressed as a proportion of the total work force. For example, if a firm has 300 workers and 18 leave the company in a year, the employee attrition rate is 6%.

Employee turnover rates vary from industry to industry. For instance, the manufacturing industry usually offers workers good pay and benefits and tends to have low employee attrition rates. By contrast, firms in the entertainment and hospitality industries, such as restaurants, have high turnover. These businesses often pay low wages and rely on students and others who do not plan to remain in their jobs permanently. In general, a business has a "good" turnover rate if employee attrition is below the industry average.

Costs of Employee Turnover

Replacing a valued employee is expensive. Some costs are difficult or impossible to measure, like added stress on remaining workers or disruptions in customer service. Other costs — including recruitment, hiring and training expenses — can be estimated accurately.

A company may owe a departing individual severance pay. It may also need to pay a new hire a bonus. Overtime may be required until a replacement is hired and productivity may suffer until the new person is up to speed. For most firms, the measurable cost of turnover averages six to nine months' salary. For instance, if an employee making $80,000 per year departs, the cost of replacing her is typically $40,000 to $60,000.

Attrition Rate Calculation

Businesses don't always calculate employee turnover rate for the entire company. It is often useful to figure the turnover rate for specific departments or facilities in order to identify problem areas. Employee turnover is mainly of interest when you are talking about permanent employees. That is, figuring turnover for seasonal or temporary workers is essentially a waste of time since these individuals are slated to depart in any case.

The formula used to calculate employee attrition rate is the total number of permanent employees divided into the number of workers who leave during a specified time period. Suppose the ABC Widget Company has 200 employees. Two dozen quit, retire or are involuntarily separated during the year. Divide 24 by 200 and multiply the result by 100 to express as a percentage. Here, ABC Widgets has a 12% employee attrition rate.

Reducing Employee Attrition

If your business has a high rate of employee turnover, this can hurt the company's profitability. Conversely, taking steps to reduce employee turnover not only helps the bottom line, but it can also be the impetus to creating a more positive work environment. Making sure salaries and benefits are competitive is obviously important, but it's not the whole story. People want to know that their contributions are recognized and appreciated and that they can expect to progress in their careers if they perform well.

It is also helpful if the company sets clear goals and expectations and is consistent in its treatment of valued workers. Managers should also be alert to friction in the workplace and work to resolve disputes to maintain a positive work environment.