Budget season is now underway for many organizations. Headcount planning is a major factor in developing the annual budget. The primary task of headcount planning is analyzing current employee headcount compared to future hiring needs by line of business, department or project based on the company’s overall goals and strategy. It takes into account the cost of incumbent employees and the projected costs of retention and hiring to meet the headcount plan for the budget year. When tackled as a thoughtful and thorough cross-departmental process, headcount planning benefits the business overall and provides a clear annual talent retention and acquisition strategy.
Steps for Headcount Planning
Here are the fundamental steps for headcount planning.
Review the organization’s upcoming personnel needs to address business challenges and goals. This is a cross-departmental task.
Compare incumbent salaries to market rates. This is typically called salary benchmarking or compensation benchmarking. Human resources (HR) handles this task and the next.
Figure the cost to bring incumbent employee salaries up to market rate and the cost to competitively attract new hires per the business plan needs.
Compare the total headcount plan cost to the business plan's overall budget and adjust the headcount plan as needed. This is the concluding cross-departmental task.
With these core steps, the outcome will be a clear headcount plan that HR and talent acquisition can use to form their strategy for recruiting, hiring and retention efforts for the coming budget year.
Connect Business Goals and Plans to Personnel Needs
Who should have a seat at the table for identifying personnel needs for the upcoming budget year?
HR can contribute information about current year headcounts and identify where hiring, retention and related issues have gone well and where gaps remain.
Business executives, department heads and finance can share how their operations and projects have fared regarding personnel and how they foresee these needs changing to accommodate upcoming plans and projects for the next budget year. Overall estimated budgets and the personnel line items within those are put on the table.
This step should occur as soon as business leaders have arrived at tentatively agreed plans and budgets.
Let’s say an organization is preparing to introduce a new product. To meet objectives for this new product, the organization may need to increase its headcount on the product development, production, marketing and sales teams to carry out these objectives.
Alternatively, suppose an organization hasn’t met its product sales goals for the current fiscal year and plans more modest production goals for a few months to deplete accumulated inventory. In this case, production personnel hours would be decreased for a matching period then increased again to support a return to a higher production run rate.
It is at this step that the Analysis tool within LaborIQ® can provide economic insights on a national and per-metro level. The Analysis tool can aid business executives with their business planning. It provides a look at forecasted job market recovery from the pandemic and for GDP, higher education and population trends for the next six years, which can affect market demand assessments.
These cross-departmental discussions and the resulting headcount impacts form the basis for the next steps.
Incumbent Employee Salary Benchmarking
The salary benchmarking process includes 3 basic steps: 1) collecting salary surveys to find the current market rate and ranges for all jobs, 2) organizing current incumbent employee data by job, experience, education, and other criteria and 3) making the salary comparisons.
The outcome of salary benchmarking is critical for two main reasons:
1) Understanding the current market rate for all employee roles and anticipated increases or decreases in these rates for the coming budget year provides the basis for annual budget calculations.
2) Identifying personnel being underpaid per market rate provides insight into retention risks for key employees and opportunities for salary corrections to improve retention outcomes. Likewise, it identifies those being paid at or above the market rate for consideration when planning future raises.
Accurate salary data forms the heart of the benchmarking process. It is based on these factors: location, talent supply, skills, experience and industry. Company size and annual budget can also play a role.
Gathering this data can be a major project for the HR department and consist of purchasing various salary surveys, manually searching free salary sources and possibly using data tools. These sources may or may not take all of the necessary factors into account in their numbers, such as providing a national figure which could differ significantly from an appropriate local rate.
Here is the first suggested headcount planning shortcut: use LaborIQ for your benchmarking task.
The extensive LaborIQ database and proprietary algorithms account for all of the important salary factors and even apply economic factors to provide accurate current market rate salaries. By entering a spreadsheet of current employee data that includes relevant factors, the LaborIQ Benchmarking tool generates a complete benchmark report that can be viewed in convenient dashboards as well as in spreadsheet format.
Figure Projected Headcount Costs for Incumbents and Planned New Hires
This step consists of calculating and totaling two headcount cost elements: the cost to retain incumbent employees and the cost to competitively attract and retain planned new hires.
Wouldn’t it be helpful to be able to see into the coming year to know how much the market rate would change for a given job? Next year’s competitive salaries form the basis for this step. Once these figures are identified, the calculations are straightforward based on the headcount plan thus far.
For incumbent employees, calculations would begin with the benchmarking report. HR would bring forward these current costs for retaining incumbent employees at the current competitive market rate, which is especially important in a labor market that favors workers. Next they would apply any typical annual salary increases for cost of living raises and consult with business managers to identify employees tagged for merit raises or promotions and those planned to exit for retirement or other reasons.
Here is the second recommended shortcut: use LaborIQ Compensation Answers for instant, market-driven annual and variable compensation answers for the following year’s projection for competitive market-rate salaries adjusted for your organization’s employee roles and details. LaborIQ provides projected salaries per specific job based on demand and supply plus surrounding economic factors, for the following year and six years out.
Next, new headcount needs can then be applied to the resulting incumbent employees with their market-rate base figure. Costs can then be projected to competitively hire the added headcount. This will provide the total projected cost for the preliminary headcount plan.
Finalizing the Headcount Plan
To prepare for the final cross-departmental step, HR would compare their projected headcount plan and costs against the preliminary business budget provided in the initial meeting.
If the projection differs significantly from the provided business budget for headcount, HR should bring not only their projected totals spreadsheet but also details such as job salary ranges for the coming year and proposed ways to accommodate both business needs and the realities of the labor market. These detailed preparations and insights by HR are what will gain the respect and credibility of HR as a valued player in the overall operation of the business.
In this final step of adjusting the headcount plan to the business plan to resolve any anticipated headcount budget issues, business leaders and HR come together again to hear from HR and then apply informed judgment to balance any necessary adjustments to the plan. By working together, the pros and cons of various options can be considered by all affected parties so that the optimal final headcount plan can be agreed to. Shortcuts at this point would only lead to issues later.
Make Headcount Planning More Realistic and Effective
A solid headcount plan provides HR and talent acquisition with a clear roadmap around which to set their upcoming strategy and tactics, setting them and the company up for success.
With the right software like LaborIQ, the HR team and hiring managers can be more effective in their headcount planning to meet business needs. Being able to rely on accurate, unbiased salary answers will help by reducing the risk of inaccurate budget forecasts per employee, reduce the risk of losing key employees to competitors for unintended lack of competitive compensation and assist with recruiting new candidates in a competitive job market. Such a talent intelligence tool can also significantly reduce the time and effort to achieve a final headcount plan.