Human resource costs can represent a large portion of an organization’s budget. They also come in a variety of shapes and sizes: hourly, salary, permanent, temporary, contracted, etc. This blog provides a range of methods to estimate these costs. A key feature is that there is not a one-size fits all solution.

The Economic Exchange of Humans

A person paid to come in and help your organization out is a human resource. Excluded from this definition are people NOT paid but who still come in and help – volunteers. This group is discussed in other blogs and including ways to care and feed them.

The relationship a person has with your organization runs a gamut of their economic ‘skin in the game’:

1. Owner: While anyone who has shares in their employer is an owner, this category is for individuals whose economic benefit comes from ownership versus being an employee. A small business owner who does not draw a salary but draws equity instead (e.g. dividends) is an example
2. Salary-Employee: An individual who receives the same compensation no matter how many hours worked.
3. Production Unit-Employee: Base compensation is calculated by the number of units contributed to the organization. The most common unit is time (e.g. an hour of their labour) but others units may be used as well. For example, art work submitted, courses taught, units produced, etc.
4. Casual Employee: All of the above presupposes an ongoing and exclusive relationship between the individual and the organization. A casual employee does not have this relationship and may provided their labour or efforts to a number of organizations even those in competition with each other.
5. Contractor: Other than an owner, every employee has a contract with their employer. This type of contract is recognized and protected by statutes and common-law. A contractor, by contrast, has engaged with the organization without this employer-employee relationship.
6. Students and Interns: These individuals may receive monetary compensation but part of the exchange is the experience and credibility they gain from the organization.

Basis of Compensation

Excluding pure owners from consideration, the payments made to the above are based on a number of factors that incorporate performance, seniority, desirable working conditions and legally-mandated payments. The following is Alberta and Canada centric but is representative of most western countries [2]

• Base Pay: May be a salary (e.g. $120,000 per annum, divided by 12 months), hourly-unit (e.g. $25/hour), other-unit (e.g. $10,000 to teach Intro to Economics this semester) or in the form of a stipend (e.g. $5,000 living costs for an otherwise unpaid internship).
  • The determination of the base pay is a function of negotiations or a set time in position pay scheme.
  • The floor for hourly pay is set by minimum wage laws.
• Performance Pay: when an employee’s output exceeds a set level, there may be additional pay. For example, a sales bonus unrelated to hours worked but corelated to sales made.
• Desirable Working Incentives: individuals working evenings, nights, weekends and statutory holidays may receive additional pay based on the time worked against their base pay (e.g. a nurse working nights receives a $5.00/hour supplement).
• Legally-Mandate payments: In Alberta, an employee either has a statutory holiday off with pay or must be paid at least 1.5 times their normal base pay.

How Many Humans are We Talking About Here?

The larger the organization the more similar some employment relationships become. A union agreement will standardize this relationship into a contract. Even in a non-union environment, the shop-floor workers, office-staff and executives are similar enough that their costs can be calculated as a group. A key consideration for this grouping is how many human units are involved – and thus the concept of a full time equivalent (FTE) and positions [1].

There are a number of FTE definitions but they generally boil down to one year’s worth of work. Five part time people working 1 day a week each have a FTE of 1.0. The FTE is typically expressed against a position. A single position has the following characteristics:

• Job Description and Competencies: There may be a formal-job description or an informal implicit understanding. This document describes the tasks, duties and responsibilities of the role. An individual may under or over perform against this list.
• Pay Range: Based on the job description, there is a common pay range for the individuals. Where an individual is ‘out of range’ against their peers or past/future employees, there is ideally a legitimate justification for it. For example, a junior person may be paid less because they are considered an ‘under-fill’ for the role.
• Supervisor and Relationships: A position typically reports to a single supervisor. There may be identical positions elsewhere in the organization (e.g. a staff nurse position in multiple wards), this reporting relationship makes a position unique and identifiable.

Non-Working Costs

A key difference between a contractor and an employee is the payment of benefits. Contractors are paid more than an employee because they must fund their own pension, health insurance, taxes, etc. An employee foregoes this extra money for the security of the collective payments (and protection from things such as summary dismissal).

The following are typical non-working costs for most employees. A base level is usually mandated in law and exceeded by most organizations hoping to attract and retain the best individuals.

Statutory Payroll Taxes, Fees and Social Programs

• Canada Pension Plan (employer and employee portions)
• Employment Insurance (employer and employee portions)

Employer Benefits

The following lists the more common benefits but is hardly exhaustive.

• Supplemental retirement benefits through pension plans, Registered Retirement Savings Plans and other vehicles.
• Insurance plans (health, life, other).
• Social benefit payments (health spending accounts, counselling services).
• Non-work-paid benefits (family, bereavement, sick leaves; vacation; study time for courses)
• Top-up leave benefits (sabbaticals, m/paternity leave)
• Allowances Training allowances
• Equipment, clothing and uniform allowances

Payroll Complexity

If you have been keeping count, there may be dozens, and some cases – hundreds, of factors that determine an individual’s compensation. This is why payroll and compensation has become its own professional branch of work with designations and certifications.

Organizations manage this complexity by outsourcing the function to a provider or by in-sourcing and buying technology designed to handle the complexity. These costs and investments are to ensure people are receiving their proper compensation. How about estimating these costs as part of a budget process?

Factors in Selecting a Human Resource Budget Method

In addition to the above, the following factors need to be taken into consideration when deciding how complex and detailed a human resource budget process should be:

• Materiality: If staffing costs are a fraction of total budget (e.g. supplies, facilities, material, etc.), then time budget effort is best spent elsewhere.
• Turn-Over: A stable staff complement is easier to cost then one in which individuals zoom through a revolving door.
• Seasonality and Surges: Similar to turn over, staffing may follow a business cycle (summer, Christmas, etc.) or on demand (emergencies, elections, etc.).
• Vacancy Discount/Surcharge: When one individual leaves, it may take sometime before a replacement is onboarded. This period of not paying the individual is a discount. Conversely, if overtime has to be paid to cover for the vacancy, this savings can become a cost.

A Cascade of Budget Strategies

As in budgeting itself, there is an inverse relationship between the degree of complexity of the budget and its usability. Payroll activity is complex and technical. The budget process can attempt to capture this complexity but if reality changes then the budget is out of date.

Method	Description	Use When…
Roll-Over	Based on historical costs. Add a simple +/- factor for simple changes such as salary increments. Use at an organization or unit level.	Staffing is stable with few changes period over period.
Simple Positions	Identify positions for which there is already a staff member in the role or hiring is anticipated. Gross up the salaries by a set amount for benefits, taxes, etc. 25% is a generous number. Any number of FTEs can be attributed to a position.	Positions are stable with few or planned vacancies. Salary costs are straight forward, e.g. few premiums or straight forward benefits.
Complex Position Management	Using appropriate technology, develop the algorithms to manage as many variables in staffing as possible (premiums, salary increments, benefits that vary significantly within individuals, etc.). At a minimum, this will require a spreadsheet to perform the calculation and preferably it is done by your payroll system/ provider. As noted above, there are diminishing returns in adding calculation complexity when the underlying environment is unstable (e.g. staff-turnover, unknown premium entitlement, etc.).	There are a large number of staff and this is the focus of your organization. A union contract often specifies the parameters need to construct the algorithms. Ensure your systems, provider or staff can create and sustain the results.

Putting It All Together

Budgeting for a large staff complement is a resource and time intense activity.  There is the motivation to refine the prediction to perfection.  As in all budget activities, the law of diminishing returns applies to seeking perfection.  

Notes and References

1. Wikipedia: Full Time Equivalent.
2. Payscale provides a  good overview: WHAT ARE THE DIFFERENT TYPES OF COMPENSATION?