Having already figured out all the elements that require budgeting in Part 1 of this blog series, let’s have an overview of the actual budgeting process.
It is imperative for an HR manager to have a rationale for each cost element, old or new. Why? The process of reasoning requires an HR manager to delve deeper into the realm of data/ information (company and competition) to acquire an understanding of the business and to see linkages between HR processes/ practices and the business.
Please read ahead while wearing the hat of an HR manager!
- For the current business, work out the numbers taking into account the company’s projected attrition percentage (average of last two years), industry attrition percentage and business plans.
- Remember that infant mortality (attrition within three-six months of joining) is very high (30-35%) for volume recruitment done for large expansion projects.
Consider parameters such as revenue per employee, the impact of technological changes, productivity measures, clubbing of offices, outsourcing plans, business reorganization, etc.
- The vital point here is exhaustive discussions with Heads of Departments (HoDs). Such discussions help you, as an HR manager, to comprehend the business better and help HoDs appreciate your insights for optimizing the employee count.
Sourcewise recruitment and selection cost
- Based on your analysis of the past data in terms of contribution of each source to overall recruitment and cost thereof, assign numbers to each source. Drop the sources that are either cost-ineffective or not contributing significantly to overall recruitment and explore new sources, if required.
- The impact of efficiency or new measures (example – increased use of web conferencing vs. in-person interviews, more use of social media vs. print media, etc.) calls for due consideration before finalizing the cost.
- Make sure you have effective negotiations chalked out with concerned vendors - portal, consultant, print media, hotels, travel agents, etc.
- Allocate revised numbers and individual costs to each source and arrive at the final numbers. This gives the final cost-per-hire number.
Compensation (CTC) and non-statutory benefits
- Consider inflation (average of last two years - CPI is the most common indicator), projected performance increment percentage and the industry data (survey at least four-five competing companies, mainly those to whom you are losing employees and check salary trends at relevant campuses for entry-level positions).
- The amount of overtime depends on outsourcing plans, technological changes, productivity measures, etc. Make sure that you check for statutory liabilities on overtime payment.
- Budgeting for incentives (Sales, Production, Marketing, Business Development, etc.) depends on the respective HoDs’ strategy. However, an HR manager must ensure a comparison with two-three select companies on these parameters to help the HoDs calibrate their incentive design including cost.
- For other benefits, again effective negotiation with vendors bears a significant impact on the final budget. Remember to factor in the projected workforce numbers.
- Keep in mind the key business ratios like wages to sales, wages to total cost, etc., while freezing the compensation budget. CFOs would be of great help for this.
Statutory benefits/ Cost
- Incremental and new costs depend on the final compensation budget and any changes in the company’s policy (For example – The CEO proposes to give out bonuses higher than the previous year’s bonuses, subject to certain criteria).
- For mediclaim premium, factor in the change in coverage (example – from ‘only employee’ to ‘employee and spouse’ and/or increase in coverage amount) if any proposed.
- If the company is focusing on gender diversity through recruitment of more female employees, make sure that you have guesstimated provisions with regard to maternity benefits.
- It is useful for you to understand the process of calculating bonus as per the Payment of Bonus Act and actuarial valuations for determining the provision of gratuity liability.
Training and development
- Have a yearly training plan based on the performance review process and business requirements and have it duly endorsed by the CEO. A training plan typically consists of a program brief, target audience, purpose, estimated cost, post-program actions, feedback process, etc.
- Take into account last year’s data for relevant cost items, build in the inflation partially or fully depending on the item, and work out a budget for each program.
- If the company is planning to strengthen self-learning through suitable technologies, provide for the capital cost and corresponding operating expenses.
- Where there are tie-ups for facilities (hotel, travel, conveyance and audio-visual equipment), again make sure negotiations happen for cost optimization.
- For repetitive programs, have an annual contract with the faculty.
- Finalize the types and number of events, number of employees who will attend, and broad design of each event in consultation with the CEO. Treat these events as an opportunity to communicate to your employees – vision, business plans, progress, mid-year critical changes, etc.
- Most cost elements here are predictable and require suitable extrapolation.
- A large portion of the cost comes from logistics (hall, food, prizes, travel, conveyance, stage arrangements, etc.) and hence good and advanced negotiations with vendors help manage the cost effectively.
- Review the existing policy/ practices and make suitable changes, if required, in consultation with the HoDs and your CEO. These changes can be in terms of either amount of reward or increase in the frequency of rewards or introduction of new rewards.
- It is advisable to review what your competitors are up to! Alternatively, your company can choose to lead the industry.
HR Surveys and Interventions
- Finalize interventions in consultation with your CEO.
- Provide references of at least two or three consultants with relevant credentials along with your order of preference.
- Foresee any post-intervention work that may require allocation of funds.
- Cost here entirely depends on the design of the intervention, actions after the intervention, consultant fees and incidental expenses.
- Such interventions happen once in two or three years and hence, past data may not have great relevance.
- For ongoing and anticipated legal cases, provide for lawyer fees and incidental costs in consultation with your Legal Head.
- Provide for likely financial liabilities (in the event of the company losing the case) and keep your CEO posted on the same.
- For travel costs of HR team members, finalize the tentative travel schedule based on your recruitment plans, proposed on-site meetings, etc., and then provide the costs mainly based on the past data.
- Discuss with the Head of Purchase for understanding available options for proposed requirements and then provide for cost suitably.
- Pay attention to ease of maintenance, easy availability of spares, service quality of vendors, and employee-friendliness of the product/ service.
The process of budgeting is a great learning tool for you, as an HR manager. It enables you to acquire an understanding of the business. This, in turn, helps you to visualize the implicit and explicit role of the HR function in helping your company achieve its goals.
In other words, the process of budgeting goes beyond mere numbers. It is actually about demonstrating the your capability as an HR manager of being a business partner.