HR Budgeting and Total Rewards: A Comprehensive Guide

Introduction to HR Budgeting

Both the cost and the range of functions taken on by a Human Resources Department are directly dependent on the size of the company. Smaller companies tend to make fewer distinctions between programs that the HR Department oversees, while larger companies draw clearer lines between different functions. However they are packaged, and whatever the title of the individual who carries out the assignments, HR Departments generally oversee the types of functions described below. As HR Departments become increasingly comprehensive in the services they provide — acting as supporters of both employees and managers and as the primary mediator between the two — their responsibilities are only likely to grow in scope and complexity.

The first task an HR Department faces when considering any change in programmatic offerings is one it shares with every other department: assessing the budgetary constraints within which it must work. No reliable budget can be created without first collecting relevant data as accurately as possible. One of the most important tasks any HR Department can undertake, therefore, is to gather this data and produce a workable budget. Only once this budget is in hand can the department — in concert with other departments and under the supervision of company executives — rank its priorities in ways that stay within the allotted budget. This is a profoundly simple principle, but also a profoundly important one.

Among the most important data an HR Department must collect is the number of employees the company will employ over the next year, or however long the budgetary period may be. The budget must also include a breakdown of the different types of employees and the likely turnover rate in each category. Finding ways to reduce employee turnover is one of the most effective cost-reduction strategies a company can implement and must therefore be kept in mind throughout the budgeting process.

Forecasting Staffing and Compensation Costs

The HR Department budget should include complete information on the company's human resources from the current and several past years, as this data provides the most accurate basis for predicting future costs. Future costs must account for any planned or potential increases in salary or benefits. Some of these costs can be predicted with a reasonable degree of accuracy because they are based on established company procedures. For example, if a company provides a two-percent cost-of-living allowance and intends to keep it in place, the increased cost can be easily calculated. However, most future costs are not so straightforwardly calculable (How to find recruiters in your midst, 2012).

Healthcare insurance costs for employees are also relatively easy to predict accurately, particularly for larger companies that negotiate their entire annual healthcare contribution on a yearly basis with the insurance carrier(s) with which they have a contracted relationship. Estimating future healthcare costs for individual employees can be harder, however, since workers often have little advance warning of changes in coverage — sometimes receiving only a few weeks' notice before a consequential financial decision must be made. The HR Department must therefore plan staff time to help employees — individually or in groups — understand upcoming changes and make informed decisions. While HR Departments are often perceived as being on the side of executives, a well-run HR Department can fairly represent all parties involved in a company's operations. This service not only improves relations between workers and management but also specifically reduces turnover.

How a company compensates its employees — including wages and benefits — is part of the broader business strategy, and so HR budget planning in this area must be especially well coordinated with other departments. Future costs should also account for upcoming laws and regulations that may affect the company. A clear real-world example is comprehensive federal healthcare legislation, which requires HR Departments to determine how the company will be affected and to communicate relevant information to employees through meetings, individual appointments, emails, and other internal channels. Similarly, if industry-specific regulatory changes require additional employee safety training, the HR Department must organize such training — either in-house or through external providers — and budget for the time employees spend participating. These needs may be filled through temporary workers, overtime pay, or a combination of both (How to find recruiters in your midst, 2012).

When selecting new employees for any reason, the HR Department must budget for a range of tasks and functions. These begin with advertising the new position, including paying for recruiters or "headhunters" to perform a gatekeeping function so that HR staff can limit the time spent evaluating candidates who do not closely meet the requirements (Ulrich, 1996). The HR Department may also need to cover the cost of temporary workers until a permanent employee is hired. These costs can be relatively low for hourly positions but may be very steep for highly skilled roles. In some cases, a key employee cannot reasonably be replaced on a temporary basis, which may require the HR Department to help design workarounds that prevent the company's broader operations from being slowed or compromised (Ulrich, 1996).

Recruitment, Training, and Development Expenses

Once a pool of suitable candidates has been identified, other costs include staff time for conducting interviews, skills testing where relevant, and drug testing if required by company policy. Most companies conduct background checks on at least some employees, and these too must be budgeted. For higher-level positions, there are additional recruitment-related expenses such as flying candidates in for interviews and providing hotel and meal coverage — costs that would not apply to entry-level or part-time positions. One way for an HR Department to reduce such costs is to conduct thorough background checks before inviting candidates to interview in person, thereby limiting the number of on-site visits. Reducing recruitment costs in any reasonable and ethical way possible benefits both short-term and long-term company finances, given that effective recruitment is central to financial success even in capital-intensive industries (Human resources reports and essays, 2006).

The HR Department must also budget for a range of training and development programs addressing everything from new company policy to the regulatory changes discussed above. While there are certainly costs associated with such programs, well-designed training can allow a company to avoid far greater costs later. A training that helps employees comply with new regulations, for example, can save the company directly — by avoiding fines — and indirectly, by retaining good employees who might otherwise leave for organizations that act more proactively, and by preserving public confidence. If training is conducted off-site, additional costs such as travel and registration fees must be included. In-house training may require budgeting for speakers or consultants (How to find recruiters in your midst, 2012).

Among the most substantial line items in any HR budget are employee salaries and other forms of compensation. These include healthcare costs (covering — or not — dental and vision insurance), life insurance, and, increasingly, long-term disability insurance, which has become more important as the workforce ages. While fewer companies now offer traditional pension plans, most large companies must consider offering matching contributions to a 401(k) or comparable program. Stock-sharing or other stock options may also be offered, though these can be unreliable — especially in high-tech industries — and may not always function as effective recruiting or retention tools (Ulrich, 1996). Nonetheless, a strong employee benefits package may be essential for attracting and retaining high-quality employees, which in turn enhances organizational efficiency and is one of the more important indirect contributors to cost reduction. More and more, HR Departments are being held accountable for such indirect costs and benefits (Human resources reports and essays, 2006).

Additional direct compensation-related costs that an HR Department must budget for include the cost of running the department itself, overtime wages, and the cost of temporary workers. Helping a company limit overtime expenditure is a fundamentally important HR function; one approach is the judicious use of temporary workers, who generally cost less than full-time employees paid at overtime rates — both because temporary workers earn lower base wages and because they typically do not receive benefits from the company, or if they do, those benefits are provided through the temporary staffing agency (How to find recruiters in your midst, 2012).

One effective cost-reduction strategy is to reward the best employees so they remain with the company, thereby lowering turnover. Such rewards can range from cash bonuses and additional vacation days to more desirable assignments or even less tangible perks such as a preferred parking space. While such incentives may seem minor to an outside observer, a skillful HR Department will know its workforce well enough to design a rewards program aimed specifically at the employees involved (Conaty & Charan, 2011).