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What is Annualized Attrition and How to Calculate It?

written by: N Nayab•edited by: Jean Scheid•updated: 5/10/2011

Annualized attrition calculation reveals the ratio of the number of employees who leave an organization to the average number of employees in the payroll for the year. This is an important HR metric, for a high attrition ratio may indicate underlying symptoms of a dysfunctional organization.

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    What is HR Attrition?

    Employee Attrition Attrition is the turnover of employees, or the loss of employees for an organization owing to resignations, retirements, death, or any other purpose. Attrition rates are the ratio of employees leaving compared to the total number of employees. The Human Resource Department usually has to hire new employees to replace such lost employees.

    Calculating employee turnover rate is more complicated than what is apparent, as there exists no common formula, and many organizations follow different yardsticks when drawing up the figures.

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    Uses

    The annualized attrition rate is an important HR metric, and helps shed light on the state of the organization. A high attrition ratio may indicate some underlying strains or dysfunction in the organization that prompts people to quit. The organization explores the causes for resignations and strives to effect a fix. A low attrition ratio may indicate good HR systems and a motivated workforce.

    As a rule of thumb, organizations try to reduce attrition, as a higher attrition rate means greater costs to recruit and train new staff, and loss of productivity as the new employees take time to get accustomed with the work systems, procedures, and flows.

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    Calculating Attrition Rate

    A simple and straightforward method of calculating attrition is dividing the number of separations in the specified period by the total number of employees for the period.

    Attrition rate = number of employees leaving during the period / average number of employees for the period * 100

    One problem with the equation is determining the total number of employees for the period, which varies when attrition occurs. The solution is to determine the average number of employees in the period. For instance, calculate the number of employees on rolls at the end of the each day or month, add up these figures, and divide the total by the number of days or months. Another approach is to add up the number of employees at the start of the period and the number of employees at the end of the period and divide by two to achieve the average number of employees.

    To calculate annualized attrition rate, divide the numerator, that is number of employees leaving during the period by the number of days in the period and multiply by 365, and apply the same formula. The denominator or the average number of employees during the period remains unchanged without additional data.

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    Example

    Assume the following number of employees in company payroll at the end of each month:

    • January: 90
    • February: 103
    • March: 92
    • April: 89

    Assume the total number of employees having left the company during this period is 26.

    Calculate the average number of employees during the four month period; 90 + 103 + 92 + 89 = 374 / 4 = 93.5, and is the average number of employees per month.

    If 26 people leave in a four month period, the attrition rate for the period is 26 / 93.5 * 100 = 27.8 percent.

    To calculate annualized attrition rate, estimate the number of employees leaving in the year. If 26 employees leave in four months, 26 / 4 * 12 = 78, and represents the number of employees that leave in a year. The average of a total of 93.5 employees in the payroll holds without any additional data. The annualized attrition rate is 78 / 93.5 * 100 = 83.4 percent.

    This means the company has a high employee turnover, and for every ten people recruited, 8.3 people leave within the year.

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    Distortions

    In the example above, assuming the number of employees at the start of January was 95, another approach to calculating the average number of employees during the period is 95 + 89 / 2 = 92. In this case, the attrition for the period calculates as 26 / 92 * 100 = 28.2 percent, and the annualized attrition as 78 / 92 * 100 = 84.8 percent.

    Many employers calculate both the number of employees and the total employee count differently, and this further distorts annualized attrition rates greatly. For instance, many employers include only voluntary resignations in the number of employees leaving, and do not include employee separation owing to operations constraints, such as retrenchments owing to a branch closing, or terminations owing to performance issues.

    Some employers calculate new hire attrition by dividing the total number of employees who quit within one year of joining divided by the total number of new hires in a year to calculate fresher attrition, to determine whether new hire stay with the company or whether underlying issues induce a high turnover.

    In short, an annualized attrition calculation is not set in stone, and depends largely on the method and figures adopted.

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    Reference

    NaukriHub. “Employee Retention." http://retention.naukrihub.com/attrition-rate.html

    Image Credit: freedigitalphotos.net/Ambro






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