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very important today. Headcount should be done by position and department, since most executives can analyze headcount reports with this information. This type of report will enable the executives to determine whether departments are under- or overstaffed.
DIMENSIONS AND CHART OF ACCOUNT CONSIDERATIONS
The dimensions that your company chooses will be dependent on how you are going to budget your employees. If you are budgeting by individual employee, then you will need an employee number, at the minimum. You may also want to include a po- sition code. But if you are budgeting by position code, then you will not need the employee number. This is generally used for security reasons so that no one will have access to the salary information of others.
For the chart of accounts, it would be best to have a separate account for each type of compensation and benefit. Examples include regular payroll, overtime, in- surance, taxes, 401(k) contributions, and parking.
TOP-DOWN OR BOTTOM-UP APPROACH
The best practice in employee budgeting is to use a hybrid of these two methods.
Upper management should make assumptions about the annual increase percentage, the month of the annual increase, the 401(k) percentage, medical and dental ex- penses, and tax percentages for consistency across all departments. The managers for each department should budget by individual employee after upper management determines the assumptions, as they will have a better idea whether a certain em- ployee deserves a higher percentage increase than another employee. Management should be able to determine the bonuses, based on a departmental estimate received from the corporate offices.
DRIVERS
The main driver of employee costs is the annual increase. Workers in the United States typically expect a raise every year, regardless of the financial strength of the company; they also expect to see an increase regardless of the company’s overall performance. But meeting this expectation goes against a company’s belief that it should always try to reduce costs. Should a company always give an annual raise to every employee? An employee may not feel greater motivation to work after a raise;
conversely, an employee may no longer care about performance if he or she does not receive a raise.
Some companies give multiple increases during the year, but typically, there is only one increase a year. Companies have a choice on how to communicate the annual raise to their managers. A rate can be set by the executives, which may be adjusted by individual managers with a comment as to why they are adjusting the per- centage. Also, a company might communicate a minimum raise, such as a cost-of- living increase, which the individual managers can increase or leave as-is. The other
choice is to give each manager complete control over the percentage increase given to employees, but with some guidelines from the executives.
A bonus is another typical employee budget driver and some companies pay out multiple bonuses throughout the year. The other drivers are hire date, termination date, medical and dental expenses, 401(k) percentages, and all taxes, such as FICA.
ASSUMPTIONS
There are many assumptions that the corporation should consider before launching the budget process. The following are the assumptions that should be included for employee budgeting:
• Raise percentage. There should be an annual percentage set for all employees, which can be adjusted by the managers if need be.
• Raise month. Typically, all raises happen in one month during the year.
• Bonus month. Some companies have more than one bonus month, but the month(s) should be consistent across employees.
• Health insurance. Typically, there is a dollar amount per employee for all full- time employees.
• Employee taxes maximum (e.g., FICA). This should only be budgeted in com- panies where employees comprise a large percentage of overall expenses.
• Employee tax percentage (e.g., FICA). This should be consistent across em- ployees, and it should be determined at the corporate, not the department level.
• 401(k) maximum. This is comparable to the employee tax maximum. It, too, should only be budgeted by companies with large employee expenses.
• 401(k) percentage. This percentage, if any, should be determined at the corpo- rate level.
• Future hires’ salaries. Each company needs to determine how to calculate new- hire salaries. Basically answer: Are the managers of each department going to de- termine the salary of their new employees, or will human resources direct them?
SPECIAL CONSIDERATIONS
The main consideration is whether to budget by each employee or by job position (salary grade). There are advantages and disadvantages to each solution:
• Administration. Budgeting by employee is much more complex than by job po- sition because of employee turnover. A job position will have an average salary, along with the number of positions to be filled within each department. Using this method, it will not matter if someone is fired because another person will probably fill the position in the near future. But when budgeting by employee, the current employee has to be terminated in the budget process and a new em- ployee then has to be hired.
• Confidentiality. This is a major issue in employee budgeting because it could cause hurt feelings and be demotivating if salary amounts were discovered by employees. A job position budget has greater variability and does not have a name attributed to the salary. A salary attributed to an employee is an absolute amount, whereas an average salary attributed to three accounting managers would not have as much meaning to an employee.
• Comparison. Many companies want to figure out what a particular person will make in the coming year. Position budgeting may not have as much meaning to a department manager, whereas a position may have more meaning to upper managers because they will not know every employee and their job titles. One major disadvantage to position budgeting is that the salary is an average, hence may not be indicative of the actual salary of positions from year to year. An- other disadvantage is that headcount reports may not be accurate. An example would be if an employee quits and the position remains unfilled for six months because a qualified employee cannot be found. In employee budgeting, the headcount would be zero for those six months, but would still count as one if you are budgeting by position.
Another special consideration is the calculation of benefits. There are two main techniques to calculating benefits, such as FICA and SUTA taxes, insurance, worker’s compensation, and 401(k) contributions. The simple way is for the orga- nization to determine an average rate for each of the benefits and calculate it from the total employee department cost. Additional formulas can also be entered to de- termine the maximum FICA and 401(k) amounts per year. The positive aspect of the simple technique is the speed of calculating benefits. A company can also con- duct what-if analyses quickly, by changing a percentage and determining the dif- ference in the benefits. The disadvantage to this method is that the costs will not be 100 percent accurate. For some companies, this is not a problem, but for many oth- ers, employee benefits comprise a large percentage of their overall costs, so they want to know exactly what the total cost will be for the coming year.
The second method should be undertaken only if employee benefits are one of the most expensive costs for your organization. Basically, each employee has to be
“tagged” with a benefit percentage for each of the benefits listed. For example, John Doe will have a FICA and SUTA tax percentage and insurance amount, while Jill Doe will need a percentage for herself, too. This method will determine the overall benefit expense more accurately than the simpler method.
USERS
Managers should be the only users of employee budgeting. This information is highly confidential and should be off-limits to employees. Managers should only be required to enter a few lines of data per employee, such as raise percentage (if dif- ferent from the corporate raise), bonus amount, termination date (if needed), hire date for new employees, and a salary for new employees. All other information,
such as monthly salary, headcount, and benefits should be automatically calculated by the system that you are using.
BEST PRACTICES
The first task that needs to be done is for the finance department to determine the tax percentage information. Basically, this is the percentage and maximum amounts for each of the taxes that your company pays out. For example, the finance depart- ment would enter 4.5 percent for 401(k) matching, with a ceiling of $72,000 in salary, which implies that an employee will no longer receive 401(k) benefits after reach- ing $72,000 in salary during the year.
First we will cover the current employees. The best practice here is to have human resources send the following information to the finance department prior to budgeting:
• Employee number
• Employee name
• Position code
• Position title
• Department
• Annual salary
Some managers will want additional information, such as hire date, but this is supplemental information that is not really needed to calculate any line items. Other areas are specific to certain companies, such as overtime eligibility, 401(k) eligibility, and department charged, but we are going to concentrate here on the majority of companies. For each employee, the preceding information should be locked, but the manager should be able to enter the following information:
• Raise percentage. This could be a global percentage from top management, but you can still grant override access.
• Raise month. This is usually consistent across all employees.
• Bonus amount or percentage. Executive should determine the guidelines for paying bonuses.
• Bonus month. This should be determined by the executives.
• Termination date. This is useful if you hire employees under contract for a cer- tain time period.
After all of the preceding information has been entered, the system that you are using should be able to calculate a monthly salary, the bonus, and all benefits. The salary and bonus will be calculated from the amounts entered by the manager, while the benefits will be calculated from the percentages entered by the finance department.
For new hires, there are only a couple of differences. First, there should be an entirely separate form for new employees. Though you probably won’t know the name of these future employees a name text field should be included so that the man-
ager can enter a name or some type of description as soon as it becomes available.
There also must be a hire date for new employees, because their salary will not start on the first month of the fiscal year. As noted for current employees, many of the input lines are locked, but all of this information, such as title code and salary must be open for entry for new employees. All calculations will be the same for them, ex- cept that certain benefits may be eliminated, such as 401(k), since new employees may be ineligible for these benefits (see Exhibit 11.1).
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SALARY INPUT FORM BUSINESS UNIT MANAGEMENT—01-110 Currency: USD ExistingAnnualRaise % RaiseEnd EmployeePositionSalaryDefaultOverrideMonthMonthJanFebMarAprMayJunJulAugSepOctNovDec Doe, JohnSupervisor55,0007.0%44,5834,5834,5834,9044,9044,9044,9044,9044,9044,9044,9044,904 Doe, JaneAnalyst50,0007.0%44,1674,1674,1674,4584,4584,4584,4584,4584,4584,4584,4584,458 Smith, JoeSr. Manager95,0007.0%3.5%4117,9177,9177,9178,1948,1948,1948,1948,1948,1948,1940 Jones, JaneManager85,0007.0%47,0837,0837,0837,5797,5797,5797,5797,5797,5797,5797,5797,579 Lewis, MichaelDirector110,0007.0%29,1679,8089,8089,8089,8089,8089,8089,8089,8089,8089,8089,808 White, SamAdmin. Assistant28,0007.0%42,3332,3332,3332,4972,4972,4972,4972,4972,4972,4972,4972,497 Total Existing Employees35,25035,89235,89237,44037,44037,44037,44037,44037,44037,44029,24729,247 AnnualStartEnd Future HiresPositionSalaryRec #MonthMonthJanFebMarAprMayJunJulAugSepOctNovDec TBH01Jr. Analyst35,00055555-555553002,9172,9172,9172,9172,9172,9172,9172,9172,9172,917 TBH02Accountant40,00043434-4343440003,3333,3333,3333,3333,3333,3333,3333,3333,333 TBH03Temp. Analyst32,50045678-12345610000002,7082,7082,7082,70800 Total Future Hires002,9176,2506,2508,9588,9588,9588,9586,2506,2506,250 Total Salary32,25035,89238,80843,69043,69046,39946,39946,39946,39943,69035,49735,497 EXHIBIT 11.1Salary Input Example
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