12 January 2023
Ease forecasting and budgeting headaches through salary modelling
With people costs a significant proportion of an organisation’s annual expenditure, forecasting and managing salaries in 2023 looks like an unenviable task.
And with inflation at a generation high, managing costs is likely to top most organisation and business challenges lists. Effective management of people costs is key.
Several variables come into play when looking at people costs this coming year.
The Great Resignation – with people leaving jobs in record high numbers – has seen long-term gaps open up for businesses. Some key roles remain unfilled months after the previous incumbent’s departure. Many people – estimated in the hundreds of thousands – have simply left the workforce altogether, opting for early retirement post-pandemic.
Brexit saw the departure of many non-UK workers – leaving particularly large gaps in retail and hospitality.
The cost-of-living crisis is impacting wage demands – in both unionised and non-unionised sectors. Businesses and organisations are under pressure to increase wages while watching materials and operating costs skyrocket. Many businesses are finding it hard to attract people because they’re not meeting jobseeker expectations.
A budgeting headache
Budgeting next year’s salaries – which was once a relatively straightforward task – has become significantly more complex. In recent years a small business with say £3M in annual salaries would factor-in an overall percentage increase, let’s say 3%. They’d also consider planned new roles – say six, totalling a budgeted £180k. They’d factor in increased national insurance (NI) costs and perhaps include a ‘buffer’ of some kind arriving at around £3.3M.
In 2023 some roles within a business won’t change and what has been budgeted for will be actioned. Other roles – particularly where there is greater employee fluidity – could blow out financially. Even a handful of 12-18% pay increases, where 5% was budgeted, will cause forecasting problems. Increased costs could be compounded by the need to use agency people or freelancers to temporarily fill roles or complete projects. Conversely a prolonged gap for an unfilled role may save the organisation some money but will impact budgets and forecasting. Importantly, gaps in roles will likely mean reduced productivity which in turn could hit both top and bottom line.
Forecasting salary costs in 2023 is a tough gig and some businesses and organisations are going to be caught by surprise. Or a series of surprises.
In MHR’s 2023 predictions guide, Mark White, a financial performance specialist, says: “Salary modelling is a massive requirement currently – trying to balance pay inflation due to the cost-of-living crisis. We’re also seeing high staff churn as employees chase higher salaries to counteract soaring energy prices and general inflation. And there’s the skills shortage – caused by the ‘Great Resignation’ that followed lockdown – which can be seen in many industry sectors.”
Support is available
CFOs, their teams and departments right across an organisation need support around salary forecasting in 2023. Salary modelling and analytics software will provide invaluable support to finance managers and their teams.