SHRM defines employee turnover, as the “Rate at which employees enter and leave a company in a given fiscal year”. We had discussed headcount and headcount growth. Now, let us focus on headcount turnover or as it is increasingly being called, Attrition.
MEASURING ATTRITION
Unlike the headcount, attrition is always a percentage rate. It is measured in annual, quarterly and monthly intervals, though sometimes companies in high turnover industries track manpower leakage almost on a daily basis.
A simple formula for deriving attrition is:
Attrition rate = Number of employees who quit during an year
Average Headcount for that year
When multiplied by 100, this gives attrition percentage.
It is easy to find the number of employees who quit during any given 12 month period. How do you arrive at the average headcount?
It depends on the degree of accuracy you are looking for. A basic formula would be
Average Headcount = Headcount on 1st April + Headcount on 31st March
2
If you need greater resolution,
Average headcount = (Headcount Month 1) + (Headcount Month 2) +… (Headcount Month 12)
12
Headcount of a month is usually calculated by averaging the headcount on the first day of the month and last day of the month.
| Month | April | May | June | July | August | Sept | October | Nov | Dec | Jan | Feb | March |
| Headcount | 1200 | 1250 | 1270 | 1450 | 1475 | 1550 | 1625 | 1660 | 1650 | 1700 | 1725 | 1750 |
| Exits | 15 | 18 | 25 | 45 | 30 | 20 | 10 | 10 | 15 | 18 | 20 | 15 |
What will be the attrition rate by the first method?
Attrition = (241/ 1475) = 16.3%
Now, if we average out the headcount across the year, then the denominator becomes 1525. The attrition rate then is
(241/1525) = 15.8%
We are able to see a 0.5% difference in attrition on the basis of how the averages are arrived at. While there is no right or wrong, any average that considers more sampling is likely to be more accurate.
LTM or YTD?
There are not arcane terms. As far as attrition is concerned, there are two different ways of arriving at an annualized number.
In most companies in India, the fiscal year runs from April to March. On April 1st of the next year, you will be able to identify the attrition rate for the previous year.
However, business is more dynamic to wait for a year to find out attrition rate. Often, updates are required on a quarterly or monthly basis. Then what do you do?
LTM
LTM stands for Last Twelve Months. In some places, TTM is also used (Trailing twelve months). This works on a rolling rate principle. Suppose we want to know the attrition rate in August. We have only seen 5 months in the fiscal. So, we use the attrition formula for preceding twelve months.
LTM attrition for August 2014 = Number of quits from September 13 to August 14
Average headcount from September 13 to August 14
This is similar to how businesses calculate their revenue run rate. While the company may have done $500 million last fiscal, on the basis of their last twelve months revenue, they say our run rate is 575 million $.
Advantage of going with LTM basis for attrition calculation is that you are always basing it on information available. There are no assumptions being made here.
However, suppose a company wants to set attrition goals for its managers. The going rate is 18% and it wants to bring it down to 15%. So, it sets that all managers should keep attrition at 14%. Appraisals have arrived. How to calibrate the performance of managers?
One way could be to just consider the LTM attrition as of appraisal time. This would include performance over the past 6 months. However, what if you want to only give importance to performance in this fiscal?
Here YTD comes into play.
YTD
Year To Date. One calculates the going attrition rate and extrapolates it for rest of the year.
Let us start with a simple example. Assume that the attrition rate for a company at the end of April is 2%. Then using YTD method, we assume that the attrition for rest of the year also would be 2% per month. Total attrition on an YTD basis, becomes 24%. (Not good for our managers!)
Let us take forward for a quarter
| MONTH | INITIAL HEADCOUNT | FINAL HEADCOUNT | ATTRITION |
| April | 800 | 820 | 12 |
| May | 820 | 845 | 10 |
| June | 846 | 866 | 9 |
What is the attrition for this quarter?
We see that the average headcount for April, May and June are 810,833 and 856 respectively. Average headcount for the quarter then is, 833. Company lost 31 employees.
Attrition rate for the quarter is (31/833) = 3.7%
On an YTD basis, we extrapolate it for 4 quarters by multiplying by 4. The YTD attrition rate is 14.8%.
This estimation happens to be more conservative way of forecasting attrition. In effect, the company is growing by 22 employees a month, while it is losing at the rate of 10.33 a month. Extrapolating for the year, attrition could be
Annualized attrition = (12*10.33 / 932) = 13.3%
While rate extrapolation is a very quick way of forecasting, we can project headcount growth and attrition and arrive at a more accurate estimate as shown above.
YTD calculation is estimation. However, it is completely based on current environment and does away with any impact from the past or business actions from the previous year.
A usual mistake done by people is to take the rate for a period and state that as the attrition rate. Just taking the rate for a period as that for the year will set us up for shocks in the future. It is always better to estimate the annual rate and then share it accordingly.
Both YTD and LTM have their backers and their uses. It makes sense to be aware of both and use appropriately. YTD is a better measure of short term spikes, while LTM levels out such spikes and presents a more realistic picture.
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