Is wage cost even important?

No doubt we are kicking in an open door by saying that understanding your wage and employment costs is important, and that understanding is all the more pressing in times of high inflation.

Nonetheless, it is a challenge for many companies to bridge the gap between HR and payroll policy and finance.

That translation is particularly relevant when you're in a data-driven way:

• Want to plan the timing of recruitments
• want to calculate adequate margins on your labor costs
• want to express your personnel costs in cash flow terms
• Want to create budgets and forecasts for your employee population
• want to correct injustices in your wage policy
• Want to make drastic (or less drastic) changes to your pay policy
• Want to assess the overall health and social liabilities of your company
• ...

Now, to make that translation, most companies we talk to start from the P&L. 

In doing so, let us disprove one thing in advance: the income statement (P&L) of your accounts provides no or too little insight into the composition of your payroll expenses.

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Do not depart from the P&L

In practice, one often applies the rule of three to the total cost of wages appearing in the accounts. The reason for this is that companies can get started quickly with this and that this calculation can be done by finance.

But why couldn't you start from the P&L for payroll projections?

Well because that approach is inaccurate by definition. Because you lump everything together and start calculating with average labor costs. Unless of course every (future) employee is right on the average wage cost, which of course is never the case.

On the total cost of wages appearing in the accounts, apply the rule of three. 10 employees cost EUR 1 mio, so 15 employees cost EUR 1.5 mio. 

That methodology will provide rough estimates, but mostly just accurate estimates are indispensable for businesses. 

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Start from the individual pay packets

If you want a thorough understanding of your payroll and employment costs, you need to start from the individual pay packages for each employee.

Why? 

Some examples.

1️⃣ You want to calculate the budgetary impact of the new NSSO exemption for #copyrights, but what if only 30% of employees are covered?

2️⃣ You want to simulate and budget recruitment for functions x, y and z

3️⃣ You want to understand the cost per wage component

4️⃣ You want to know the budgetary impact of adjustments at the individual level, such as correcting injustices in your wage policy (e.g., remedying the gender pay gap).

Of course, those requirements for a budget often all come together in one exercise. So starting from the P&L in this regard is a perilous undertaking if you want an accurate estimate of payroll costs.

Moreover 5️⃣ you may also want to be able to take into account items that appear here and there in the balance sheet or income statement for your payroll and employment costs.

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Hit the bridge between HR and finance

One of the things that frontline companies excel at like no other is building bridges between departments and business functions to achieve an integrated approach.

Wage and employment costs have an impact on pricing. We saw this very clearly during the enormously high wage indexations in 2022 and early 2023. Moreover, many HR departments lack hard data and numbers to get buy-in from the business function and finance.

By understanding payroll and employment costs, you'll speak the language of finance from HR, gaining buy-in and convincing the CFO/CEO to do/don't do certain things.

But finance also gains insight into the things HR is doing and you gain insight into why you should/should not do certain things.

You can simulate changes - both minor and major - in your payroll policy for the current year, as well as for several years into the future. 

You can simulate inflow of new employees, even from a cash flow perspective. 

You can simulate employee attrition, including calculations of social liabilities. 

You can identify incongruities, such as the existence of a gender pay gap within your company that occurs despite all good intentions. 

You can identify suboptimal situations and risks.

And so on and so forth.

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The next step: dashboarding and visual reporting

But what if you could also report all the key numbers in bite-sized visual form that would allow you to get the CEO and CFO right along with your story?

What if you could plot actual wage and employment costs against projections of wage and employment costs? 

What if you could consolidate all payroll and personnel data into one dashboard to chart, for example, the cost of absenteeism, the greater or lesser cost of changing work regimes, etc.?