Article

What is personnel cost planning?

Table of contents

Personnel costs represent a significant cost factor in any company. That said, the size of the personnel costs in particular can be influenced to a considerable degree with purposeful planning. Personnel cost planning is therefore an influencing variable that can become a success factor for any company. In our blog article, we provide advice on all the questions relating to personnel cost planning.

Benefits of successful personnel cost planning

In these times of skill shortages and employee churn, companies rely greatly on effective HR activities. Purposeful investment in the company’s own HR resources is also an investment in the successful future of the company as a whole.

Personnel cost planning generally involves working with various cost items, such as wage labor costs, social security contributions, recruitment costs, as well as training costs.

However, successful personnel cost planning does not only take into account the direct costs relating to investments into the company’s own employees and new hires but also indirect cost items, such as those resulting from onboarding and induction activities and the productivity loss caused by employee churn.

This is where personnel cost planning comes into its own: Strategic HR work will be successful if all the costs, opportunities, and risks to be considered are known and can be weighed up against each other to provide a sound basis for decision-making.

Reasons for software-supported personnel cost planning

To hold one’s own in the long term in today’s fast-changing competitive environment requires planning precision and flexibility at the same time.

Software-supported personnel cost planning facilitates the greatest possible planning reliability combined with optimum flexibility. Internal as well as external influencing factors can be mapped in detail to allow specific planning scenarios for cost development to be illustrated. The software allows HR actions to be simulated transparently and based on the latest data before implementation.

Thanks to the simple and intuitive operation of the planning tools, software-supported personnel cost planning allows HR resources to be deployed in a fast, reliable, and efficient manner, as well as risks to be recognized and avoided, thus contributing significantly to the company’s long-term success.

How does personnel cost planning work?

Successful personnel cost planning always forms part of the corporate Workforce Management.

In this context, the personnel cost planning plays a special role as the success of the complex process flow of the Workforce Management can only be ensured through continuous controlling of the operating costs.

To this end, personnel cost planning works with a regular comparison of planned and actual data, where the forecast personnel costs within a certain period and section of the company are compared to the actually incurred personnel costs and forecast need for personnel. Through repeated analyses and checks, planning figures can thus be reviewed regularly and adjusted as necessary.

Personnel cost planning will only be successful if this process can be performed in a fast, flexible, and intuitive manner.

How can personnel cost planning be organized?

Personnel cost planning basically involves different cost items that can vary in terms of weighting depending on the situation. To be able to perform effective personnel cost planning, HR expenditure is distinguished roughly into the following cost types:

  • Wage labor costs
  • Non-wage labor costs
  • Voluntary social security contributions
  • Statutory allowances

The organization of the personnel cost planning involves a process chain that can be divided into three fundamental process areas:

  • Creation of a planning basis generated from the available actual data
  • Simulation of various future developments and changes
  • Analysis of the resulting relevant planning data

The substantiated planning figures resulting from the personnel cost planning can subsequently be analyzed and used for departmental as well as corporate decision-making in coordination between the HR department, managers, and senior executives. The taken decisions are then reinforced by accompanying controlling measures.

This form of organization can be used both to control the HR expenditure reliably and make best use of the available HR resources.

The process chain of personnel cost planning

The individual links in the personnel cost planning process chain will now be presented in detail.

Step 1: Preparation

Planning rounds that serve as preparation for any personnel cost planning are usually performed on an annual basis. But besides annual planning, other planning periods may be of importance. Planning periods spanning several years may be used in connection with the development of new business areas, while shorter planning discussions and forecasts can be broken down all the way to a monthly level, depending on the purpose.

There are two approaches available for the preparation of the planning in principle:

  • Top-down method
    With the top-down method, the management initially determines budgetary targets and passes them on to the HR department. This approach can be implemented fast and at low cost and it makes for very homogeneous planning – but it may fail due to a lack of acceptance by the workforce and therefore poor implementation.
  • Bottom-up method
    The bottom-up method involves coordination between the HR department and various managers and results in a planning proposal being submitted to the management. This approach ensures good acceptance by the workforce, but bears a risk of diverging objectives of the planning stakeholders resulting in contradictions and conflict. The bottom-up method is also more time-consuming and labor-intensive than the top-down method.

Hybrid methods, such as the so-called “mixed-planning method”, can mitigate against the disadvantages of the two basic methods.

Step 2: Create the planning basis

Reliable personnel cost planning must be based on genuine data. This data is derived from payroll figures plus the headcount data and the organizational assignment of the employees.

The data required for accurate personnel cost planning thus include, for instance, the employees’ basic salaries, the social security contributions, taxes, as well as likely special payments. But pay scale tables, pay scale groups, the employee churn data, as well as details about organizational units, positions, and jobs are used to establish a broad database.

The success of meaningful personnel cost planning also always depends on the quality of the underlying data – and it is therefore particularly important to create a planning basis that is as broad as possible, using all the personnel data available in the systems.

Step 3: Take into account influencing factors and changes

When initiating the personnel cost planning, special care must be taken to bear in mind that many factors can influence the monthly personnel costs, as personnel costs never develop in a linear manner.

To take this into account in the personnel cost planning, both company-specific and external influencing factors must be considered and included in the planning:

  • Company-specific influencing factors
    Important planning variables that will need to be taken into account for the personnel cost planning may include things like the development of absenteeism, employment fluctuations, the internal staffing policy, frequent restructuring measures, and influence exerted by the supervisory body. Corporate incentive schemes, training costs, and the corporate recruitment policy are also among these company-specific influencing factors.
  • External influencing factors
    The external factors include things like collective bargaining contracts, changes to tax and levy legislation, as well as general economic fluctuations and the competitive market situation; they too have a significant impact on the accuracy of the personnel cost planning and therefore need to be considered as part of the planning basis.

Step 4: Simulation of different cost planning scenarios

Taking into account the identified influencing factors, the real data obtained for the personnel cost planning can now be used to run through various planning scenarios in order to derive a benefit-risk assessment from the obtained results.

The cost planning figures can be broken down to the level of individual employees, jobs, and positions – but planning scenarios can also be simulated at company or department level.

The scope for action identified by each planning scenario will always require some interpretation in order to be able to take final decisions. Beside the pure planning figures, the impact of an action on the employees’ motivation, for instance, should also be considered in the interpretation, as should the level of the potentially resulting employee utilization or overburdening.

Examples for this include, for instance, the simulation of salary increases compared to a target-based bonus scheme or the simulation of different scenarios where the impact of existing employees doing overtime is compared to the hiring of new employees.

If such aspects are taken into account, personnel cost planning will provide valuable new insights that will bring about not only cost savings for the company but also a better HR strategy.

Step 5: Create planning data from projections

To be able to create planning data effectively in the personnel cost planning you first need to determine the level of granularity of the data projection.

There are two options available here that have different advantages:

  • Projection of low granularity
    This option allows the user to obtain quick insights into the effects of specific HR influencing variables on the cost situation. This can, for instance, be useful for showing and analyzing short-term changes in the influencing variables.
  • Projection of high granularity
    This option, on the other hand, is particularly useful for longer-term planning rounds, for instance for fundamental annual planning. This type of projection is more detailed, more time-consuming, and provides more comprehensive analysis results.

Step 6: Review of planning scenarios

The insights gained for the personnel cost planning on the basis of different scenario simulations, different projections, consideration of internal and external influencing factors as well as the company-specific requirements will undergo a thorough review before the conclusion.

This additional discussion of the results and insights is particularly important to ensure that the final choice between different options yielded by the personnel cost planning actually match the strategic orientation of the corporate decisions.

Step 7: Decision based on planning results

The final decision-making within the process chain of the personnel cost planning frequently requires more than a single planning round. This will ensure that the final decisions command the widest possible acceptance within the corporate structure.

Step 8: Concomitant controlling

Sound personnel cost planning should always involve a controlling process overseeing the implementation of the planned measures.

In this context, “controlling” does not only refer to checking outcomes against intended objectives, pinpointing deviations from planned values. The personnel cost planning controlling should also involve regular monitoring for potential changes in (internal/external) influencing factors and checking whether previously defined HR KPIs show any deviations from the target values.

Controlling concludes the process chain. It provides certainty about risks being recognized in good time so that countermeasures can be initiated promptly to ensure the company’s long-term success, which effective personnel cost planning can help achieve.

At a glance: the process of personnel cost planning

Planning rounds that serve as preparation for any personnel cost planning are usually performed on an annual basis. But besides annual planning, other planning periods may be of importance.

Reliable personnel cost planning must be based on genuine data. This data is derived from payroll figures plus the headcount data and the organizational assignment of the employees.

Personnel costs never develop in a simple linear manner. To take this into account in the personnel cost planning, both company-specific and external influencing factors must be considered and included in the planning.

Taking into account the identified influencing factors, the real data obtained for the personnel cost planning can now be used to run through various planning scenarios in order to derive a benefit-risk assessment from the obtained results.

To be able to create planning data effectively in the personnel cost planning you first need to determine the level of granularity of the data projection. There are two approaches here that have different advantages: projections of either low or high granularity.

The insights gained on the basis of different scenario simulations, different projections, consideration of internal and external influencing factors, as well as the company-specific requirements undergo a thorough review before the conclusion of the personnel cost planning.

The final decision-making within the process chain frequently requires more than a single planning round. This will ensure that the final decisions command the widest possible acceptance within the corporate structure.

Sound personnel cost planning should always involve a controlling process overseeing the implementation of the planned measures. Controlling concludes the process chain of the personnel cost planning.

More information

In this blog article, we were able to give you an initial overview of the benefits and the process flow of the personnel cost planning in a company.

Are you interested in finding out how you can optimize your personnel cost planning process further, how you can conduct smart analyses of your planning data?

In our webinar, our HR expert Johannes Kumpf illustrates how the solution for optimized personnel cost planning will adapt to your requirements:

Would you like to speak in person to an expert to discuss the particular requirements and possibilities of your personnel cost planning?

The experienced HR Team of the CubeServ Group will offer you the services of consultants with years of practical experience in all areas of Human Resource Management. Get in touch with us.

Would you like to receive your personal test version of PeoplePLAN, the leading personnel cost planning software with real-time operation, on a non-binding, free-of-charge basis?

PeoplePLAN enables you to conduct detailed cost and headcount projections conveniently, at the click of a button.

Test PeoplePLAN now free of charge.

Wir freuen uns auf Ihre Nachricht

Füllen Sie das folgende Formular aus und ein PeoplePLAN Mitarbeiter wird sich in Kürze mit Ihnen in Verbindung setzen.