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Quality of HR planning – Part three: Costs to be planned

Posted by  Tijana Balotic Truong

In the previous articles we discussed the relevance of strategic direction in HR plans and the steps required in the planning process. After those are agreed, we move to the operational stage of the HR planning process. In this part, the focus is on:

 

  • Identifying the cost types to be included in the HR plan
  • Agreeing the assumptions required for the cost calculation

The types of costs included in an HR plan

The common costs that sit under the HR umbrella are:

  • Salary and fringe
  • Employee benefits
  • Recruitment, re-locations and employment terminations
  • Training and development
  • HR programs and initiatives

Salary and fringe (S&F)

In order to have a complete picture of the S&F amount, it is important to consider the various forms of employment contract that the company will use during the relevant period. Typically, those are:

  • Permanent contracts – full-time and part-time
    • Local hires
    • International assignees
  • Temporary contracts – people engaged for a specified period of time
    • Hired via 3rd party (e.g. employment agencies)
    • Contracts made directly between the contractor and the company
  • Contracts with seasonal workers

The distinction between contracts is relevant because each will trigger different type of costs. For example, when temporary labour is hired via an employment agency, it is necessary to plan for the agency fee as well.

Employee benefits

Everything the company provides to its employees as a benefit should be factored into the plan. Examples include bonuses and incentive schemes, company cars, employer’s voluntary pension contribution, health insurance, canteen costs, accidental insurance cover, apartment rental, children school costs and tax advisors.

HR policy, similar to any other company policy, should be compliant with local legislation, available in writing and approved by management. Benefits are often linked to the type of employment contract and the level of the employee within the organisation. Traditionally, international assignees receive a wider range of benefits by way of compensation for the additional challenges associated with moving. Also, more senior roles usually receive a higher compensation. On the other hand, a company could potentially make some savings by hiring people for a limited period of time and not always providing the same level of employee benefits to everyone. This will ultimately depend on how critical the role is.

A plan for these costs can be performed in detail, based on a clear and complete understanding of the company’s policies. Using historic spend can be a faster method of planning if no major changes are expected. Adjustments need only be made for inflation or general percentage increases in salary. For any benefit structure that is uncertain, a generic assumption can be made at first and then later details can be elaborated, once more clarity is found.

Recruitment, re-locations and employment terminations

Organisations often go through periods of staff increases or reduction. The costs associated with each of these dynamics should be planned for accordingly. Staff increases and recruitment might involve fees for headhunting services or vacancy advertisements (e.g. in the newspapers, online). If the expectation is that people will be hired from another location, the company might offer special bonuses or relocation packages including items such as flight tickets, house hunting trip, belongings shipment, settling-in allowances.

For any terminations of permanent employees additional payouts may be required. Sometimes the level of the payout is indicated in the employment contract, known as a “golden parachute”, or it is defined based on the local legislation and industry practice. In any case, it is important to properly factor these events and their costs into the plan.

Training and development

The strategy for training and development should be in line with the future needs of the company. Certain professions require regular knowledge updates or certifications (e.g. doctors, accountants, IT specialists). In other cases training requirements are driven by the agreed career progression of the employee. Some companies finance studies like an MBA or other professional courses. To secure the return on investment, organisations usually define specific conditions. For example specifying that the employee needs to stay with the company for a certain number of years after completing the course or payback the course costs if they leave earlier.

If the training plan is not clear in advance, costs can be planned by using the average spend per headcount as a base. This can then be adjusted for any known material change such as a new department or a change in operations that requires additional training.

Assumptions for cost calculations

Once the types of costs in the HR plan are identified, it is time to set valid inputs for calculating the cost value. The cost is usually driven by:

  • The number and level of people the organisation will need
  • The location(s) in which they will be working
  • The conditions required for having the right people

Manpower needs

The number and expertise of people that are required primarily depends on the company objectives defined for the plan period. This is because it is these people who need to meet these specified objectives. Manpower needs can be determined using a centralised or bottoms-up approach, dependent on company size and culture. If top-down guidance is given early in the process, it is helpful. For example. if the scene is set that there will be a “hiring freeze during the plan period” the planning process will be done differently compared to “15% headcount reduction during the plan period” or “the organisation needs to be rejuvenated”.

A bottoms-up approach is where the assessment of manpower required starts from the lowest level of the organisation. If a company is organised by function, and within each function there are several departments with specific teams, planning starts at a team level. Each team lead will provide realistic input on the team size and structure that is needed to deliver set objectives. These then get consolidated and reviewed.

The planning process is smoother if input collection and consolidation is standardised. Using automated tools can also increase efficiency since information is available faster and there are less processing errors. When consolidated staff numbers differ from the size expected by senior management, the plan needs to be revised or a rationale of the higher staff number needs to be prepared.

Main cost drivers

The total value of HR cost depends on:

  • Salary levels: Will there be an increase, decrease or no change?
  • Benefits: Will there be a structure change? (E.g. a new benefit introduced or an old one cancelled).
  • Location: Where will people be working? (In some cases jobs which can be performed remotely are moved to a location with a lower cost of labour).
  • Seniority and knowledge required for the positions: A higher number of senior profiles with specific skills will usually bemore expensive.
  • Retirement / new hires: The timing of each.
  • Types of training required.

Local legislation determines taxes and contributions, which can vary across contract types or the state might provide subsidies for vulnerable groups. The level of cost will also be impacted by the length of contract and the age or skillset of the people hired. In addition, international assignees can be subject to complex taxation requirements and the final cost to the company may depend on the existence of double taxation treaties.

Cost calculation

For confidentiality reasons, the calculation of salary and benefits costs is often performed by payroll specialists within HR. If the organisation is using an agency to take care of monthly payroll, plan computation may also be outsourced to the same provider.

Salary and employee costs are often a significant component in the overall operational costs of the company. As such, they have a visible impact on its profitability. At the same time, the success of the company is driven by its people, therefore any radical cuts in HR spend may put  existing gross margin at risk.

Management is continuously exploring various options to reduce costs without compromising quality. New technology enables improved models of operation (service centers, remote working or virtual offices), while outsourcing allows for specialised services to be found through partnerships. The next generation of employees, along with the organisations that will employ them, need more flexibility. HR plans need to recognise the new reality and adapt to supporting these new operation styles.

Tijana Balotic Truong

Tijana Balotic Truong is a performance management and commercial finance specialist, with 15+ years of international experience in large FMCG companies.

She is strong in risk management and developing business partnering within markets, regions and HQ, and is now helping start-ups and SMEs in the domains of strategy and finance.

Tijana is also active in NGO sector, most recently focusing on enhancing fund raising strategies and programs that improve children well-being.

She is a Chartered Global Management Accountant and a Master of Management.