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Key Components for Budgeting for Human Resources: Your New Year Checklist

In a New Year, the key components for budgeting for human resources are summarized by the three Bs: Budgets, Benefits, and Bonuses.

In the early part of Q1, every department is scrambling to get budgets aligned and approved, which includes headcount and associated salaries. New benefits also usually take effect January 1, which can mean fielding a slew of questions from employees about changes to health insurance, fringe benefits and office perks. It’s also annual bonus season. If your company is like most companies, performance reviews are completed in January or February looking back at the previous year with bonuses to be processed and paid out before the end of Q1.

In other words, the beginning of a new year is a busy time for human resources.

Of course, budgeting for human resources involves more than the three Bs. Viewed holistically, the key components for budgeting for human resources include all of the following:

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  • Compensation and Benefits
  • Hiring and Onboarding
  • Training and Development
  • Employee Relations
  • Health and Safety
  • Performance Management
  • Employee Experience and Retention
  • Operations and Technology

These in turn break out into additional key components. For Compensation and Benefits, this includes cost estimates for salaries and salary increases, payroll expenses, incentive compensation and all benefits costs, including administration. For Hiring and Onboarding, key components include costs for applicant tracking systems (ATS), jobs board advertising, background checks, drug testing, referral programs, and so on.

Budgeting for human resources is complex in part because employee programs are intrinsically interconnected. The human resources department must estimate budgets based on growth projections, employee headcount, benefits cost increases, salary cost increases, and turnover rates and use that information to set a budget plan.

This is a lot to navigate.

This is especially true when it comes to compensation and benefits as headcount impacts nearly every part of the business, especially in a high-growth year where hiring is on the rise, and the numbers are constantly shifting. Whether you just got handed responsibility for compensation as a new compensation manager or need to decide what to do with some remaining HR budget from the previous year, it can be difficult to stare at the next 365 days and know what to focus on.

Don’t worry. As compensation experts, we’re here to help. Regardless of how you ended up with the responsibility, there are some best practices for how to approach compensation at the start of a new year.

1. Be strategic: Identify what matters to the business and do your research

What you should spend money on depends on where you’ve been and where you’re headed. Start with the business strategy. Are you in a period of retraction, maintenance or growth? Where are the biggest threats and opportunities? Does the business need talent to bring in more revenue, service more customer accounts, expand to new locations, or enhance the product offering? Are you struggling to attract and retain top talent in a competitive talent economy? Do you need more or better trained managers to invigorate and grow the talent you already have?

Your talent strategy will depend on your business strategy and your compensation strategy will depend on your talent strategy. Plan accordingly.

The start of a new year is also a good time to look back on HR programs from the previous year and determine what didn’t get done, what has been fruitful and what didn’t have the impact you were hoping for.

To get these answers, talk to executive leaders, line of business managers, department heads, and the talent recruiting teams. Survey your general employees. You should be able to get a sense of where the biggest pain points are when it comes to operations (where the business is overburdened and understaffed or where there is discord and disengagement) as well as concerns around acquisition and retention. You might also calculate your employee turnover rate and the cost of recruiting new talent for critical roles within the business. Finally, if your business conducts employee engagement surveys or exit interviews, this would also be an excellent time to go through that data and look for patterns that can help illuminate challenges and how to improve the employee experience.

Finally, you should familiarize yourself with the job market, specifically changes to unemployment and cost of living and averages for annual salary adjustments necessary to keep up with inflation. You should also look at what your industry and competitors are paying talent and be proactive about adjustments to salary to keep valuable talent from becoming a flight risk. The beginning of a new year is a good time to give market pay adjustments and merit pay adjustments. Providing a well-informed bump in compensation to deserving employees proactively goes a long way in ensuring loyalty. After all, year over year, higher pay is the primary reason that people give for quitting their jobs.

2. Get estimates for new investments in compensation research early

Once you have assessed where you’ve been and where you’re going, you will be armed with the business story you need to make a strong case for new or better investments in compensation data.

Accurate data is a critical component of any compensation strategy, but it is a common mistake to jump straight into compensation data projects — like doing a pay equity audit to make sure you are paying women and minorities equally — without first getting buy-in from leaders and approvals on an appropriate budget.

Without money, you can’t make any new investments in compensation data. Of course, in order to know what is an appropriate budget, you first have to get estimates from providers. Intensive customized reports from global HR consulting firms will vary vastly from reports that are compiled from third party survey data which will also differ from real-time market salary data and analytics from compensation management software. If you have no idea what compensation data should cost or the value of one solution over another, it is a good idea to get some preliminary estimates that include the accuracy, time commitment, and the potential impact of each investment. Obviously, here at PayScale, we believe that up-to-date market data as part of a software subscription provides you the most accurate information with the most tangible value.

However, it is important to keep in mind that the impact of compensation data depends on what you do with it. A report that goes into a drawer doesn’t do much good for anybody. Neither does a software subscription that you never use. What action you should take will depend on what the data says, of course, but it also depends on the organization being ready to act on the insights. You should plan far enough ahead to know what your compensation strategy will be once you have updated data to work with, and you should get buy-in from the affected parties on that strategy.

In summary, get estimates on compensation-related investments early. Know whose buy-in you need to execute and prime the proper parties to be receptive to a strategic compensation plan in advance. That way, when you are greenlit on a compensation data project, you will know what to do with the data once you have it and none of your efforts will be a waste.

3. Create or update job descriptions

You should have job descriptions for all the roles in your organization. Job descriptions are detailed, internal documents that define the responsibilities, authority, working conditions and expectations of a specific role in an organization. Job descriptions are different from job postings or advertisements written by hiring managers and used by recruiters to attract applicants for open positions. Ideally, every employee is issued a job description at the time of hire that is accurate to the position.

Job descriptions are important to have because they are admissible in court. They can protect the organization from lawsuits because they document the differences in responsibilities between two employees who receive different pay even if their titles or job levels (e.g. Director vs. Director) are similar. Job descriptions can also protect organizations from other kinds of legal trouble.

Job descriptions are a considerable time investment to update, though, especially in an enterprise-level organization with hundreds or even thousands of jobs. Don’t underestimate the size of this project but do consider the ramifications of not having accurate job descriptions. A full job description audit and update might be unnecessary if the objective is just to organize or provide merit increases at the beginning of a new year, but it is absolutely essential to have job descriptions for legality and compliance purposes.

An updated job description is also a useful tool for performance evaluations and merit pay increases, so they are worth thinking about at the beginning of the year, even if a full job description audit needs to be deferred. Job descriptions are particularly useful for conversations about compensation with variable pay structures. Job description updates are also good to do in preparation for investment in a performance management system, whether new technology is being implemented or processes are being updated.

In summary, you need job descriptions for legal reasons. If you don’t have any, find the budget somewhere to create them. But if they just aren’t as organized as you like, you don’t need to do a full audit and overhaul all your job descriptions in order to do compensation adjustments.

4. Communicate your compensation strategy

It’s all too common for organizations to invest in compensation data or compensation management software, build a compensation strategy around the information, and then never communicate it to employees.

This is a mistake.

Although HR has traditionally kept salary information close to the vest, expectations are changing. Most employees today have access to salary information. General salary research data is easily obtainable online from PayScale, Glassdoor, the U.S. Bureau of Labor and Statistics, and in social media. Employers legally can’t prohibit discussion of salary and working conditions among employees, as this is protected by the National Labor Relations Act.

Salary discussions among employees shouldn’t be cause for concern, though. If you aren’t discriminating against protected groups or intentionally trying to underpay your workers, some level of pay transparency is actually to your benefit. Most people just want to know that they are fairly paid.  Most people assume they are not if there is no communication about how compensation is decided. This perception is true even among people who are actually paid above market.

In most cases, it benefits companies to be more transparent about compensation, especially when it comes to communicating total compensation packages. The average employee is unaware of how much it costs their employer to provide benefits and how these investments are intended to increase employee engagement and retain top talent. If you want your employees to understand that you are investing a great deal in their health and wellness, learning and development, office perks, or other benefits so that they will stay with the company, you need to tell them! Break down the numbers and show the investment of total cash compensation versus total compensation that includes benefits. Most organizations see positive results from providing a total compensation statement to employees along with the job description and other parts of the offer letter or onboarding documents. The degree of transparency associated with total compensation statements can vary depending on your organization’s pay philosophy.

[Note: PayScale’s Insight Lab product can auto generate total compensation reports with flexibility on the level of pay transparency]

total compensation report example - PayScale

Reviewing what goes in the total compensation package is a good exercise at the beginning of the year, but so is reviewing how you communicate total compensation statements, as there is a right way and wrong way to do this. PayScale’s Compensation Best Practices Report (CBPR) found that only one third of companies offer training to managers on how to have pay conversations. Providing employees with a total compensation report is a great tool that will reduce the need for tough conversations later, but you still need to train managers on how to talk about comp.

In summary, even if you have no budget to spend on new compensation data, you can still make an enormous impact by reviewing your communication strategy around compensation and implementing best practices for pay transparency and communication around compensation in the New Year.

Amy Stewart
Sr. Content Marketing Manager at PayScale
Read more from Amy

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