Attrition budgeting

The Guessing Game of Attrition Budgeting

A significant issue in businesses with large numbers of employees is estimating the proportion of them that will leave the company during a budget period. This is an important issue, since the company's actual compensation expense during the budget period will be reduced if these employees are not replaced promptly. The result will be an inevitable favorable compensation variance, since the budget does not account for this shortfall in compensation expense. There are several ways to deal with the issue:

  • Assume no employee turnover, which will certainly result in a favorable budget variance.
  • Attempt to predict exactly who will leave; this is extremely subject to error, since the individuals in question may not know themselves if they are planning to leave.

The Attrition Percentage

A potentially more accurate approach is a simple one; calculate the actual attrition percentage in prior periods, and use this percentage in the budget. This approach works well when attrition is compiled across a large number of employees, and less likely to work when the estimate is derived from a small employee base. The percentage can be improved by adjusting it for the following factors:

  • Eliminate the effects of one-time departures, such as layoffs
  • Incorporate any changes in the market demand for employees

The attrition percentage will probably prove to be reasonably accurate when calculated for the entire year, and less so for individual months. Consequently, expect to see a moderately large favorable or unfavorable compensation variance through the first few months of a budget year, which gradually declines to zero over the course of the budget year, as actual attrition comes closer to the long-term average.

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