HR Budgeting: What You Need to Know

It’s that time of year again where you are going through a months-long budgeting process that may or may not end with your proposals being used. Whether you are an HR leader or budget decision-maker, planning and implementing an HR budget can be tedious and stressful. Planning for a new year involves a lot of data gathering, conversations, and anticipations of the future.

We work with a lot of clients who are looking for some basics around HR budgeting. This article outlines how we approach the work. Before we go any further, let’s define HR budgeting. A business budget will typically contain 2-3 portions: revenue, expenses, and/or investments. Employees typically show up as expenses, which may be reflected as “personnel” in the financial statements. This is what we are discussing here.

HR budgets are all the expenses related to employing people at your business. These budgets are typically planned at the annual level with adjustments (or forecasts) being made throughout the year. We are focusing here on the annual budgeting process. Let’s start with the key elements of the HR budget and a few questions to consider for each one.

Pay: This is your employee pay for the year and includes anyone who receives payment (full-time, part-time, interns, etc.). This does not typically include contractors. This portion also includes all types of pay: base pay, cash incentives, bonuses, overtime, and interim pay.

o   What is your staffing plan next year? How many people will be full-time, part-time, etc.? If you have some additions, do you have those budgeted at the appropriate start dates?

o   How do you address cost of living increases each year? The cost of living in the United States outpaces employee pay. (Click here for more information.) If these are included in merit increases, then what are you communicating to your employees about cost of living? Will these increases be distributed evenly among employees?

o   If you are updating your salary ranges, are you updating them across the entire organization? Sometimes we see clients raising the entry level salary to meet recruitment demands and not making the same increases at the middle levels. This approach creates salary compression, which drives people to leave.

o   If you offer pay increases based on performance, are you able to track that performance to increased organizational performance and/or effectiveness? Many of our clients are doing what we call “consciously uncoupling” performance from pay. Performance rating systems hold too much bias and create lots of unnecessary work to track. Unless you can directly show that your performance ratings are increasing your overall performance, we recommend going to a multi-lane pay raise framework that eliminates performance ratings linked to pay increases.

Taxes: Based on your geographic location, you may be paying multiple levels of tax. Of course, the federal tax includes 7.65% FICA (6.2% for Social Security and 1.45% for Medicare). This tax is paid in addition to your employee wages.

o   What changes are happening at the federal, state, and local levels for your employee pay? If you employ people across multiple state, then this will require some research on your part.

o   Typically, you are also paying state unemployment tax (SUT). This is set annually by your state and is determined by the number of people who have applied for unemployment. What is your current SUT rate? Are there ways to decrease this amount for next year?

Legal compliance: It is important to know what laws and reporting requirements specific to your organization. These may vary depending on geographic location and sector. Non-compliance may create financial penalties.

o   Are you abiding by the latest FLSA updates? The Fair Labor Standards Act (FLSA) was designed by the US federal government to protect workers. This law created the right to a minimum wage, overtime pay for qualified employees, and protections for working minors. Most recently, the US Department of Labor proposed an increase to the salary ceiling for those who can receive overtime pay. This will likely impact your HR budget.

o   Are you compliant with any current or upcoming pay transparency laws? Pay transparency laws are being passed in local governments to reduce bias and pay inequity within job offers. Those organizations who lightly address pay transparency with muddled salary ranges for open positions may abide by laws, but they are not building trust with candidates and employees. Read more here.

Benefits: These are programs and offerings used to recruit, motivate, and retain employees. Benefits might include paid time off, health insurance, retirement, cell phone stipends, etc.

o   How are you budgeting for health insurance usage? Your insurance broker can provide an overview of how many employees utilize your plan offerings and how to better pair your offerings with employee needs. I always assume that everyone will utilize the health insurance coverage since you never know when someone might need it.

o   Have you reviewed your retirement plan contributions lately? Many employers are moving from an employer match to an employer contribution. This allows the organization to contribute even if the employee is not able or chooses not to do so. Some organizations are using tiered contributions as a way to reward longevity.

o   Where and when are employees working? If possible, most organizations are offering a hybrid or remote work environment. This requires some updates on home office policies and even more dedicated funds toward a sustainable home office setup.

Transitions: Employment transitions are normal and can run the gamut from unexpected new hires to retiring employees to employees being out for extended illnesses.

o   How many promotions will be given next year? If you have an idea now, then you can budget well for the pay increases usually associated with promotions.

o   Which positions might need a reclassification? If you have employees with regular and frequent overtime, then it might be a good time to review that position and see if you need another person in the role and/or might this role meet the FLSA exempt requirements. A review could save money.

o   How much money do you need to cover interim work? Some employees might be planning absences due to caregiving needs. Or maybe your organization offers a sabbatical and a team doesn’t have enough capacity to fully support someone leaving for a few weeks. No matter what, it is smart to set aside some extra funds to cover these situations.

Learning & development: Employees need organizational investment in the skills, education, and certifications needed to do their jobs well. Plus, employees need a vision of how to grow with the organization over the long-term.

o   What are the organizational messages that everyone needs to hear? Employees need to hear these messages at different times and in different ways. Maybe you need to budget for an all-staff, in-person meeting that includes flying people into a single location. Maybe you need to hire an external consultant to organize and facilitate listening sessions. It’s important to communicate well and often.

o   What technology skills will your employees need next year? Whether it’s a new client tracking system or implementing a Slack channel, your employees will need training and support to make the transition successful and sustainable. Of course, you can’t always predict when a software platform makes a major update, but you can be ready to fund it.

o   How can you make learning more engaging for employees and more profitable for the business? Sending people to conferences and trainings can be helpful, and I find that many clients don’t always understand the return on investment (ROI). You could divert or add some funding to creative learning in your workplace. Here’s an affordable idea. Give everyone $100 to complete whatever training they want in a single week and then have an all-staff meeting that Friday to source the learnings and how they will help people do their jobs well.

Other: Only you know what other costs may fall into this category, but these are the extra expenses that you may need to have available in the next year.

How are you feeling about this list? It is a lot, and hopefully you have a better understanding of the complexities within an HR budget. And this list is not all-inclusive! We find that reflection and planning with intention promotes inclusive budget practices.

Even if you don’t have enough money to fund everything on this list, it is still important to explore scenarios and plan where you can. You never know when you might get asked for new ideas, so it’s helpful to have that dream list ready. Good luck on your budgeting. May the odds be ever in your favor.

Need some help with your HR budgeting? Explore our organization coaching options where you can work directly with Sally Loftis, Managing Director. Click here for more details.